3-4. A large electric utility company releases 62 million tons of greenhouse gas

Question

3-4. A large electric utility company releases 62 million tons of greenhouse gases (mostly carbon dioxide) into the environment each year. This company has committed to spending $1.2 billion in capital over the next five years to reduce its annual emissions by 5%. More will be spent after five years to reduce greenhouse gases further. (3.3) What is the implicit cost of a ton of greenhouse gas a. of b. If the United States produces 3 billion tons greenhouse gases per year, how much capita must be spent to reduce total emissions by 3% over the next five years based on your answer in Part (a)?

Explanation / Answer

1) Reduction in Emission = 62 million tons per year X 0.05 = 3.1 million tons of greenhouse gas per year

Implicit cost of reducing 1 ton of carbon dioxide:

= ($1.2billion) ÷ (3.1 million tons) = $387.10 per ton

2) Reduction in Emission = 3 billion tons per year * 0.03 = 90 million tons of greenhouse gas per year

Requirement of capital: 90 million tons * $387.10 per ton = $34.84 billion

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