Give All Permits to Polluters Plan

Under this scenario, the utilities are currently generating emissions at the original levels of 2.272 million tons (Figure 7, column [C]), and they are granted the right to emit the level of CO2 emissions corresponding to the proportionately reduced levels totaling 1.972 million tons (Figure 7, column [F]).

However, the lowest aggregate cost means of retooling the utilities’ operations to achieve the reduced total level of emissions, 1.972 million tons, is for the utilities to implement the minimum cost reduction scenario presented in Figure 7, columns [G], [H], and [I].

So under this “give all permits for free” scenario, the utilities will end up retooling operations to emit the levels corresponding to those in the minimum cost scenario.  Utilities 1 and 2 will end up emitting more CO2 (1.060 millions tons and 0.787 million tons respectively – see column [I]) than the amounts for which they own permits (0.960 millions tons and 0.746 million tons respectively – see column [F]).  In contrast, Utility 3 will end up emitting less CO2 (0.125 million tons – see column [I]) than the amount for which it owns permits (0.267 million tons – see column [F]).  Utilities 1 and 2 will then buy permits for their respective difference between allotments to emit and actual emissions from Utility 3.

Utility 3 will be willing to sell its extra permits for no less than the costs it incurred to retool operations to reduce emissions by the extra amount, $11.12 per ton ($1.571 million spent to reduce emissions by an extra 141,000 tons – see columns [J], [K], and [L]).  Utilities 1 and 2, on the other hand, will be willing to buy the permits for no more than the costs they saved by not retooling operations to reduce emissions by the difference between the proportional and minimum cost allocations, $38.28 and $23.28 respectively (see columns [J], [K], and [L]).  In other words, the transaction price for the exchange of permits between Utility 1 and Utility 3 will fall between $11.12 and $38.28, while the transaction price for the exchange of permits between Utility 2 and Utility 3 will fall between $11.12 and $23.28

In the end, the aggregate costs of achieving the reduction in emissions under this scenario will be $2.727 million, the retooling costs.  There will also be exchanges of payment for extra rights to pollute between Utility 1 and Utility 3, as well as between Utility 2 and Utility 3, but these “side payments” will be a wash in the aggregate.

More generally, the individual costs to each of the utilities of achieving the reduction in emissions will be highest for those utilities with the highest costs of reducing emissions.  The utilities with the lowest costs of reducing emissions might actually end up better off financially after the reductions, if their costs of reducing emissions are significantly lower than those of the other emitters that are forced to reduce.