Question 1 : Cap-and-trade

A government decides to introduce a Cap-and-trade system to reduce carbon emissions. The government distributes 700 million permits to firms, where each pemit allows the holder to emit one ton of CO₂.

a) Sketch the supply and demand for emission permits. I'm not providing you with any information on demand, so just sketch any reasonable demand curve.

b) Qualitatively, what will happen to the price of permits if the government increases the number of permits available? Illustrate graphically.

c) Suppose the government decides to introduce a minimum price of 5$ per permit. Will that have any impact on the permit price? Show graphically how your answer depends on the demand for permits.

Question 2 : Cap-and-trade

Answer the following questions (taken from Tietenberg and Lewis, Environmental & Natural Resource Economics, 2012, p.392) and the follow-up questions (c) and (d) below. Note that "allowances" is just another name for pollution permits.

In a region that must reduce emissions, three polluters currently emit 30 units of emissions. The three firms have the following marginal abatement cost functions that describe how marginal costs vary with the amount of emissions each firm reduces.

Suppose this region needs to reduce emissions by 14 units and plans to do it using a form of cap-and-trade that auctions allowances off to the highest bidder.
a. How many allowances will the control authority auction off? Why?

b. Assuming no market power, how many of the allowances would each firm be expected to buy? Why?

c) At what price do you expect allowances to sell for?

d) If the government decides to implement a tax rather than a cap-and-trade system, what should be the tax rate?

Question 3 : Policy choice

Suppose that you work at the United Nations, and you are asked to provide advice to member countries on setting up a policy to reduce their GHG emissions.

a) Suppose that you are advising a country in which the population is very supportive of taking strong action to reduce carbon emission. Explain in details which policy you would recommend, why, and how you would recommend implementing it. What are the advantages of implementing the policy in the way that you have suggested?

b) A second country comes to ask your advice. The president explains to you that his main concern with implementing a GHG emission reduction policy is that he fears many firms will leave the country if the costs of the policy are too high. Would you keep the same recommendation as in (a)? If so, why? If not, what would you recommend instead, and why?

Question 4 : Price v.s. quantity controls

a) Environmental economists often talk about the "equivalence of taxes and cap and trade" (or,in more general terms, the "equivalence of price and quantity controls"). What do they mean by that? Illustrate your answer with a graph.

b) Does this equivalence still hold when there is uncertainty on the MCA curve, but not on the MBA curve? Why? Provide both a graphical and intuitive explanation.

c) Does this equivalence still hold when there is uncertainty on the MBA curve, but not on the MCA curve? Why? Provide both a graphical and intuitive explanation.

Question 5 : VSL

Two companies require identical skills and training from their workers. Both employ 10,000 people. On average, Safety First has one worker fatality per year, while Safety Second has two worker fatalities per year. Jobs at Safety First pay $50,000/year, while jobs at Safety Second pay $50,500/year.

(a) Why do these jobs with identical requirements pay different salaries, based on the information presented here?

(b) What is the risk for a worker of a fatal accident at each company? What is the pay premium associated with that risk?

(c) What is the value of a statistical life for workers with these skills and training?

(d) Do you expect this value of a statistical life to be appropriate for the population as a whole? Why or why not?

Question 6:

Could a revealed preference method other than travel cost have been used in the Bedford Harbor case to estimate the effects of contamination? Explain how hedonic pricing or averting behavior approaches might have been used, or why they would not have worked.

Question 7 : Environmental valuation

The coast of Brittany is a densly populated and highly touristic area, renowned for its beautiful wild shorelines. Sadly, in December 1999, the tanker Erika sank off the coast of Brittany, in France, creating an oil spill with major environmental impacts on the nearby shoreline.

a) Propose a revealed preference method that you could use to value those damages, and explain how you would proceed in applying this method. Can that method alone give you a value that accounts for all the impacts of the disaster?

b) Propose a different revealed preference method that you could also use to value those damages, and explain how you would proceed in applying this method. Can that method alone give you a value that accounts for all the impacts of the disaster?

c) Propose a stated preference method that you could use to value those damages. Write down the exact WTP question that you would ask within the survey (there are many correct answers to this question), and explain briefly any advantage from the specific formulation that you chose. What population would you choose your sample from? Can that method alone give you a value that accounts for all the impacts of the disaster?