Tradable earthquake certificates

Abstract

This article presents a market-based idea to compensate for earthquake damage caused by the extraction of natural gas and applies it to the case of Groningen in the Netherlands. Earthquake certificates give homeowners a right to yearly compensation for both property damage and degradation of living space. The level of compensation is a percentage of the joint annual gas revenues of the Dutch government, Shell and ExxonMobil and may vary based on the intensity of earthquakes in the previous year. These certificates are tradable within the Netherlands to stimulate the illiquid housing market in the province of Groningen. Although frequent earthquakes have decreased property values in this province, a seller will still receive an efficient price for his house because he can also sell his earthquake certificate. A buyer of this certificate receives an annual stream of income and may use these revenues, for instance, to repay his mortgage or to maintain his house at reduced tax levels. However, multiple implementation problems make the viability of this market-based instrument difficult if not questionable, such as the political decision on the aforementioned level of revenue sharing and the behavioral complexity of the options that tradable earthquake certificates offer to homeowners.