Reference no: EM133082290

The social cost of carbon (SCC) is an estimate of the dollar cost to society of emitting each additional tonne of carbon dioxide equivalent. Assume for now that the SCC is constant at $50 per tonne, and that the marginal abatement cost curve for carbon emissions in Canada is given by MAC(e) = 200 - 2e where e is carbon emissions measured in millions of tonnes.

(a) Find the unregulated quantity of carbon emissions. Hint: In the absence of regulation, the price of polluting is zero.

(b) Find the optimal Pigouvian carbon tax and associated socially optimal quantity of carbon emissions.

(c) Calculate the deadweight loss in the unregulated scenario.

(d) Assume the government implements a cap-and-trade program that limits total emissions at 80 percent of the unregulated quantity. Does this policy achieve the optimal quantity of carbon emissions? If not, calculate the deadweight loss associated with this policy (relative to the socially optimal outcome).

(e) Suppose the government completely forbids carbon emission. What would be the deadweight loss under this policy?

(f) Imagine you are writing a proposal for either a carbon tax or cap and trade policy that will begin in five years and you think technical progress will reduce abatement costs by some unknown amount. If your forecasted marginal abatement cost schedule is MAC(e) = 200 - 2e - u where u is an unknown that you believe is greater than zero and less than 100, should you propose a carbon tax or cap and trade policy?

(g) Would your answer to (f) change if the social cost of carbon was increasing in emissions so that the marginal environmental damages are MED(e) = 25 + 3e? Why or why not?