Offset Credits 1. Suppose there is a municipal wastewater treatment (MWT) facility with a marginal cost of abatement per kg of Nitrogen of: MCMWT = 1.20MWT The MWT believes it will exceed its NPDES permit limit by 50 kg in the coming year. Their total abatement costs are: TCMWT = 5(QMWT) a. What is the total cost of reducing N emissions to meet the NPDES permit? A nearby farm has received offset credits for 50kg of N. They offer the offsets to the MWT for $35 per kg. b. If the MWT purchases offset credits instead of reducing their own emissions, what is the total cost? c. How much pollution should the plant reduce itself and how many offset credits should it purchase to minimize total cost? 2. Two farmers are considering implementing no-till and cover crops to receive payments for carbon sequestration. Bayer is interested in buying these carbon offsets. Farm A can reduce 0.75 mt of CO2-equivalent per acre per year (mt CO2-eq/ac/yr) at a cost of $11.25 per acre. Farm B can reduce 0.5 mt CO2-eq/ac/yr at a cost of $7.50/acre. The current market price for carbon offsets is $15 per mt CO2-eq/ac/yr a. Would Bayer contract directly with farmer A for offsets? With farmer B? Why? b. What is the maximum price Bayer would offer Farmer A? Farmer B? C. Assume Bayer cannot observe which farm is which, and so offers $11.25/acre. Which farms participate? What is the per acre cost of abatement? Is this a good decision for Bayer? d. Is there any price Bayer can offer, such that it is not overpaying for offsets, to purchase offsets from farm A and/or B