Assume an economy has only two polluters, one airline and one power plant. Last year, theairline emitted 4000 tons of CO2 and the power plant emitted 6000 tons of CO2. It is predictedthat the airline and the power plant’s CO2 emissions will not change next year if no emissionmitigation policy is implemented. The regulator will implement ETS next year. The schemewill take the last year as the baseline year and will grandfather all the allowances according tothe baseline emissions. The policy target is to cut 10% of CO2 emission. The marginalabatement cost (MAC) of the airline is $60 per ton of CO2 and the MAC of the power plant is$40 per ton.(a) How many allowances will be allocated to the airline and the power plant respectively?(2 marks)(b) If the allowances can be traded and the market price of allowances is $50 per ton, whichpolluter will buy allowances, and which one will reduce emissions and sell allowances tothe other? How much will be the total abatement cost?
Question
Assume an economy has only two polluters, one airline and one power plant. Last year, theairline emitted 4000 tons of CO2 and the power plant emitted 6000 tons of CO2. It is predictedthat the airline and the power plant’s CO2 emissions will not change next year if no emissionmitigation policy is implemented. The regulator will implement ETS next year. The schemewill take the last year as the baseline year and will grandfather all the allowances according tothe baseline emissions. The policy target is to cut 10% of CO2 emission. The marginalabatement cost (MAC) of the airline is 40 per ton.(a) How many allowances will be allocated to the airline and the power plant respectively?(2 marks)(b) If the allowances can be traded and the market price of allowances is $50 per ton, whichpolluter will buy allowances, and which one will reduce emissions and sell allowances tothe other? How much will be the total abatement cost?
Solution
(a) To calculate the number of allowances allocated to the airline and the power plant, we need to determine their baseline emissions and apply the 10% reduction target.
The airline emitted 4000 tons of CO2 last year, so its baseline emissions are 4000 tons. To achieve a 10% reduction, the airline will need to reduce its emissions by 10% of 4000 tons, which is 400 tons. Therefore, the airline will be allocated allowances for 3600 tons of CO2 emissions.
Similarly, the power plant emitted 6000 tons of CO2 last year, so its baseline emissions are 6000 tons. To achieve a 10% reduction, the power plant will need to reduce its emissions by 10% of 6000 tons, which is 600 tons. Therefore, the power plant will be allocated allowances for 5400 tons of CO2 emissions.
Therefore, the airline will be allocated 3600 allowances and the power plant will be allocated 5400 allowances.
(b) If the market price of allowances is $50 per ton, the polluter with the higher marginal abatement cost (MAC) will buy allowances, while the polluter with the lower MAC will reduce emissions and sell allowances to the other.
The MAC of the airline is 40 per ton. Since the power plant has a lower MAC, it will reduce emissions and sell allowances to the airline.
To determine the total abatement cost, we need to calculate the amount of emissions reduced by the power plant and the amount of allowances bought by the airline.
The power plant needs to reduce its emissions by 600 tons to meet the 10% reduction target. At a MAC of 40/ton = $24,000.
The airline needs to buy allowances for 400 tons to meet the 10% reduction target. At a market price of 50/ton = $20,000.
Therefore, the total abatement cost will be 20,000 for the airline.
Similar Questions
If the allowances can be traded and the market price of allowances is $50 per ton, whichpolluter will buy allowances, and which one will reduce emissions and sell allowances tothe other? How much will be the total abatement cost?
Suppose a factory emits greenhouse gases from its chimney. Currently, the factory does not abate emissions at all. If it were to abate, its marginal abatement cost curve is MAC = 225 - 5E. The residents of a nearby town are impacted by the pollution and face marginal damages of $4 per unit of emissions MD = 4E. 1. What is the unabated level of emissions? 2. What is the socially optimal level of pollution? 3. Compute the total damages at the socially optimal level. 4. Compute the total abatement cost at the socially optimal level.
To further assess their carbon footprint, EcoTech Solutions decides to reduce emissions by 20% for both the EcoTab and EcoPhone. Determine the reduced carbon emissions, in metric tons of CO2, for each product after implementing this reduction.
When there is uncertainty over the marginal cost of pollution abatement, explain when a tax on pollution is preferable to quantity regulation
Which of the following is a policy that could be implemented to reduce air pollution?Group of answer choicesAll answers are correctCleaner vehiclesClean energy solutionsStrategies for waste reductionReducing smokestack emissionsLow-emission fuelsPromoting walking and cycling routes
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.