Assume an economy has only two polluters, one airline and one power plant. Last year, theairline emitted 4000 tons of CO2 and the power plant emitted 6000 tons of CO2. It is predictedthat the airline and the power plant’s CO2 emissions will not change next year if no emissionmitigation policy is implemented. The regulator will implement ETS next year. The schemewill take the last year as the baseline year and will grandfather all the allowances according tothe baseline emissions. The policy target is to cut 10% of CO2 emission. The marginalabatement cost (MAC) of the airline is $60 per ton of CO2 and the MAC of the power plant is$40 per ton.(a) How many allowances will be allocated to the airline and the power plant respectively
Question
Assume an economy has only two polluters, one airline and one power plant. Last year, theairline emitted 4000 tons of CO2 and the power plant emitted 6000 tons of CO2. It is predictedthat the airline and the power plant’s CO2 emissions will not change next year if no emissionmitigation policy is implemented. The regulator will implement ETS next year. The schemewill take the last year as the baseline year and will grandfather all the allowances according tothe baseline emissions. The policy target is to cut 10% of CO2 emission. The marginalabatement cost (MAC) of the airline is 40 per ton.(a) How many allowances will be allocated to the airline and the power plant respectively
Solution
To calculate the number of allowances allocated to the airline and the power plant, we need to consider their baseline emissions and the policy target of reducing CO2 emissions by 10%.
First, let's calculate the baseline emissions for each polluter. The airline emitted 4000 tons of CO2 last year, and the power plant emitted 6000 tons of CO2.
Next, we need to determine the allowances for each polluter based on their baseline emissions. Since the scheme will grandfather all the allowances according to the baseline emissions, the airline will be allocated 4000 allowances and the power plant will be allocated 6000 allowances.
Now, let's calculate the reduction target for each polluter. The policy target is to cut 10% of CO2 emissions. For the airline, 10% of 4000 tons is 400 tons. For the power plant, 10% of 6000 tons is 600 tons.
To achieve the reduction target, the airline will need to surrender 400 allowances (400 tons / 40 per ton).
Therefore, the final allocation of allowances to the airline will be 3600 (4000 - 400) and to the power plant will be 5400 (6000 - 600).
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