Econ 1 Principles of Microeconomics apila Solve 8 questions

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Dirk Forrister's Career Parallels the Ups and Downs of the Kyoto Treaty

Morning Edition February 16, 2005

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RENEE MONTAGNE, host: The Kyoto Treaty to combat global warming takes effect today. The United States has not signed on to it but countries in Europe have and they are starting to take the first small steps to slow global warming. NPR's Richard Harris has the story of one man whose career parallels the ups and downs of the climate treaty. RICHARD HARRIS reporting: In the back room of a financial trading house a few blocks south of London's Liverpool Street station, you might be surprised to find a genial man with a hint of a Tennessee accent. Mr. DIRK FORRISTER (Managing Director, Natsource Europe): I'm Dirk Forrister and I'm managing director of Natsource Europe. HARRIS: Natsource is involved in a brand-new business. Forrister and his colleagues are helping thousands of companies throughout Europe buy and sell permits that give them the right to emit carbon dioxide from their smokestacks. Mr. FORRISTER: Day to day, we are on the phone with power companies, oil companies, steel, cement, all of the heavy industry essentially throughout Europe and find somebody that has some to sell and bring them to the guy that has a need to buy. HARRIS: Forrister's career is intertwined with the fate of the Kyoto climate treaty. Back in 1997, he was a senior member of the US delegation to the Kyoto talks. His big job at the bargaining table was to convince some extremely skeptical European diplomats that buying and selling the right to pollute was a good way to tackle global warming. The United States had used a trading scheme like this with great success to control acid rain. Forrister says since Kyoto, Europe's attitude has gone from reluctance to exuberance about trading pollution permits for carbon dioxide, which is the biggest contributor to global warming. Mr. FORRISTER: And now the United States is nowhere on it and the market is most vibrant in the European Union. It's an absolute stitch when I think about it. HARRIS: The United States government is nowhere on this because President Bush announced in 2001 that he would have no part of the Kyoto Treaty, so Forrister has followed the action to London which is now the world capital for carbon trading. (Soundbite of music) Unidentified Man: ...(Unintelligible) approach to Coventry. Coventry (unintelligible) stop. HARRIS: Last Thursday, he hopped a train to the British Midlands to talk to one of his clients, a power company called E.ON UK. Mr. FORRISTER: Hi, Phil. Mr. PHIL GILLAM (E.ON UK): Good to see you again. Mr. FORRISTER: Good to see you, yeah. Mr. GILLAM: Keeping well? Mr. FORRISTER: Good. HARRIS: Phil Gillam at E.ON explains that the British government has issued his company a certain number of permits to emit carbon dioxide. If the company has more permits than it needs, it can sell the excess or if it needs to emit more carbon, it will need to buy more permits. Unidentified Woman: ...(Unintelligible) 16. HARRIS: E.ON already has a trading floor where they buy not only coal and gas for their power plants but carbon permits as well. Unidentified Woman: ...(Unintelligible) 42.80 come back 50 at 9 (unintelligible). HARRIS: How much does it cost to emit a ton of carbon? Mr. GILLAM: At the moment, the price has been around about seven euros, which I think is probably about $9 a ton. HARRIS: That sounds fairly modest. Mr. GILLAM: Well, if you had to go and pay them yourself, I think you'd be saying that it was fairly modest and depending on how many you have to buy as well. HARRIS: Gillam says businesses across Europe emit about two billion tons of carbon dioxide a year. E.ON itself burns a lot of coal so it will probably end up buying permits and passing on the costs to consumers. The British government figures electric bills will go up about 5 percent nationwide as the country meets its obligations under the Kyoto climate treaty, but the measures could also have economic benefits. Carbon brokers like Natsource expect to make money. So do companies that make windmills and more energy-efficient equipment. Mr. FORRISTER: This is now a competitive arena to clean up greenhouse gases. It's a business. People are making money off of it and I think it is something that is going to benefit the rest of the world and looking at what goes on in Europe and seeing that, hey, that actually created a lot of economic wealth because companies were dealing with it. HARRIS: To be sure, carbon trading alone can't stop global warming. Ultimately, worldwide emissions will need to be slashed by 60 percent or more to stabilize the climate. That would require a technological revolution, but Forrister says putting a price on emissions is an important step. Richard Harris, NPR News. MONTAGNE: A primer on emissions trading and a religious view of global warming can be found at npr.org.

According to Mr. Gillam, the representative from the power company E.ON UK, European businesses emit about how many tons of carbon dioxide per year?


		A.	9 billion

		B.	20,000

		C.	2 billion

		D.	5 million

According to the news report, worldwide greenhouse gas emissions need to be slashed by at least what percentage in order to stabilize the global climate?


