Question

QUESTION 10 Soot is considered the second largest cause of global warming. It is emitted from a variety of sources, but most notably from vehicles. Damian owns a logistics company that has a very large fleet of diesel trucks. The Australian Government recently introduced legislation that charges companies based on the amount of emissions of their fleets that are above 5% soot. They can either opt to meet the 5% target and pay no permit cost (Process D), or purchase permits entitling them to pollute in excess of 5% (but this will also incur a cost to modify their fleet using Processes A, B, and C) Process Soot emissions (% Costs to modify Damian's fleet with Process ($ thousand Permit cost (S thousand) 10 6 700 100 900 100 300 500 a. What is the system called where the government could issue a maximum amount of soot emissions permits that would allow firms to emit soot only if they held a valid permit? and Trade, F for Free market, C for Competitive market. Type CT for Cap b. There is a total of 7 logistics companies exactly like Damian's that make up the entire Australian logistics industry (including Damian's company). What is the net cost to society for the Australian logistics industry in order to meet the Government's 5% reduction target? Answer in millions of dollars (to one decimal place). $ million c. If the cost of permits was 4 times that shown in the table, and firms chose to adopt the least cost solution to achieve any emission target. What process would be adopted by all those in the logistics industry? Type A, B, C, or D

Answer 1

a. The system used by the government is Cap and trade method. Where either a cap or limit of 5% soot emissions is imposed on logistics companies or else an emission permit is sold.

b. The table shows different process and cost involved in them.

Process	A	B	C	D
Soot emissions (in %)	10	8	6	5
Costs to modify fleet	0	100	700	900
Permit cost	500	300	100	0

Cost of reducing soot emissions to 5% for 1 firm = $900 thousand

So, the cost of reducing soot emissions to 5% for 7 such identical firms = $6300 thousand or $6.3 million.

c. If the cost of permits was 4 times what is given in table,then the revised costs would be.

Process	A	B	C	D
Soot emissions	10	8	6	5
Costs to modify fleet	0	100	700	900
Permit cost	2000	1200	400	0
Total cost	2000	1300	1100	0

The total cost is lowest in case of process D, so firms would opt process D.