(1) Ohio State University has agreed to try to reduce carbon emissions over the five years. As
you know, they have bought wind power from a company with wind generation in
Northwestern Ohio. This wind power provides about 25% of the energy used by the campus.
Now they are considering installing solar panels at the farm, and on a number of buildings
out on west campus.
The solar panels would generate an additional 15% of electricity for campus, or about
120,000 MWh (1 MWh = 1000 KWh). The solar panels would cost $25 million to install. (A) The price of electricity is $48 per MWh. Assuming a 5 year project horizon, evaluate
whether the university should install the solar panels using a 3% and a 7% discount rate.
What I mean by a 5 year horizon is that you only need to evaluate the gains of the solar
project over a 5 year period. It will obviously provide benefits in the future if it remains
installed, but you should ignore years beyond the 5
year for this analysis. (B) Because the university is under no obligation to use green energy, they can sell
renewable energy credits on the market. The current price of renewable energy credits is $5
per MWh in Ohio. Suppose Ohio State University sold the credits, would this change your
decision about whether or not to invest in the solar panel project.
(C) If the social cost of carbon is $10 per MWh, what is the present value of the social
benefit provided by Ohio State University if it undertook this project, assume only a discount
rate of 3% for this calculation and a 5 year horizon.
(D) Discuss the difference between the two discount rates and which rate you think Ohio
State University should use when evaluating projects like this. (2) Suppose the marginal benefits of reducing the damages from climate change are a constant
$25 per ton CO2. The following are marginal cost functions for reducing carbon dioxide
emissions from two technologies, coal burning power plants and automobile exhaust.
Assume that the units for marginal costs (MC) are $ per ton CO2 and the units for total tons
of abatement (Q) are given in millions of tons of CO2 abated by the technology.
= 3 + 2Q
= 0.5 + Q
(A) Given this information, calculate how much abatement from each technology should be
done for the efficient solution?
(B) How much total abatement should be accomplished?
(C) If you try to accomplish the entire amount of abatement calculated in (B) with coal
burning power plants only, what would your marginal cost of abatement be? Would this be
efficient? Explain your answer.