		A.	30%

		B.	60%

		C.	50%

		D.	10%

yoto attempts to reduce the likelihood of global warming from excessive greenhouse gas emissions. Under the Kyoto Protocol, many developed countries (such as Russia, the United Kingdom, and Japan) made specific commitments to reduce carbon dioxide emissions. The Protocol refers to these countries as Annex I countries. Under the emissions trading program described in the NPR story, each Annex I country receives emissions permits, or credits, to distribute to carbon-emitting firms in its economy. Each credit allows the holder to emit 1 ton of carbon dioxide during the year. If, at the end of the year, a firm has emitted more pollution than its credits allow, it pays a large fine. If a firm needs to emit more pollution than its permits allow, the firm can buy the additional credits it needs from a firm that does not need all of its pollution credits. The following questions ask you to evaluate this "cap-and-trade" program.


		3.1.	Suppose the Annex I countries currently emit 6 billion tons of carbon dioxide per year. The countries agree to "cap" global carbon dioxide emissions at 3 billion tons over the next year. To do so, they distribute 3 billion carbon credits among the Annex I countries. The graph below represents the market for carbon credits in Annex I countries. The downward sloping blue line represents the demand for carbon credits. One credit gives the holder the right to emit 1 ton of carbon dioxide, so the total number of credits in circulation equals the total amount of pollution. The vertical orange line represents the fixed supply of carbon credits per year. Only the government can create new credits or reduce the number of existing credits. Even firms that already hold credits pay a "price" to pollute. The opportunity cost of using credits is what the firm could have sold its credits for in the market. For simplicity, assume the credit prices are denominated in euros, the currency of the European Union. According to the NPR story, Forrister often works with cement and steel companies because they use carbon-intensive production processes. Suppose economic growth in China increases the global demand for cement and steel. Shift one or both of the curves below to show how the increase in the demand for cement and steel impacts the market for carbon credits. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. When you are satisfied with your answer, click the Submit Answer button.

3.2.

Kyoto attempts to reduce the likelihood of global warming from excessive greenhouse gas emissions. Under the Kyoto Protocol, many developed countries (such as Russia, the United Kingdom, and Japan) made specific commitments to reduce carbon dioxide emissions. The Protocol refers to these countries as Annex I countries. Under the emissions trading program described in the NPR story, each Annex I country receives emissions permits, or credits, to distribute to carbon-emitting firms in its economy. Each credit allows the holder to emit 1 ton of carbon dioxide during the year. If, at the end of the year, a firm has emitted more pollution than its credits allow, it pays a large fine. If a firm needs to emit more pollution than its permits allow, the firm can buy the additional credits it needs from a firm that does not need all of its pollution credits. The following questions ask you to evaluate this "cap-and-trade" program.

Again, consider the market for carbon credits. According to the story, the countries participating in Kyoto will begin scaling back the distribution of carbon credits 3 years after the Protocol takes effect. Shift one or both of the curves to show how a reduction in the distribution of carbon credits affects the market below.

3.3.

Again, consider the market for carbon credits. The story mentions the notable absence of the United States in the 2005 Kyoto Protocol. Suppose the United States changes its policy and agrees to join the cap-and-trade emissions program with other Annex I countries. U.S. entry into the Kyoto agreement would have two effects on the market for pollution permits: First, the U.S. government and Kyoto participants would set a cap on American emissions and issue new credits to American firms in accordance with the cap. (Note that there is a difference between pollution worldwide and pollution from Kyoto participants. If the United States participates in Kyoto, pollution from Kyoto participants rises. However, as a Kyoto participant, the United States will cap emissions. Worldwide pollution will be lower when U.S. emissions are limited by the Kyoto agreement.) Second, American firms in need of additional carbon credits would enter the global emissions market and bid for carbon credits. Shift one or both of the curves to show how U.S. participation in the Kyoto cap-and-trade program would affect the market for carbon credits.

3.4.

Wind-generated energy is a low-emissions substitute for carbon-intensive energy sources, such as coal combustion. Consider the demand for windmills. The demand side of the windmill market consists of firms that need energy sources, such as power companies. Shift the curve to show how implementation of the cap-and-trade program affects the demand for windmills in an Annex I country.

Cement production generates pollution -- sulfur dioxide, a pollutant that generates acid rain, and carbon dioxide, a primary suspect for global warming. Because of the negative pollution externality, the (marginal) social cost of cement production is greater than the (marginal) private costs cement producers face.


		4.1.	Consider the market for cement below. The blue line is the demand curve for cement. The orange line labeled S = PC is the supply (or (marginal) private cost) curve. For example, the (marginal) private cost of producing the 25 millionth ton of cement is $20. The green line labeled SC is the (marginal) social cost curve. For example, the (marginal) social cost of the 25 millionth ton of cement is $60. The vertical distance between the two lines represents the cost of pollution. Use the black drop line (X symbol) to indicate the market equilibrium. Then, use the purple drop line (diamond symbol) to indicate the social optimum. Tool tip: For information on using the graph tool, click the Help button.


		4.2.	The graph below shows the market for carbon credits. Consider the demand for pollution rights. In the absence of constraints on pollution rights, the cost of polluting is zero and the firms in Annex I countries emit 6 billion tons of carbon dioxide (the point where the demand for carbon credits intersects the horizontal axis). The Kyoto Protocol turns the right to pollute into a scarce resource -- pollution rights go only to those firms willing to pay the equilibrium price for carbon credits.

