AFRE 265: Extra Credit Activity A More Complicated Cap-and-Trade Example This extra credit activity allows you to replace the lowest grade in your Activities. It will test your ability to model a tradeable permit system where the two firms considered are VERY different: both in terms of their baseline emissions and their abatement costs. If you complete this activity in its entirety, ypu will demonstrate a strong grasp of how regulators set both quantity and price regulations, how this relates to the marginal abatement costs of firms, and how the regulator's model reflects some of the same information as the firm model. Note: Some of the results in this problem set are not whole numbers (e.g., 1, 2, 3, etc.). You will need to approximate the results (e.g., 1.25, 1.5, 1.66, 1.75, etc.) in some cases. Suppose we have two oil refineries in society. Oil Refinery 1 is bigger than Oil Refinery 2. Oil Refinery 1 emits 20 million tons of CO2 and it is less costly for this firm to abate. Oil Refinery 2 emits half as much CO2, 10 million tons, and it is more costly for this firm to abate. The Marginal Abatement Costs for each firm are shown on Table 1: Table 1: Oil Refinery Marginal Abatement Costs Suppose that the Environmental Authority for this society conducts a study and determines that the marginal abatement benefits for society are as follows: Figure 1: Environmental Authority Regulation Model 1) (1 point) Find the market marginal abatement cost curve by performing horizontal summation over the two MAC curves for the Oil Refineries. This is the same procedure as finding the market supply curve, but in this case the supply curve is for abatement. Draw it on Figure 1 above and label it MACSociety. 2) (0.5 point) What is the optimal amount of abatement that the Environmental Authority should choose for this society? 3) (1 point) If the regulator imposes this amount of abatement how much CO2 will continue to be emitted by the Oil Refineries? How many permits would the Environmental Authority need to issue to achieve this abatement goal? 4) (0.5 point) If the Environmental Authority were to impose a price instrument what would the cost of emitting one ton of CO2 be? 5) (0.5 point) What would the total abatement cost be in this society if the Environmental Authority imposed either the quantity or the price instrument