1a. ExxonMobil is considering the installation of a filtration unit on its Liza1 oil production platform in the Gulf of Mexico off the coast of the country of Guyana. The filtration unit is designed to take out a chemical contaminant that makes the oil less valuable to oil refineries. The filtration system is expected to increase the platform's revenue by $15 million in 2020, $25 million in 2021 and $10 million in 2021 and which point the filtration system would need to be replaced.[Note that discounting starts in 2021]. If the cost of this project is $50 million and the discount rate is 3%, will the company implement it?

1b. What is the benefit cost ratio of this project if a discount rate of 7% is used in assessing NPV? 5

2a. Consider a CCGT power plant with the following cost function of producing q MWh of electricity:c(q) = 200 + 6q + .001q2 . Write down an expression for a new cost function if the power plant is required to purchase CO2 permits costing $20 per ton of emissions? [Note that generation of 1MWh results 0.5 tons of emissions.]

2b. What is the optimal quantity of power generated if market price of electricity is $20/MWh? [Use the cost function that you found in part (a)]

2c. The government now requires all power plants emitting CO2 to pay an annual fixed license fee, which does not vary with the amount of electricity produced. How large would this license fee have to be before the power plant would stop producing electricity? [Use cost function from part (a) and the price of electricity from part(b)]

3. UCSD completed a lightretrofitting project in 2016 by replacing 10,000 60Watt light bulbs with 25 Watt fluorescent light bulbs that provide the same amount of illumination. Assume that cost of this project is just a total cost of purchasing new lights. If the price of each new light bulb is $6, what was the negawatt cost of daily power savings, assuming that these lights are always on?

4a. The Salt River Project (SRP), the public utility in Phoenix, is considering either adding a new CCGT or a new solar thermal plant. You work for SRP as an economist are asked to do benefitcost analysis of the two options using three years of operation (t=1, 2, 3). The CCGT plant costs $10 million (t=0) and the solar thermal plant $50 million dollars (t=0). The annual operational cost for generating the needed amount of power (which is the same in both cases) is $40 million for the natural gas plant and $20 million for the solar thermal plant. If the discount rate used by SRP is 5% and the annual monetary value of the power generated is $100 million, what are the benefitcost ratios for each of the two options?

4b. If the discount rate used by SRP was 3% rather than the 5% in 4a, what would the present value of net benefits be for the CCGT plant and solar thermal options? 6 4c. If SRP had to buy $20 million dollars per year of carbon permits to generate the desired amount of electricity from the natural gas plant, how would the benefit cost ratio for the natural gas option change assuming that no other aspect of 4a changed?

5a. The government of South Korea imposed a large new carbon tax on gasoline in order to reduce CO2 and other air pollutants. If this action resulted in a 40% increase in price and the quantity of gasoline used during the next month fell by 20% in response, what is the shortterm price elasticity of demand for gasoline in South Korea?

5b. How much would the price of gasoline have had to increase to achieve a 30% cutback in carbon dioxide emissions in the shortrun if the price elasticity is the one you calculated in 5a?

5c. Is the longrun price elasticity in South Korea likely to be larger or smaller (in absolute value terms) relative to 5a? Why?

6. If the European Union (EU) issued 20% more carbon permits than permit buyers had been expecting and the price of carbon permits on the European Climate Exchange suddenly dropped by 10%, what is the price elasticity of demand for EU carbon permits?

7. A new law is passed in Arizona so that for every ton of coal burned permits allowing emissions of 2.86 tons of CO2 must be purchased. It takes approximately .5 tons of coal to make 1 MWh of electricity. If the cost of a 1 ton CO2 permit is $20. Write out the cost function in to include the permit cost.

8. The visual range (a standard measure of the quality of visibility) in a city improved by 20% (from 10 to 12 miles) when the price per bundle of firewood suddenly went up by 40% (from $50 to $70) due to a new restriction in cutting wood in a particular area. What is the price elasticity of visual range?

8b. What (quantitative) tax on firewood could have achieved the same result (under the simplifying assumption that the supply curve is flat)?

9.In the State of Oregon the government is considering a bill that would require a utility company to replace its residential customer's electricity meters with new models that record the time of day electricity is used, which will allow the company to introduce real time (time of use) pricing. The company serves 200,000 customers and each new meter costs $200 installed. The Oregon PUC state and the utility have agreed to change the residential electricity rate from $0.10 kWh to $0.15 kWh from 2pm to 9pm if the bill passes. The utility (and PUC) forecast this increase in the electricity price will cause demand during that period to fall from an average of 500 kWh per customer to 400 kWh each month.What price elasticity of electricity during 2pm to 9pm is the regulator using for its forecast?