This research project has assessed the potential of using auctions to allocate agri-environmental measures. The project has shown that it is possible to create and apply scientifically justified environmental indices to be used either in auctions or when targeting agri-environmental measures using more traditional instruments. Three kinds of indices were developed under the research project: a biodiversity index and phosphorus and nitrogen indices related to mitigating nutrient loads. Phosphorus index was tested in an actual auction whereas the nitrogen index was tested with a computer based simulation model. The pilot auction on applying gypsum in Nurmijärvi area was succesful. The budget of 25 000 euro was allocated among ten winning bids (out of 21). The choice criterion was the ratio of environmental benefits and proposed compensation per hectare. Each accepted bid was paid the proposed compensation. The phosphorus index used in the pilot auction captured the environmental effects and the choice criterion guaranteed budgetary efficiency. The administrative burden of the piloted system was light. The pilot showed that the farmers are capable of and willing to participate in auctions on agri-environmental measures. Farmers' bids were consistent with optimal strategies based on the choice criterion used. The bids were made on environmentally vulnerable parcels with substantial potential to cut down phosphorus losses. Assessment of national and EU legislation showed that there are no substantial constraints in applying auctions in Finnish agri-environmental program. Environmental indices can be used as part of Common Agricultural Policy. Applying auctions in the context of national subsidies, however, might be in contradictions with legislation, as presented in this report. The project showed that auctions can be used for allocating measures to protect surface waters; international experience has shown that they can be used in allocating measures to promote biodiversity. The farmers seem to have clear opinions on how auctions could possibly be used in the Finnish agri-environmental program. They would not like to have them used in allocating the basic agri-environmental measures. They are, however, found acceptable when allocating special environmental contracts. Further research is needed before auctions could be implemented. Firstly, the costs of the piloted environmental measure (spreading gypsum) were fairly homogenous between farmers. One should be able to compare the efficiency of auctions in comparison to uniform instruments. To this end, one should conduct pilot auctions with measures aiming at nitrogen reduction or biodiversity promotion. Secondly, transaction costs should be analyzed conditionally on the scope of the intended use of auctions. Thirdly, one should further analyze the use of environmental indices: how many and what kind of environmental attributes should be included, and what would be the related administrative costs and efficiency gains. Current agri-environmental policy might undermine the efficiency of auctions. Because the costs of environmental measures can be heterogeneous, one should allow the compensations to vary across farmers as well. The effects of subsidy limits on the efficiency of auctions should be assessed. Furthermore, the principle of compensating only the costs of environmental protection might make auctions less attractive to farmers.