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LP models for pricing diffuse nitrate discharge permits

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  • R. Ranga Prabodanie
  • John Raffensperger
  • E. Read
  • Mark Milke

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. Copyright Springer Science+Business Media, LLC 2014

Suggested Citation

  • R. Ranga Prabodanie & John Raffensperger & E. Read & Mark Milke, 2014. "LP models for pricing diffuse nitrate discharge permits," Annals of Operations Research, Springer, vol. 220(1), pages 87-109, September.
    • Handle: RePEc:spr:annopr:v:220:y:2014:i:1:p:87-109:10.1007/s10479-011-0941-0
    DOI: 10.1007/s10479-011-0941-0
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    Cited by:

    1. Anetta Caplanova & Keith Willett, 2019. "Emission Discharge Permit Trading and Persistant Air Pollutants (A Common Pool Market Application with Health Risk Specifications)," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(1), pages 19-38, February.
    2. Filippelli, Raphael & Termansen, Mette & Hasan, Syezlin & Hasler, Berit & Hansen, Line & Smart, James C.R., 2022. "Water quality trading markets – Integrating land and marine based measures under a smart market approach," Ecological Economics, Elsevier, vol. 200(C).
    3. Sushil Gupta & Hossein Rikhtehgar Berenji & Manish Shukla & Nagesh N. Murthy, 2023. "Opportunities in farming research from an operations management perspective," Production and Operations Management, Production and Operations Management Society, vol. 32(6), pages 1577-1596, June.
    4. Hansen, Line Block & Termansen, Mette & Hasler, Berit, 2017. "Effectiveness Of Markets In Nitrogen Abatement: A Danish Case Study," 2017 International Congress, August 28-September 1, 2017, Parma, Italy 260887, European Association of Agricultural Economists.
    5. Syezlin Hasan & Line Block Hansen & James C. R. Smart & Berit Hasler & Mette Termansen, 2022. "Tradeable Nitrogen Abatement Practices for Diffuse Agricultural Emissions: A ‘Smart Market’ Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 29-63, May.

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