ER100/PP184/ER200/PP284, Fall 2022Problem Set #4Total Points: 75 for ER110/PP184; 100 for ER200/PP2841) Environmental Economics [25 points ER100, 35 points ER200]Imagine you are the governor of a US state and a member of the US Climate Alliance. Youare committed to reducing your state’s greenhouse gas (GHG) emissions in order to achievegoals set out by the 2016 Paris Climate Agreement. You want to invest in renewables suchas wind and solar, but due to the cheap price of natural gas, utilities in your state have noeconomic incentive to transition to renewables. Therefore, you would like to account for thesocial cost of carbon (SCC) and impose a carbon tax on all GHG emissions from energyproduction.The table below provides data for two major natural gas-fired power plants currentlyoperating in your state.Plant NameCapacity(MW)Thermalefficiency(%)AverageAnnualCapacityFactorAnnualEnergyProduction(MWh)Current Priceof EnergyProduction(¢/kWh)Pavilion(SingleCycle)400.33.00.903.154 x 1068.1Fairdale(CombinedCycle)450.54.00.903.548 x 1066.9a) Assume that natural gas is quantified in terms of its internal energy content inmillion-Btu, and is estimated to emit roughly 53 kg CO2/million-Btu when combusted(source: USEIA). Therefore, what are the annual CO2 emissions (in tonnes) for each powerplant? [8 points]Pavilion:3154000 𝑀𝑊ℎ𝑦𝑒𝑎𝑟*1 𝑀𝑊ℎ0.33 𝑀𝑊ℎ*3.414 𝑀𝑀𝐵𝑇𝑈𝑀𝑊ℎ*53 𝑘𝑔𝑀𝑀𝐵𝑇𝑈*1 𝑡𝑜𝑛𝑛𝑒1000 𝑘𝑔=1. 7*106 𝑡𝑜𝑛𝑛𝑒𝑠 𝐶𝑂2Fairdale:3548000 𝑀𝑊ℎ𝑦𝑒𝑎𝑟*1 𝑀𝑊ℎ0.54 𝑀𝑊ℎ*3.414 𝑀𝑀𝐵𝑇𝑈𝑀𝑊ℎ*53 𝑘𝑔𝑀𝑀𝐵𝑇𝑈*1 𝑡𝑜𝑛𝑛𝑒1000 𝑘𝑔=1. 2*106 𝑡𝑜𝑛𝑛𝑒𝑠 𝐶𝑂2b) Now you want to set a carbon tax on emissions that captures the social cost of carbon.You decide to set the tax at $40./tonne-CO2. Using your answers from part a, what willthe new cost of energy production be for each of the plants? If the cost of renewableenergy production is 9.0 ¢/kWh, which plant(s), if any, now have higher production coststhan renewables and would therefore be incentivized to transition to clean energy? [7points]Find the additional cost per kWh incurred due to the carbon tax:Pavilion:1.729*106 𝑡𝑜𝑛𝑛𝑒𝑠 𝐶𝑂2𝑦𝑒𝑎𝑟*$40𝑡𝑜𝑛𝑛𝑒*𝑦𝑒𝑎𝑟3154000 𝑀𝑊ℎ*𝑀𝑊ℎ1000 𝑘𝑊ℎ=$0.022𝑘𝑊ℎSo the new cost of electricity for Pavillion is 8.1 + 2.2 = 10.3 ¢/kWh, which is moreexpensive than renewables, so it would be incentivized to switch to clean energy. Fairdale:1.189*106 𝑡𝑜𝑛𝑛𝑒𝑠 𝐶𝑂2 𝑦𝑒𝑎𝑟*$40𝑡𝑜𝑛𝑛𝑒*𝑦𝑒𝑎𝑟3548000 𝑀𝑊ℎ*𝑀𝑊ℎ1000 𝑘𝑊ℎ=$0.013𝑘𝑊ℎSo the new cost of electricity for Fairdale is 6.9 + 1.3 = 8.2 ¢/kWh, which is still cheaperthan renewables, meaning it will likely continue to produce energy via natural gas. c) Even if renewables appear to be price competitive compared to natural gas insome instances on a cost per kWh basis, what might prevent or delay a transition torenewable energy production? Provide at least 5 reasons. [10 points]Possible reasons could include:- Sunk Costs in existing infrastructure, or “lock-in” due to capital investmentsalready made in the gas plants- Natural gas still has important benefits over renewables in terms of reliability,consistency, cogeneration of heat etc. This will likely be the case for some timeuntil renewable storage capacity is ramped up.- Short-term employment concerns associated with the transition from one energyindustry to the other. Are the capacity/training resources available and abundant toease the transition for workers in natural gas to renewables?- Price of natural gas, or of other production inputs may be expected to decrease.This could be due to improvements in discovery, extraction, and processingtechnologies, amongst other factors.- Price of renewables may be expected to increase, or may be subject to volatility. -Political climates are dynamic, and a carbon tax imposed today could be reduced oreliminated in a few years with a change in political power, which would make atransition based on a given tax risky.- If the state’s grid is part of a regional grid, and they are the only ones enacting thecarbon tax, the state’s utilities may simply increase imports of cheaper natural gaselectricity from neighboring areas without the tax (leakage).- Permitting, impact analyses, land use litigation, construction, and all otherfactors associated with bringing new renewable plants online will take time.d) [ER200 ONLY] What are some possible drawbacks of employing astatewide carbon tax as the sole strategy to reduce GHG emissions? Provide atleast 5 reasons. [10 points]Possible answers include:- Industries may be slow to respond or transition to renewables even if the price signalis there. Delay (redundant with part c above, but an acceptable answer)- There are NO GUARANTEES that a tax will decrease overall emissions - Taxesbased on the social cost of carbon are subject to all of the uncertainties andassumptions embedded in the SCC estimates themselves, and may under-represent ormisrepresent certain impacts that are not easily quantifiable (e.g. ecosystem services,long-term health impacts (especially of relatively new technologies like fracking)), orwhich are not estimated in a full life-cycle analysis manner.- Taxes confined to a single region or state can result in leakage, or simplyimporting cheaper out-of-state fossil-fuel energy- The tax could potentially be seen as unjust or regressive, with lower-incomerate-payers bearing a disproportionate burden of the increases in energy costs- Other issues of environmental justice associated with pollution associatedwith emissions or energy production are not addressed solely with a tax.- Unlike the sunk costs of investing in infrastructure, taxes can be easily removedor diminished by any given politician- Implementing a tax could simply motivate innovation to further reduce the price ofnatural gas, or cut other production costs (providing benefits to workers etc.) ratherthan transitioning to renewables.- A blanket tax may have inequitable consequences throughout the state. Issues ofenvironmental justice could arise if2) Energy Efficiency at Home [25 points ER100, 30 points ER200]: Suppose you have twokettles – a plug-in electric kettle and a stovetop kettle. The electric kettle