ECON3128/ECON8040_Semester 2 Resource and Environmental Semester 2 – End of Semester, 2020

Multiple Choice Questions (16 points, each 1 point)

Please record the correct answers on your answer sheet.

1.Which one of the following statements about carbon dioxide emission is FALSE?

a) Coal consumption is the largest source of carbon emissions.

b) Concentration level of carbon dioxide in the atmosphere can increase even without any human activities.

c) Global carbon emission reduction policies will inevitably hit developing countries harder.

d) High-income countries accounted for more than 50% of global emissions in 20th century.

e) Most of the future growth in global emissions will occur in developing countries.

2. Which one of the following statements is FALSE?

a) Technological progress will lower the price of tradable pollution permits.

b) Under a pollution tax, technological progress will reduce overall pollution levels.

c) Under a system of tradable permits, technological progress will reduce overall pollution levels.

d) A pollution tax creates an incentive for technological progress.

e) Under a system of tradable permits, technological progress can result in some firms increasing their pollution levels

3. Which one of the following statements is FALSE?

a) Carbon dioxide is a stock pollutant.

b) Life could not exist on earth without the natural greenhouse effect.

c) The atmosphere is an example of a global commons.

d) Global carbon dioxide concentrations in the atmosphere have increased since the Industrial Revolution.

e) Global climate change results from ozone layer depletion.

4. Which one of the following statements regarding carbon taxes is FALSE?

a) Carbon taxes would increase coal prices more than other fossil fuel prices.

b) Carbon taxes would reduce negative environmental externalities.

c) Carbon taxes would not set the exact level of carbon emissions.

d) The effect of a carbon tax on demand depends on the elasticity of demand for fossil fuels.

e) A revenue-neutral carbon tax implies an increase in income and other taxes.

5. Which one of the following statements is TRUE?

a) The price of renewable energy is expected to fluctuate considerably in the future.

b) Oil will remain cheaper than renewable energy sources for the foreseeable future.

c) The prices of renewable energy are more stable than the price of fossil fuels.

d) The price of wind energy has increased in recent decades.

e) The price of photovoltaic energy is expected to increase in the future.

6. An exponential reserve index assumes ...

a) that economic reserves will increase exponentially.

b) that consumption will increase exponentially.

c) that the resource lifetime will increase exponentially.

d) that identified reserves will increase exponentially.

e) that undiscovered reserves will increase exponentially

7. Which one of the following represents an adaptive strategy to global climate change?

a) Reducing the level of economic activity

b) Construction of dikes and seawalls to protect coastal areas from flooding

c) Instituting a system of tradable carbon permits

d) Planting more trees

e) Increasing fuel efficiency standards for motor vehicles

8. Which one of the following statements about Aluminium is FALSE?

a) We will never exhaust all stocks of Aluminium

b) Aluminium has not entered stage 3 of the non-renewable resource use profile

c) The recycling of Aluminium is likely to prolong the time we can mining for the virgin stocks of Aluminium

d) Aluminium has a relatively high expected resource lifetime, so it is still abundant

e) Recycling of Aluminum requires much less energy inputs than mining of Aluminum 9.If the price of a resource reaches the choke price, that means that ...

a) the physical reserves are zero.

b) the economic reserves are zero.

c) the environmental costs have been fully internalized.

d) environmental costs need to be internalized.

e) prices will continue to fall.

10. The Paris Agreement of 2015 …

a) relies on voluntary national commitments to reduce greenhouse gas emissions.

b) creates a system of mandatory greenhouse gas reductions.

c) exempts developing countries from participation.

d) expires in 2020.

e) sets a goal of no more than 4 degrees Celsius global temperature increase.

11. A carbon tax, without any other tax changes, would be …

a) distributionally neutral.

b) revenue neutral.

c) progressive.

d) regressive.

e) inefficient.

12. Which one of the following statements about the policy responses to climate change is FALSE

a) Amplifying the inequalities in the society is a major concern for implementing the carbon tax

b) Pairs Agreement is an extended version of Kyoto Protocol, extending from developed countries to other countries in the world.

c) G20 countries had committed to phase out the subsidies for fossil fuels

d) Efficiency ratings is a demand-side policy for lower emissions from energy consumptions

e) Replace coal-burning power plants with gas-burning power plants will reduce the carbon emissions.

13. The total revenue curve for a fishery with changes in fishing effort will typically look like ...

a) a U-shape.

b) an inverted U-shape.

c) a pyramid.

d) a straight line.

e) an S-shape.

14. As emissions levels increase at a steady rate for a stock pollutant, accumulations ...

a) decrease at a steady rate.

b) decrease at an exponential rate.

c) remain constant.

d) increase at a steady rate.

e) increase at an exponential rate

15. Which one of the following statements about international trade is FALSE?

a) when consumption externality is ignorant, importing will always be environmentally beneficial

b) Import happens only when the global price for a goods is smaller than the domestic price

c) Exports of carbon emissions happens when a country importing goods from other countries

d) Multi-national companies’ production decisions should be blamed for creating pollution havens in less-developed countries

e) The process and production methods used in trade agreements should be blamed for creating pollution havens.

