TUTORIAL 3 SOLUTIONS
CLIMATE CHANGE ECONOMICS AND POLICY
1. Illustrate with a diagram and explain in words how, theoretically the former Labor
Government’s carbon tax policy compares with the Coalition Government’s direct action plan
(Response in one paragraph under 100 words)?
Theoretically a tax (t) and a subsidy payment (s), set equally (i.e. t = s), should produce the same
level of abatement. The diagram below illustrates this where firms abate emissions up to Q* and
receive a subsidy payment s for these reductions in emissions. Alternatively firms reduce emissions
up to Q*, as this costs less than the tax and pay the tax rate t for all emissions after this as it is
cheaper than abatement. In both cases if the tax and subsidy are set equal firms engage in the
cheapest emissions abatement activities.
Costs
Marginal control cost
Total cost of abatement
t=s
Q*
Quantity of emissions
2. Assume you are a senior researcher with the United Nations Framework Convention on Climate
Change (UNFCCC). The Head of the research branch has requested a briefing note on the
possibility of linking the EU ETS with the NZ ETS. She has asked for precise and concise answer
to the following two questions (assume the linking is direct and bilateral).
a) In two dot points what is the key motivation for linking two emissions trading schemes
(Respond in less than 60 words)?
• Increase the opportunities for cost effective reductions in GHG emissions with more
participants and a larger market.
• Increase in liquidity from a larger market and more trading, which will generally reduce price
volatility in the linked market.
ECO3CCE Page 1
CLIMATE CHANGE ECONOMICS AND POLICY
1. Illustrate with a diagram and explain in words how, theoretically the former Labor
Government’s carbon tax policy compares with the Coalition Government’s direct action plan
(Response in one paragraph under 100 words)?
Theoretically a tax (t) and a subsidy payment (s), set equally (i.e. t = s), should produce the same
level of abatement. The diagram below illustrates this where firms abate emissions up to Q* and
receive a subsidy payment s for these reductions in emissions. Alternatively firms reduce emissions
up to Q*, as this costs less than the tax and pay the tax rate t for all emissions after this as it is
cheaper than abatement. In both cases if the tax and subsidy are set equal firms engage in the
cheapest emissions abatement activities.
Costs
Marginal control cost
Total cost of abatement
t=s
Q*
Quantity of emissions
2. Assume you are a senior researcher with the United Nations Framework Convention on Climate
Change (UNFCCC). The Head of the research branch has requested a briefing note on the
possibility of linking the EU ETS with the NZ ETS. She has asked for precise and concise answer
to the following two questions (assume the linking is direct and bilateral).
a) In two dot points what is the key motivation for linking two emissions trading schemes
(Respond in less than 60 words)?
• Increase the opportunities for cost effective reductions in GHG emissions with more
participants and a larger market.
• Increase in liquidity from a larger market and more trading, which will generally reduce price
volatility in the linked market.
ECO3CCE Page 1
