Question

Two firms in a regional shipping industry, Albatross, Inc. and Barracuda LTD, both emit carbon in their transportation activities. Albatross emits 40 tons annually and can abate carbon emission at $100 per ton. Barracuda also emits 40 tons annually and can abate at $200/ton. The regional EPA wants to reduce carbon emissions between these two firms to 60 tons total annually, so it issues 30 permits to each firm.   Assume for now that the firms cannot trade, exchange or otherwise buy or sell these permits. They are nontransferable. Calculate how much it costs each firm to abate to meet the standard and how much it abates and emits.

Select one:

a. Albatross emits 20 tons and abates 20 tons for a cost of $2000. Barracuda does not abate anything (cost = $0) and emits 40 tons.

b. Each firm emits 30 tons and abates the remaining 10 tons. The abatement cost to Albatross is $2000, and to Barracuda it is $1000.

c. Each firm emits 30 tons and abates the remaining 10 tons. The abatement cost to Albatross is $1000, and to Barracuda it is $2000.

d. Barracuda emits 20 tons and abates 20 tons for a cost of $4000. Albatross does not abate anything (cost = $0) and emits 40 tons.

Answer 1

Since, both the firms cannot sell or trade or exchange permits, each firm has to compulsorily abate 10 tons of excess emissions for which they do not possess the permits.

Each firm can emit only 30 tons according to the number of permits they possess and hence have to abate 10 tons each

Cost of abating 10 tons of emissions for Albatross = $100 x 10 = $1,000

Cost of abating 10 tons of emissions for Barracuda = $200 x 10 = $2,000

Ans: c. Each firm emits 30 tons and abates the remaining 10 tons. The abatement cost to Albatross is $1000, and to Barracuda it is $2000.