LP models for pricing diffuse nitrate discharge permits

Abstract

Nitrate discharges from diffuse agricultural sources significantly contribute to groundwater and surface water pollution. Tradable permit programs have been proposed as a means of controlling nitrate emissions efficiently, but trading is complicated by the dispersed and delayed effects of the diffuse pollution. Hence, markets in nitrate discharge permits should be carefully designed to account for the underlying spatial and temporal interactions. Nitrate permit markets can be designed similar to the modern electricity markets which use LPs to find the equilibrium prices because the two trading problems have close analogy.In this paper, we propose alternative LP models to find efficient permit prices for year-ahead markets. The model structure varies depending on the catchment hydro-geology and long-term goals of the community. We show how the market price structures are driven by the constraint structure under different environmental conditions. We discuss the physical and economic conditions required to assure consistent prices, the modeling of essential and optional constraints in an LP, and the problem of balancing resource allocation over time among delayed-response discharge units. We then extend the LP model to balance resource allocation over time and to improve the market performance.

Pricing mechanisms for cap and trade policies: computer-assisted smart markets for air quality

“…The objective function Equation (7) represents the joint net economic benefits of undertaking permit trading assuming the constraints on ambient concentration standards at a range of receptor locations are satisfied. The linear programming model is specified as a gross pool formulation which is independent of the initial distribution of permits (Prabodanie et al 2011). The bid function for each bidder is represented by a step function and the bids reflect the additional quantity of EDPs preferred at each price by bidder if there are no initial holdings.…”

“…If the EDP bid functions are based on true marginal emissions control cost functions, we can conclude that m j is a marginal cost-based price that results in a cost-effective allocation of resources. Prabodanie et al (2011) called this type of shadow price a 'resource price'. That is, m j is the portion of the market price which matches the demand and supply for the ambient concentration level or resource j: The EDP is equivalent to a bundle of resource permits (i.e.…”

“…The shadow price u in on the bid upper bound constraint (9) indicates the increase in economic benefit (this can be measured by a marginal reduction in emissions control cost) if firm i were able to release one more unit of emissions. The bid at tranche n for firm i will be fully accepted if the following applies: Prabodanie et al (2011) argued that the shadow price f in of the lower bound constraint (10) represents the loss in economic benefit if one unit were to be accepted from that bid. Thus, bids are not accepted if:…”

A smart market for nutrient credit trading to incentivize wetland construction

“…Centralized auctions (Morgan et al 2000) connect traders and an auctioneer through electronic media, use hydro-geological models to evaluate the impacts of trade, and attempt to find market equilibrium by adjusting prices iteratively. Smart markets (Prabodanie et al 2014) use centralized clearing, various watershed hydrogeological models, and in particular, linear optimization algorithms to find market clearing prices, but smart market designs have not been tested for nutrient trading with wetlands. A detailed literature review on various nutrient trading systems is available in TWI (2014).…”

“…A smart market is a periodic auction cleared with the help of mathematical optimization (Carlson et al 2012;McCabe et al 1991;Rothkopf et al 1998). Owing to the use of an optimization model to clear the market (i.e., to determine the prices and quantities to be traded), smart markets are a viable trading mechanism that can account for complex physical 6 interactions relevant to trade in common-pool commodities such as groundwater, electricity and pollution (Alvey et al1998;Hogan et al 1996;Prabodanie et al 2014;Raffensperger 2008). As in a clearinghouse (Woodword et al 2002), participants buy from or sell to a centralized auction manager rather than from or to each other.…”