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Example Pollution Problem

Six firms emit the pollutant

Total emissions from all firms equals 600 tons

Each firm has six actions (A-F) it could take to reduce emissions Actions may differ between firms

Each action can be used to eliminate up to 10 tons of emissions Example: Firm 2 could use action A to eliminate 5 tons

Each action has a specific cost per ton eliminated Example: Firm 2’s action A costs $6 per ton; eliminating 5 tons costs

$30

To protect public health, emissions need to be reduced by 30% to 420 tons

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Command and Control Policy 1: Equal Reductions

Each firm must eliminate 30 tons of its emissions

Firms can choose the lowest cost method

Questions: Which actions should your firm take? What is the firm’s total cost of abatement?

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Command and Control Policy 2: Proportional Reductions

Each firm must eliminate 30% of its emissions

Firms can choose the lowest cost method

Questions: Which actions should your firm take? What is the firm’s total cost of abatement?

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Market Based Policy 1: Emissions Fee

Each firm must pay $11 on each ton emitted

Firms can clean up, pay the fee, or do some of both

Firm’s goal is to keep costs low

Questions: Which actions should your firm take? How much does it reduce emissions? What is the cost of reducing emissions? How much does the firm pay in fees? What is the total cost imposed by the policy?

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Market Based Policy 2: Tradable Permits

Each firm must own a permit for each ton emitted

Firms are granted permits for 30 tons less than original emissions

The permits can be bought or sold

Questions: How many permits would your firm want to BUY at each of the

following prices: $1, $3, $5, $7, $9, $11, $13, $15, $17

How many permits would your firm want to SELL at each of the prices above?

Fill in the answers on the worksheet

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Lessons Learned

Command and control policies Generally do not minimize cost

Emissions fees Cleanup done at minimum cost but … Fees on remaining emissions may be immense

Tradable permits A bit more complicated to use Can get cleanup at minimum cost