The EU Emission Trading System (ETS)

The EU Emission Trading System (ETS) Globalization and the Environment The EU Emission Trading System (ETS) is a market for pollution permits, and operates on a œcap-and-trade principle. Both Germany and Poland face a cap of 100 tons each on their total emissions of CO2. Suppose the marginal cost of abatement for Germany is: MCg = 20 + ½*A, where A represents the quantity (in tons) of CO2 that can be reduced. On the other hand Poland is less efficient at reducing emissions, and faces a marginal cost (MC) of abatement given by: MCp = 10 + 2*A. Using this information, answer the following questions: 1. On the set of axes above, draw for each country the cost of pollution abatement. Carefully label the intercept point, and indicate the slope. For each country, compute the quantity of CO2 abated when the MC is 40, respectively 50, and respectively 80 euros. 2. Suppose that Germany produces a total of 140 tons CO2 emissions per year, while Poland emits 190 tons. What is the level of abatement imposed on Germany by the ETS? What is the marginal cost paid by German firms to reduce carbon emissions by that amount? What is the level of abatement imposed on Poland by ETS? What is the marginal cost paid by Polish firms to reduce carbon emissions by that amount? Prof. Anca Cristea Now, assume that the market price per ton of CO2 is 50 euros, and that one pollution permit traded on this market corresponds to one ton of CO2. Thus, any polluting firm can purchase a permit to emit 1 ton of CO2 at the rate of 50 euros. Both countries take this price as given. 3. At the on-going market price of carbon, Germany is willing to abate ________ tons of CO2. Given its target abatement level, Germany has a _________________ (surplus/deficit) of pollution permits in the amount of ___________ tons of CO2. 4. At the on-going market price of carbon, Poland is willing to abate __________ tons of CO2. Given its target abatement level, Poland has a _________________ (surplus/deficit) of pollution permits in the amount of ___________ tons of CO2. 5. Does Germany gain from trading (i.e., buying/selling) permits on the European carbon trading market? Explain your answer. Also, indicate on the graph the gains/losses from trade. 6. How about Poland, does it gain from trading (i.e., buying/selling) permits on the European carbon trading market? Explain your answer. Also, indicate on the graph the gains/losses from trade. EC 410/510 Winter 2014 7. Is œcap and trade an efficient solution to the negative externality of carbon emissions? Why? What could be an alternative governmental intervention to this market failure? Problem 2: Income Inequality Consider two countries A and B. Suppose the household shares of aggregate income by quintile in each country are given by the following table: Quintile Share of Income Cumulative Share of Income Country A First (bottom income group) 0.02 Second 0.04 Third 0.10 Fourth 0.24 Fifth (top income group) 0.60 Prof. Anca Cristea Country B First (bottom income group) 0.06 Second 0.14 Third 0.16 Fourth 0.24 Fifth (top income group) 0.40 8. Calculate the Cumulative Share of Income for each country, and fill the empty column in the table. 9. Draw the Lorenz curve for each country. Clearly label the axes. 10. What is a Gini coefficient? Which country do you think will have a higher Gini Coefficient? (Note: no need for mathematical calculation, just explanation) Problem 3: Reading Read the attached short article from The Economist magazine. Address the following questions. EC 410/510 Winter 2014 11. What is the Kyoto Protocol? When does it become outdated? What is the current state of international negotiations on climate change? 12. What are the main reasons why countries hesitate to commit to multilateral environmental agreements? 13. What are possible ways to overcome the impasse in reducing greenhouse gas emissions? 