When the Annex I countries cap emissions at 3 billion tons and allow firms to trade carbon credits, the cost of emitting carbon dioxide rises from 0 to 6 euros per ton.

Again, consider the market for cement. The supply curve represents the (marginal) private cost of cement production.

Cement production involves carbon dioxide emissions. Show how the implementation of the cap-and-trade system affects the market for cement in an Annex I country.

$430 a Square Foot, for Air? Only in New York Real Estate

Charles v. Bagli November 30, 2005

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The price of air has gone up in Manhattan. It's now $430 a square foot. Two New York City developers have agreed to pay a record-setting amount for "air rights" so they can build a 35-story apartment tower with views of Central Park from the high floors. The brothers William L. and Arthur W. Zeckendorf are set to pay $430 per square foot - more than twice the going rate - for unused air rights over Christ Church and the Grolier Club at Park Avenue and East 60th Street. Christ Church will collect more than $30 million; Grolier will get about $7 million. Air rights allow developers to build taller by buying the space over low-scale buildings and transferring it (on paper, if not in reality) to spaces over adjacent buildings. Although such transfers occur elsewhere in the country, the prices do not run as high as they do in Manhattan, which, after all, is an island and generally provides developers with one option: up. The rights will be transferred to a site west of the Grolier Club on East 60th Street, where the Zeckendorfs and their partners own three tenements that are to be demolished. If it all goes as planned, the developers will be able to build a taller tower than the zoning ordinarily allows. In a separate deal with Christ Church, the tower will also have a coveted Park Avenue address, despite its location on 60th Street. The Zeckendorfs are third-generation developers. The brothers disagree with experts who warn about a bursting housing bubble, at least when it comes to what the Zeckendorfs call "super prime" areas. "We want to concentrate on the very high-end market where we see tremendous strength and a limited inventory," Arthur Zeckendorf said. M. Meyers Mermel, a real estate broker and a trustee of Christ Church who helped negotiate the deal, said the money would help sustain the Methodist church's programs. Carolyn L. Smith, president of the Grolier Club, a storied society of bibliophiles, confirmed that her club voted on Monday night to approve the deal. Previously, New York appraisers say that the high end for the price of air hovered around $200 a square foot. "Nothing shocks me anymore," said Daniel F. Sciannameo, an appraiser at the Albert Valuation Group. "This market is absolutely crazy."

What is the current price of air rights in New York City?


		A.	$200 per square foot

		B.	$430 per square foot

		C.	$1.2 million

		D.	Air rights cannot be sold

How does a developer obtain additional air space rights in New York City?


		A.	They earn them by donating money to selected charities.

		B.	They buy them from owners of adjacent properties whose height is below the allowed building height.

		C.	They buy them from the city government.

		D.	They accumulate them from unused discharges of pollution into the atmosphere.

According to the Coase Theorem, the private market can effectively deal with skyscraper externalities in New York City so long as: I. Property rights to air space are clearly defined and enforced II. Air space rights are distributed equally among all building owners III. Transferring air space rights involves low transaction costs IV. The City sets the price of air space rights


		A.	II and IV only

		B.	II, III, and IV only

		C.	I and III only

		D.	I, II, III, and IV

Which of the following is an advantage of having a market-determined price for air space rights in New York?


		A.	The market stops all development of the New York City skyline.

		B.	The market ensures low prices for air space rights.

		C.	Air space rights will flow to those who value them most highly.

		D.	The market fairly distributes an equal amount of air space rights to each land owner.

The graph below represents the market for air space in New York City. New York City regulations define a volume of air space for each building site based upon its dimensions or "footprint." A site owner that does not use all allowable air space can sell unused rights. Such transferable development rights (TDRs) go to developers of adjacent sites who need additional air space rights to comply with the use restrictions on their own footprint. The government sets a cap on the maximum square footage of developed air space, so there is a limited supply of TDRs. That is, the market could eventually exhaust all available air space. Until developers fill all permitted air space, the supply curve for air space slopes upward. As the price of air space rises, more building owners will sell their unused TDRs to developers of adjacent sites. The price of air space represents an opportunity cost for building owners with unused rights. Some building owners may choose to hold onto unused TDRs, retaining the right to build higher or hoping to sell later at a higher price. But as the price rises, the opportunity cost of holding onto unused TDRs increases, so one should expect that more building owners will choose to sell unused TDRs to developers.

The following questions deal with the market for air space in New York City.


		5.1.	Consider the market for air space in New York. Suppose a development boom occurs as high-income residents demand more new high-rise apartment housing in the city. Show the effect in the market for New York air space by shifting one or both of the curves. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. When you are satisfied with your answer, click the Submit Answer button.

The following questions deal with the market for air space in New York City.


		5.2.	Hoboken, New Jersey, is a city directly across the Hudson River from New York. Suppose that the mayor of Hoboken wants to attract more urban development. The mayor signs legislation that subsidizes the development of skyscrapers in Hoboken. Assume that building sites in New York and Hoboken are substitutes. Show the effect of the Hoboken skyscraper subsidy by shifting one or both of the curves in the market for air space in New York City.