Interactive Exercise

1

Scenario

• Engineer or mid-level manger in a firm– Six firms: 1 ... 6

• Know of an action that would reduce emissions– Six possible actions per firm: A ... F– Think of them as efficiency improvements

• The action could reduce up to 10 tons of emissions

• The action has a specific cost per ton– Example: $8 per ton

2

Simulation

• Randomly distribute initial information– Slips will show: firm, action, cost per ton

• Form into teams for each firm– Assemble and digest information

• Determine how firm would react to policies– Command and control (2 cases)– Emissions fee or tax– Tradable emissions permits

3

Initial Emissions

Firm Emissions

1 160

2 60

3 110

4 80

5 90

6 100

Total 600

4

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 your firm’s total cost of abatement?

5

Policy 1 results

Firm Tons Cost

1 30 560

2 30 180

3 30 300

4 30 560

5 30 180

6 30 300

Total 180 2080

6

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?

7

Policy 2 results

Firm Tons Cost

1 48 2224

2 18 108

3 33 330

4 24 368

5 27 162

6 30 300

Total 180 3492

8

Policy 3: Emissions Fee

• Each firm must pay $17 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?

9

Policy 3 results

Firm Tons Abatement cost Tax payments Total cost

1 20 240 2380 2620

2 30 180 510 690

3 40 400 1190 1590

4 20 240 1020 1260

5 30 180 1020 1200

6 40 400 1020 1420

Total 180 1640 7140 8780

10

Policy 4: 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,$19

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

– Fill in the answers on the worksheet

11

Policy 4 permit market: demand

Price 1 2 3 4 5 6 Total

1 30 30 30 30 30 30 180

3 30 30 30 30 30 30 180

5 30 30 30 30 30 30 180

7 30 0 30 30 0 30 120

9 20 0 30 20 0 30 100

11 20 0 0 20 0 0 40

13 20 0 0 20 0 0 40

15 20 0 0 20 0 0 40

17 10 0 0 10 0 0 20

19 10 0 0 10 0 0 20

12

Policy 4 permit market: supply

Price 1 2 3 4 5 6 Total

1 0 0 0 0 0 0 0

3 0 0 0 0 0 0 0

5 0 0 0 0 0 0 0

7 0 0 0 0 0 0 0

9 0 0 0 0 0 0 0

11 0 0 10 0 0 10 20

13 0 0 10 0 0 10 20

15 0 0 10 0 0 10 20

17 0 0 10 0 0 10 20

19 0 0 10 0 0 10 20

13

Policy 4 permit market

Price Demand Supply D - S

1 180 0 180

3 180 0 180

5 180 0 180

7 120 0 120

9 100 0 100

11 40 20 20

13 40 20 20

15 40 20 20

17 20 20 0

19 20 20 0

14

Policy 4 trading and abatement

Firm Emit Initial Buy Sell Final Abate

1 160 130 10 140 20

2 60 30 30 30

3 110 80 10 70 40

4 80 50 10 60 20

5 90 60 60 30

6 100 70 10 60 40

Total 600 420 20 20 420 180

15

Policy 4 costs

Firm Buy SellPermit

$Abate

Abate$

Total

1 10 170 20 240 410

2 30 180 180

3 10 -170 40 400 230

4 10 170 20 240 410

5 30 180 180

6 10 -170 40 400 230

Total 20 20 180 1640 1640

16

Summary

AbatementAbatement

CostNet Fees

Total toFirms

Cut 30 tons 180 2080 0 2080

Cut 30% 180 3492 0 3492

Emissions Fee 180 1640 7140 8780

TradablePermits

180 1640 0 1640

17

Why the differences across firms?

• Initial emissions differ– Especially important for proportional reduction or taxes

• Abatement options differ– Abatement costs differ as a result

• Here, the six firms fell into three categories– Firms 2 & 5: lowest cost at first but then rising– Firms 3 & 6: higher initial cost but rises more slowly– Firms 1 & 4: high and rapidly rising costs

18

Abatement Cost Curves

0

20

40

60

80

100

120

140

0 10 20 30 40 50

Tons

Co

st

pe

r T

on

Firms 1 & 4Firms 2 & 5Firms 3 & 6

19