Upcoming in Class Quiz #2 Wednesday

Homework #4 – Oct. 7th Exam #2 – Oct. 7th

Extra Credit Oct. 16th Writing Assignment Due Oct. 23rd

A Transferrable Pollution Permit System

Firms are allocated X number of permits

A permit represents the right to pollute 1 ton of CO2.

Firms can buy and sell permits. But firm sells their permits, they can no longer pollute and must control their pollution instead.

2 Polluting Sources

Coal Power Plant 15 tons of CO2

• Natural Gas Power Plant

• 15 tons of CO2• Suppose we determine that to maintain clean healthy air, we need to reduce emissions by 15 tons total.

• Who should reduce emissions? By how much?

Cost-Effective Allocation of a Uniformly Mixed Pollutant

Cost-Effective Allocation Minimizes the control cost between

the two sources Cost Effectiveness Equimarginal

Principle• Cost of achieving a given level of reduction

is minimized when• MC1=MC2=MC3=..=MCn

• Marginal costs of all emitters are equal

Example – 2 Emitters MCCcoal = 10 + ½ * Qcoal-CO2

MCCng = 5 + Qng-CO2

Each firm currently emits 100 tons of CO2

The government wants to reduce overall emissions to 150 tons of CO2

QCO2 = Qcoal-CO2 + Qng-CO2

Issuing Permits Lottery (equitable)

Grandfathering (politically appealing)

Auction (government revenue generated)

Example – 2 Emitters MCCcoal = 6 + 1/3 * Qcoal-control

MCCng = 2 + Qng-control

Each firm currently emits 100 tons of CO2

The government wants to reduce overall emissions to 140 tons of CO2

Qcontrol = Qcoal-control + Qng-control

Suppose a tax of $30 is implemented instead

What is the control cost to each firm?

What is the revenue to the government?

Upcoming in Class Quiz #2 Wednesday

Homework #4 – Oct. 7th Exam #2 – Oct. 7th

Extra Credit Oct. 16th Writing Assignment Due Oct. 23rd