1.  Draw a graph with two curves: 

(1) the marginal cost of GhG emissions abatement curve, and 

(2) the marginal benefit of GhG emission abatement. The marginal benefit of GhG abatement is also referred to as the social cost of carbon.

 a) Explain in words why the socially optimal level of GhG emissions is not zero. b) Suppose that the government sets a tax on GhG emissions (e.g., a carbon tax). Show the optimal level for the tax on emissions on your graph. Explain in words how the tax is determined. 

c) Suppose instead that the government establishes a cap and trade program for GhG emissions. Show the optimal level for the emissions cap on your graph. Compare the outcome this cap and trade program with the outcome for the emissions tax from part (b). 

d) Now suppose that the government sets a cap that is too lenient; that is, the cap allows more emissions than the optimal cap you identified in part (c). Show the equilibrium trading price for emissions permits with this 'too lenient' cap, and compare this equilibrium trading price with the optimal emissions tax from part (b).

 e) Suppose that a higher social discount rate is used to calculate future emission abatement costs and benefits. Explain whether or not this change in the social discount rate would affect the position of the MC of abatement curve or the marginal benefit of abatement curve, and the optimal current level of abatement.

 

 

 3.  Explain in words the meaning of the term, 'levelized cost of energy'. LCOE is often used to compare the costs of different technologies for generating electricity. Explain pros and cons of using LCOE for such comparisons. Extra Credit (10 points) A variety of government policies promote greater energy efficiency. Examples include programs for more energy efficient lighting and the federal CAF program for autos and light trucks. Consider the following claim - "Government policies promoting energy efficiency are bound to fail because of the rebound effect. These policies have the unintended consequence of lowering the effective price of energy services and thereby encouraging greater energy use."

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