Calculations for Cap & Trade

Simulation

C&S: Women in Leadership

Practice Case
Initial emissions:
E = 3000 (tons)
Marginal Abatement Costs (MAC):
MAC = 6,000 2E
Note: the E in the MAC equation is the
amount youll be emitting after the regulation
is in effect

Uniform Standard
Your firm must emit no more than 1480 tons

How many tons of CO2 does your company have

to abate?
T (Tons abated) = E(Initial) 1480
How much will it cost your firm to abate that
amount?
(T*MAC)/2
Answers are on the next slide

Uniform Standard
Your firm must emit no more than 1480 tons

How many tons of CO2 does your company have to

abate?
T (Tons abated) = E(Initial) 1480
Answer: T = 3000 1480 = 1520
How much will it cost your firm to abate that amount?
(T*MAC)/2
(1520*(6000-(2*1480))/2
Answer: Cost of abatement = $2,310,400

Cap & Trade System

Each firm receives 1480 permits

Each permit allows the firm to emit 1 ton of CO2

Permits can be bought and sold
How many permits does your firm want to buy or sell if

the market price of the permit is $5000?

How many permits does your firm want to buy or sell if

the market price of the permit is $2000?

Note: Set the price = MAC curve and solve for E

Answers are on the next 2 slides

Calculating Permit Demand

(Supply) at $5,000
Set Price = MAC Curve and solve for E

Price = 5,000, MAC Curve = 6000 2E

5000 = 6000 2E
2E = 1000

E = 500
Demand = 500 1480 = -980
We want to sell 980 permits if the price is $5,000

Calculating Permit Demand

(Supply) at $2,000
Set Price = MAC Curve and solve for E

Price = 2,000, MAC Curve = 6000 2E

2000 = 6000 2E
2E = 4000

E = 2000
Demand = 2000 1480 = 520
We want to buy 520 permits if the cost is $2,000

Cost of Abatement under Cap &

Trade at Permit Price = $5,000
We will sell 980 permits at $5,000 each, generating
$4,900,000 in income from the Cap & Trade program
How many tons will we emit (E)?
How many tons will we abate (T)?

What is the cost of abatement under the Cap & Trade

program ((T*MAC)/2) (income from permit sales)?
Answers are on the next slide

Cost of Abatement under Cap &

Trade at Permit Price = $5,000
We will sell 980 permits at $5,000 each, generating $4,900,000 in
income
How many tons will we emit (E)?
Answer: E = 1480 980 = 500
How many tons will we abate (T)?

Answer: T = 3000 500 = 2500

What is the cost of abatement under the Cap & Trade program
((T*MAC)/2) (income generated from permit sales)?
Answer: (2500*(6000-2(500)))/2 = $6,250,000 - $4,900,000 =
$1,350,000

Cost of Abatement under Cap &

Trade at Permit Price = $2,000
We will buy 520 permits at $2,000 each, at a total cost
of $1,040,000
How many tons will we emit (E)?
How many tons will we abate (T)?

What is the cost of abatement under the Cap & Trade

program ((T*MAC)/2) + (cost of permits)?
Answers are on the next slide

Cost of Abatement under Cap &

Trade at Permit Price = $2,000
We will buy 520 permits at $2,000 each, at a total cost of
$1,040,000
How many tons will we emit (E)?
Answer: E = 1480 + 520 = 2000
How many tons will we abate (T)?

Answer: T = 3000 2000 = 1000

What is the cost of abatement under the Cap & Trade program
((T*MAC)/2) + (cost of permits)?
Answer: (1000*(6000-2(2000)))/2 = $1,000,000 + $1,040,000 =
$2,040,000