15 Aug climate change economics
Short Answer:
Assume that you are asked by the Biden administration for advice on their climate policy initiatives. In particular, they are asking you to advise them on their domestic climate policy and how it should be designed. Write a short memo (250-500 words) with your recommendations. There is no “right” or “wrong” answer for this question, we just want to see a well-argued position. But do make sure to draw on the materials that we covered in class!
Multiple Question:
1. Under which of the following policy instruments can a regulated firm profit from environmental regulation compared to a situation without any environmental regulation?
a. A cap-and-trade program where permits are auctioned to firms
b. A carbon tax
c. A cap-and-trade program where permits are given for free to firms
2. If markets are efficient, which of the following must be true of firms’ marginal cost of abatement under cap- and-trade (or a carbon tax)?
a. They must all be minimized
b. They must be proportional to the firm’s total cost of abatement
c. They must all be equal
3. Suppose that a new direct carbon capture technology costs $1 million to install (year zero costs) and then sequesters 2,000 tons of CO2 out of the atmosphere per year, starting in year 1, for 10 years. Assume that the social cost of carbon is constant at $50/tCO2 and the appropriate discount rate is 5%. Which of the following statements is true:
a. This project has a negative net present value and should not be pursued
b. This project has a positive net present value and should be pursued
c. This project has a net present value of zero
4. Under what scenario can a carbon tax potentially increase overall economic activity?
a. Using the revenue to reduce the compliance costs of regulated firms
b. Using the revenue to fund important political projects
c. Using the revenue to reduce income taxes
