Deck 13: Incentive-Based Strategies: Transferable Discharge Permits

Question 1

Transferable emission permit programs work best if there is little competition among buyers and sellers of permits.

Answer 1

False

Question 2

Suppose there are two firms in an industry with marginal abatement cost curves:
MAC_A = 1,200 - 2E_A
MAC_B = 800 - 2E_B
If the regulator wants to use a transferable emission permit scheme to achieve industry abatement of 50%,how many permits will it need to issue and at what price will they trade? If each firm receives one-half of the permits at no charge,explain what permit trading will take place and calculate the total compliance cost of each firm under this form of regulation.A.B.Firm B has emissions of 150,so it does have the extra 100 permits to sell.The following table summarizes the total abatement cost,permit acquisition costs and total compliance costs for each firm.

Total compliance cost is equal to the firms' total abatement cost plus their permit acquisition costs.Since Firm B is able to earn revenue from its selling its excess permits,its total compliance cost is considerably lower than the total compliance cost of Firm

Answer 2

To determine how many permits are needed,we should first calculate the unregulated emissions of each firm.Unregulated emissions are found where MAC = 0:
MAC_A = 0 = 1,200 - 2E_A0
E_A0 = 1,200/2 = 600
MAC_B = 0 = 800 - 2E_B0
E_B0 = 400
Since initial emissions of the industry equal 1,000 units,the abatement target is 500 units and remaining emissions will also be equal to 500 units so the regulator will need to issue 500 permits.To find the permit price we need to use the following two conditions:
E_A + E_B = 500
MAC_A = MAC_B
The first condition states that the emissions of each firm will add to the total emissions of the industry.Rearranging this equation yields the relationship:E_A = 500 - E_B.If we substitute this into the second condition (the equimarginal condition),we can solve for E_B.
1,200 - 2(500 - E_B)= 800 - 2E_B
600 = 4E_B
E_B = 150
Once we know E_B,we can solve for E_A = 500 - 150 = 350.The permits will trade at the price that equals MAC under the permit:
MAC_A = 1,200 - 2(350)= $500
MAC_B = 800 - 2(150)= $500
Permits will trade for $500 each.Since each firm is initially given one-half of the permits,they each receive 250 permits.Firm A has emissions of 350,so it will need to buy 100 permits from Firm B.Firm B has emissions of 150,so it does have the extra 100 permits to sell.The following table summarizes the total abatement cost,permit acquisition costs and total compliance costs for each firm. Total compliance cost is equal to the firms' total abatement cost plus their permit acquisition costs.Since Firm B is able to earn revenue from its selling its excess permits,its total compliance cost is considerably lower than the total compliance cost of Firm A.

Question 3

The ________ established an innovative permit-trading scheme for the control of airborne SO₂ emissions in ________.

A)1990 Clean Air Act Amendments;Canada
B)1990 Clean Air Act Amendments;the United States
C)Canadian Environmental Protection Act;Canada
D)Cross-State Air Pollution Rule;the United States

Answer 3

B

Question 4

Briefly explain why firms have an incentive to monitor each other's permit usage under a transferable emission permit scheme.

Question 5

If the government regulator has chosen a target level of total emissions to be 400 units per year,________ permits will need to be issued and they will trade for ________ per permit.

A)100;$200
B)100;$120
C)400;$200
D)400;$120

Question 6

If the government regulator has chosen a target level of total emissions to be 240 units per year,________ permits will need to be issued and they will trade for ________ per permit.

A)240;$312
B)240;$180
C)260;$312
D)260;$180

Question 7

Transferable emission permit schemes provide the same incentive to invest in R&D to find cheaper methods of reducing emissions as emission taxes that achieve the same level of abatement.

Question 8

The EPA's TEP program for SO₂ was the first large-scale example of a system of transferable emission permits tried in the United States.

Question 9

Briefly explain why firms have an incentive to monitor each other's permit usage under a transferable emission permit scheme.

Question 10

A polluter will buy a permit if the price is less than or equal to its MAC of controlling emissions.

Question 11

One solution to the hot spot problem is to use a(n)________.

A)ambient-based TEP system
B)cap-and-trade system
C)emissions-based TEP system
D)baseline-and-credit system

Question 12

Suppose there are two firms in an industry with marginal abatement cost curves:
MAC_A = 2,400 - 4E_A
MAC_B = 1,400 - E_B
If the regulator wants to use a transferable emission permit scheme to achieve industry abatement of 50%,how many permits will it need to issue and at what price will they trade? If the firms must buy their permits in an auction calculate the total compliance cost of each firm under this form of regulation.A.Total compliance cost is equal to the firms' total abatement cost plus their permit acquisition costs.

Question 13

The EPA's TEP market allowed firms to use whatever means they found the cheapest to reduce SO₂ emissions rather than dictating the technology to be used.

Question 14

The EPA's TEP program for SO₂ gave producers an incentive to look for cheaper ways of lowering emissions because increasing scarcity of permits drove their price up.

Question 15

A polluter will ________ its emissions and sell its excess permits on the market if the market price is ________ or equal to its MAC at its chosen emission level.

A)reduce;less than
B)reduce;greater than
C)increase;less than
D)increase;greater than