Upcoming in Class

1. Upcoming in Class Quiz #2 Wednesday Homework #4 – Oct. 7th Exam #2 – Oct. 7th Extra Credit Oct. 16th Writing Assignment Due Oct. 23rd

2. 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.

3. 2 Polluting Sources • 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? Coal Power Plant 15 tons of CO2

4. Cost-Effective Allocation of a Uniformly Mixed Pollutant

5. 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

6. 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

7. Issuing Permits Lottery (equitable) Grandfathering (politically appealing) Auction (government revenue generated)

8. 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

9. Suppose a tax of $30 is implemented instead What is the control cost to each firm? What is the revenue to the government?

10. Upcoming in Class Quiz #2 Wednesday Homework #4 – Oct. 7th Exam #2 – Oct. 7th Extra Credit Oct. 16th Writing Assignment Due Oct. 23rd