Proposed Smart Market Design for Sediment Discharge

Abstract

Sediment discharge from erosion, urban run-off, and construction can cause environmental degradation. Governments try to regulate sediment, but the regulatory approach is costly to land owners. In principle, a market-based system could reduce costs, but the associated transaction costs are far too high, as market participants must find trading partners, negotiate, and seek government approval.In this paper, we propose a smart market design with an associated market clearing model for sediment discharge. Market participants bid for and offer tradable discharge allowances to a central auctioneer. The allowances correspond to kilograms of sediment discharge per year, as estimated by an erosion model. The auctioneer then uses a linear program to price and allocate sediment allowances in a given catchment. Participants do not trade bilaterally, but rather through a central pool, reducing transaction costs. The market design can use all available relevant hydrological data, quantifies environmental effects explicitly, and gives price signals based on the environmental features. Additionally, the initial rights could be scaled back or up when catchment is over or under-allocated to keep a market operator with revenue neutrality. We simulate the smart market for two catchments in Auckland, New Zealand.

Tradeable Nitrogen Abatement Practices for Diffuse Agricultural Emissions: A ‘Smart Market’ Approach

“…Theoretical expositions of a smart market as a viable trading approach have been presented for efficient allocation of instream river flows (Murphy et al 2009), ground water (Raffensperger et al 2009;Raffensperger 2011), impervious cover (Raffensperger and Cochrane 2010), nitrate emission rights (Prabodanie et al 2009(Prabodanie et al , 2010(Prabodanie et al , 2014), sediment discharge rights (Pinto et al 2013) and air pollution emissions rights (Willett et al 2014(Willett et al , 2015. However, to the best of the authors' knowledge, with the exception of Raffensperger et al's (2017) case study in Big Bureau Creek, Illinois, U.S.A that simulates hydrologically-grounded smart market trading in nitrogen load between point sources (sewage treatment plants) as buyers and non-point sources (farmers installing nitrogen treatment wetlands) as sellers, all prior expositions of smart markets to manage nitrogen runoff in agricultural settings have been essentially theoretical, typically comprising less than 10 notional trading entities.…”