Electronic BushBroker Exchange: Designing a Combinatorial Double Auction for Native Vegetation Offsets

Abstract

In Victoria, Australia individuals or firms wishing to proceed with development that involves the clearing of native vegetation are required to obtain an offset to replace the vegetation destroyed. This paper focuses on the design and testing of the electronic BushBroker exchange and the evaluation of alternative market institutions, while briefly describing the metric, trading rules and contracts used in the Victorian native vegetation offset scheme and. The purpose of the design is to facilitate efficient trades of offsets between developers and landowners and to overcome the complexities inherent in the native vegetation market. Four different types of policy and economic complexities were identified: policy, transaction, strategic, and time complexities. The market design recommended includes 'smart market' features (optimization constrained by the offset trading rules), combinatorial bidding preferences (or package bidding) on both the buyers' and the sellers' side, and strategic tools (including search and query functions and 'market making'), to encourage competitive trading activity. This paper seeks to elucidate the rationale behind these design features. We use two types of tests to assess the performance of the system. A series of experimental tests were used to evaluate the software performance, usability and to elucidate specific bidding behaviour and to assess efficiency. Simulations using actual data were employed to test the robustness of the system by increasing the complexity and scale of the data.

Keywords: native vegetation, offsets, biodiversity, double auction, combinatorial auction, experimental economics, market design

JEL Classification: C90, D44