Question

I. Suppose there is a national TEP program to reduce the amount of sulphur emitted by electricity-generating power plants (power plant A and power plant B) Current total emissions are 120,000 tonnes of sulphur per year, and policy-makers have decided that this must be reduced to 80.000 tonnes/year It is reported that power plants A emits 40,000 tonnes of sulphur currently. This plant is initially given 30 discharge permits. Each permit allows the holder to release a maximum of 1,000 tonnes of sulphur annually Price of permit is 75S. 400 S 400 200 200 150 120 7S- 15 30 40 25 50 65 80 Emissions from power plant A (thousand tonnes SO) Emissions from power plant B thousand tonnes SO) A manager of power plant A has three choices. Reduce the emissions to the level covered by the number of permits the plant was initially given, or 30,000 tonnes/year a. b. Buy additional permits and emit at higher levels; for example, it might buy an additional 10 permits, giving it a total of 40,000 tonnes. In this case it would not reduce its emissions at all from their initial level c. Reduce its emissions below the 30,000 tonnes for which it has permits and then sell the pemits it doesn't need. For example, if it reduced its emissions to 15,000 tonnes, 15 permits of its original allocation would not be needed; these could be sold.

Answer 1

A manager of power plant A choose:

Reduce its emissions below the 30,000 tonnes for which it has permits and then sell the permits it doesn’t need. For example, if it reduced its emissions to 15,000 tonnes, 15 permits of its original allocation would not be needed; these could be sold.

The Reason is :

Initially, total emissions are 120,000 tonnes of sulphur per year, and policy-makers have decided that this must be reduced to 80,000 tonnes/year by introducing a national TEP program.

Initially, the plant A  emitting 40,000 tonnes/year,after national TEP program, this plant is given 30 discharge permits and remaining 50 to firm B.

Now, Polluters(i.e) plant A & B, will have incentive to trade its respective permits with each other as long as their MAC differ to each other. Power plant A will have incentive to sell its emissions permits to B because it can reduce its emissions at lower marginal cost than can power plant B.

Finally, The effective equilibrium is reached where the MAC of the two power plant are equal and their total emissions equal the target level (i.e) 80,000 tonnes/year.

Therefore, A manager of power plant A Reduce its emissions below the 30,000 tonnes for which it has permits and then sell the permits it doesn’t need. For example, if it reduced its emissions to 15,000 tonnes, 15 permits of its original allocation would not be needed; these could be sold.