14. Explain/discuss your personal opinion about what is a feasible and efficient measure to reduce the carbon footprint. (Note: you can use external references to support your answer) UN climate talks: Pretty basic | The Economist World politics Business & finance Economics Science & technology Culture Blogs Debate & discuss Multimedia Print edition UN climate talks Pretty basic Diplomacy ahead of the UN climate conference in Durban augurs little progress Sep 3rd 2011 | from the print edition NEVER has the UN’s Kyoto protocol looked sorrier. In 2012 the five-year œcommitment period it brought into being”in which developed countries took on legally binding responsibilities to cut their industrial greenhouse-gas emissions against 1990 levels”will end. Already Japan, Russia and Canada have refused to repeat the exercise. America was never part of it. Of the important rich countries, only the Europeans, responsible for around 13% of global emissions, will consider a second go. If cutting global carbon emissions was its aim, the UN scheme has failed. Yet it refuses to die. A UN climate conference will be held in Durban at the end of November, and the protocol’s future will dominate it. This was stressed in a recent statement from several powerful developing countries”Brazil, South Africa, India and China”who have formed a block called the œBASIC Group. At a meeting in Brazil on August 26th-27th, œagreeing on the second commitment period was apparently the main issue they discussed. It was hardly likely, they noted sharply, that a country would leave the Kyoto protocol because it wished to cut emissions faster. As far as the rich world goes, they are right. Canada will fail in its emission-curbing commitment (as will, possibly, Japan). Quitting the UN scheme is a way to avoid the punitive burden that would be carried over into a second round. Nor do the other, non-Kyoto, parts of the UN process look promising just now. Negotiators at last year’s climate summit in Cancún promised up to $100 billion a year to developing countries by 2020 to help them deal with climate change, plus arrangements for monitoring the voluntary mitigation efforts of developing countries. But little has been done since”and, in hard times for the rich world, little of the promised money is likely to be forthcoming in Durban. The BASIC countries’ attachment to Kyoto is rooted in self-interest. As developing countries, albeit major emitters, they need undertake no mitigation commitment. This was America’s biggest objection to the UN scheme and is, above all, what they seek to preserve. This underpins their show of unity, despite big differences in the size and nature of their emissions. China is the world’s biggest polluter. Its reliance on coal-fired power stations means its emissions per head”at around six tonnes of carbon equivalent a year”are also closing on west European About The Economist online 1 of 2 11/4/11 1:02 AM UN climate talks: Pretty basic | The Economist levels. India’s, though large and rapidly rising, are well below two tonnes a head. Brazil’s, largely caused by farming practices and deforestation, should be cheaper to curb. These distinctions are reflected in the climate-related actions each country volunteered in Cancún. For instance, whereas China promised to reduce the carbon intensity of its output by 40% by 2020, Brazil, with the right assistance, is sworn to reduce its expected emissions by over 36%. These, though hard to monitor, could mean a lot if they work. Yet if the BASIC countries are to persuade the European Union to keep Kyoto alive, they, and especially China and India, must promise more. What this might mean is now being debated in Beijing and Delhi; the EU countries are watching, sceptically. That European countries, alongside Asia’s rising giants, have emerged as the main hinge of an important international process must please them. Yet whatever promise the BASIC countries offer for a post-2018 dispensation will be modest. And even the most ardent European believers in the sort of œtop-down, legally binding mitigation effort that Kyoto represents are belatedly realising that America and probably China would not join such a scheme. In that case, the world’s climate problem would remain unsolved. And moreover, if the EU can be persuaded to undertake a second commitment under Kyoto, it is likely to accept a more modest target than it has already offered. It has promised a 20% curb in its emissions by 2020”or 30% if America and others show comparable progress. In making a legal commitment, the EU would perhaps enter the lower figure, perhaps leaving the higher one to be forgotten. Hot air aplenty. Pity about the carbon. from the print edition | International About The Economist Media directory Staff books Career opportunities Contact us Subscribe Legal disclaimer Accessibility Privacy policy Terms of use [+] Site Feedback HelpTO ORDER FOR THIS QUESTION OR A SIMILAR ONE, CLICK THE ORDER NOW BUTTON AND ON THE ORDER FORM, FILL ALL THE REQUIRED DETAILS THEN TRACE THE DISCOUNT CODE, TYPE IT ON THE DISCOUNT BOX AND CLICK ON ˜USE CODE’ TO EFFECT YOUR DISCOUNT. THANK YOU

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