A 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.