Society faces high costs due to environmental degradation from sediment discharge. Development can increase stream peak flows and sediment discharge. Excess sediment discharges threaten natural habitat, recreational places, rural areas, and commercial ports. In New Zealand, the 2004 North Island floods were estimated to cost about NZ$300 million. Annual soil erosion and sedimentation in NZ cost about NZ$127 million. As a potential solution to minimizing environmental impacts and social costs, we developed a smart market for sediment discharge. This approach would encourage individuals to internalize the environmental and social cost of sediment. The smart market system uses a hydrological simulator and a linear program that would allow an auctioneer to manage the third-party effects of trades, which are not possible with an ordinary auction. The system would give better price signals related to the sensitivity of key environmental features by location. Importantly, the proposed system would reduce transaction costs, because users do not need to search for trading partners, bargaining is simpler, price history information can be made available, and the auction manager ensures market discipline.