16. Which one of the following statements about trade and the environment is true?

a) Inclusion of externality impacts increases the net gains from trade

b) Inclusion of externality impacts implies that international trade decreases overall social welfare

c) Free trade always has a damaging effect on the environment

d) Free trade always has a beneficial effect on the environment

e) Inclusion of externalities means that we cannot be sure whether free trade increases or decreases overall social welfare

Short Answer Questions (28 points)

Q1 (7 points). Aquaculture Fisheries traditionally use a lot of antibiotics in their fish production. Let’s assume the externality of the antibiotics to other water users are estimated to be $40 per kg of usage. A typical aquaculture fishery uses 5kg of antibiotics to grow 100Kg of fish.

The government is thinking about internalizing the externality the aquaculture industry is causing. They would like to determine the effect of such a tax on fish consumption if the full extra cost is passed on to consumers and raise the fish price. (There are no wild resources of this fish left and no international competition. Also, the amount of antibiotics used by the fisheries doesn’t change).

A study found the price elasticity of demand for fish to be -0.3. The current price for a kg of fish is $10/kg. Can you advise the government on how much the policy would affect fish consumption? (7 points)

Q2 (7 points). A country considers a cap-and-trade system for controlling S2  emissions. In the proposed system, the permits will first be allocated through auctions, then they can be traded freely among emitters. Currently, 30% of the national emissions are produced in a small industrial city. The high concentration of S2 in the city imposes significant health hazards to the local residents. The producers in the country are pessimistic about the costs of the system to their businesses. So, the producers are united together to fight against the cap-and-trade system.

(1) Will the cap-and-trade system likely to be effective in improving human health in this country? Briefly explain why. (3 points)

(2) If it is not effective, name one effective policy. (1 point)

(3) In one sentence, what can be done in setting up the system to attract more producer supports? (1.5 point)

(4) Small producers are also concerned that they will be forced out of business if large producers strategically purchase an excessive number of permits to drive small            producers out of business. What can be done to regulate firms covered by the system  to address this concern? answer in one sentence (1.5 point)

Q3 (7 points). The resource depletion tax is a tax imposed on the consumption of non- renewable resources.

(1) Can we regard the resource depletion tax as a Pigovian tax? Briefly explain why (3 points)

(2) In one sentence, does the right level of resource depletion tax improve the current population's total welfare? (1 point)

(3) Compare your answer in part (2) with your answer to part (3). What feature of the Pigovian tax makes your answers seemingly contradicting? How should we reconcile the two findings? Answer briefly. (3 points)

Q4 (7 points) A wind turbine has an initial construction cost of 4 million. The                   construction is quick, and the operation of the wind turbine begins in the same year as the construction (annual in &out cash flows start from period zero). During the 20 years life   span, the annual revenue generated by the wind turbine is $255,000. The annual                maintaining costs of wind turbine depends on the weather pattern, the detailed                   relationship between the weather pattern and the annual maintaining costs is summaries in the table.

	Weather Pattern 1	Weather Pattern 2	Weather Pattern 3
Maintaining costs	10,000	40,000	60,000
Probability	30%	50%	20%

Assume the discount rate is 2%. Work out the net present value of installing the wind turbine (7 points).

Problem Solving Questions (56 points)

Q5. (33 points) Two plants are currently emitting 12,000 tons of pollution each (Total of 24,000 tons). The Marginal reduction costs of the two plants are MCR1=0.04Q and          MCR2=0.06Q, respectively. Assume the policy target is to reduce the total pollution by   10,000 tons.

a. If each plant is mandated to reduce 5000 tons of emissions. What will be the reduction costs for each plant? What will be the total costs of reduction for society? (5 points)

b. Now suppose a tradable permit system is instituted in which permits for emissions of 14,000 tons of pollution are freely issued, 7,000 permits to each plant. When the two     plans can trade permits with each other what is the equilibrium level of pollution           reduction quantity for each plant. (4 points)

c. Draw a graph which shows the marginal cost of reduction over the range of the targeted emission reduction and their distribution between the two plants. On the graph, label axes carefully, indicate the equilibrium distribution of reductions with and without permit         trading. Label the associated marginal cost of reduction for each plant. Highlight the area of net savings from permit trading. (8 points)

d . Assume plants reach the trade equilibrium from above and all permits are traded at the same price (The same price for each unit of permit transfer between two firms). What will be the price of the pollution permits? Just give the number (1 point)

e. Consider the trade equilibrium, with your answer to (d), work out the total reduction costs for each plant, including the transfers between two plants. Also work out the total costs of reduction for society. (4 points)

f. If the setup and running costs of the tradable permit system are $40.000, should the government go ahead and instituted the system? Why or why not. (3 points)

g. The government decides to control the pollution through a pollution tax instead. What should be the amount of tax per ton to achieve the target of 10,000 tons of pollution        reduction. (2 points)