Discuss the below:
1. You work for a Chemicals Industry lobby group. The State of California is launching a voluntary emissions trading program, which allows polluters such as your industry to achieve cost-effective solutions when meeting requirements of the U.S. Clean Air Act. Suppose the state's objective for two major firms in an urban area in your industry, is a 20 percent reduction in carbon dioxide (CO2) emissions and that each firm faces the following costs:
Firm 1: TAC1 = 1000 + 2.5(A1)2
MAC1 = 5 A1
Firm 2: TAC2 = 500 + 1.5(A2)2
MAC2 = 3 A2,
where A1 and A2 represent the percentages of CO2 emission abatement achieved by firms 1 and 2, respectively, and TAC and MAC are measured in thousands of dollars.
a. Calculate the TAC and MAC for each firm if a uniform abatement standard were used.
b. Based on your answer to part a, would your industry have an economic incentive to participate in the trading program (with uniform abatement)? Explain. [Hint: Think of what it means, in this context, for something to be cost-effective.]
c. If a uniform standard is not cost-effective, what should firms 1 and 2 abate, for the abatement standard to be cost-effective?
d. Calculate the cost savings associated with a cost-effective abatement allocation that could be achieved through trading.