Suppose your firm makes a commitment to shareholders to reduce greenhouse gases

Question

Suppose your firm makes a commitment to shareholders to reduce greenhouse gases by 10 tons per year. One possibility is to pay for a reforestation project that offsets your polluting emissions at a cost of $7 per ton. Another option is to make changes in your production process to reduce emissions. Your firm calculates the marginal cost of abating (removing) the first ton of polluting emission at $3 and then increases by $1 for each additional ton. For example $3 for for first ton, $4 for the second, $5 for the third, etc.

Question1: What is the best combination of offsets and abatement that you recommend your firm use?

Question 2: How much money does your firm save by using the offsets?

Explanation / Answer

1)

Best Combination is 5 :5. It would not be profitable to increase abatement beyond 5 units. Cost of reducing pollution beyond 5 units through abatement would demand relatively more cost.

2)

Abatement cost beyond 5 units:

(8-7 =1, 9-7=2 , 10 -7 = 3, 11 -7 =4, 12 - 7 = 5)

Total cost saving = 1+2+3+4+5

= $ 15

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