1. Under a system of marketable pollution permits, a firm with ___________ (low/high) abatement costs will buy permits from a firm with ___________ (low/high) abatement costs.

2. Arrow up or down: A switch from regular pollution permits to marketable permits ___________ the total cost of abatement.

3. A decrease in the supply of marketable pollution permits will shift the supply curve for permits to the ___________ and ___________ the equilibrium price of permits.

4. Arrows up or down: A technological advance that decreases abatement costs will ___________ the demand for marketable pollution permits and the equilibrium price.

5. Dry weather in the Nordic countries will the demand for CO2 allowances and ___________ the equilibrium price.

6. Split the Difference for a Pollution Permit. Consider two firms, each of which is issued three marketable pollution permits. For firm H, the marginal cost of abatement is $190. For firm L, the marginal cost of abatement is $130.

a. Is there room for a mutually beneficial exchange of one permit? If so, which firm will buy a permit and which firm will sell a permit?

b. If the two firms split the difference, what s the price of a permit?

c. Suppose that after the exchange of one permit, the marginal cost of abatement for the firm that sold the permit is $170 and the marginal cost of the firm that bought the permit is $150. Will the firms exchange another permit, or are they done trading?

d. What is the savings in abatement cost from allowing firms to buy and sell a permit?

7. Reforestation versus Abatement. Suppose your firm commits to reducing greenhouse gases by 11 tons per year. You can pay for a reforestation project that offsets your emissions at a cost of $7 per ton of carbon offset. Or you can modify your production cost to abate pollution. Your marginal cost of abating the first ton is $3; the marginal cost increases by $1 for each additional ton, to $4 for the second ton, $5 for the third ton, and so on.

a. What s the best combination of reforestation offsets and abatement?

b. How much money does your firm save by using the offsets?

8. No Permits Exchanged? A state issued marketable permits for sulfur dioxide emissions to several electricity generators. Most of the permits were given to the utilities with the oldest generating facilities. One year later, none of the permits had been bought or sold. What could explain the absence of permit exchanges?

9. Lower Abatement Cost and Permit Prices. Suppose new technology decreases the cost of abating pollution by half. Depict graphically the implications of the decrease in abatement cost on the equilibrium price of marketable permits. Use Figure as a starting point, with an initial permit price of $21 (point b). What s the new equilibrium price?

10. Consider the demand for CO2 allowances in the European Union. The supply of allowances is fixed, and the initial price is $20 per ton. Suppose that dry weather in the Nordic countries increases the demand for allowances by 6 percent, and the price elasticity of demand for permits is 2.0. Predict the new equilibrium price, and illustrate with agraph.

Transcribed Image Text:

Supply of permits in 2003 Supply of permits in 1994 $21 .. 7 Demand for permits 30 100 Number of permits issued