3. Coal industry releases 60 million tons of greenhouse gases into the environme

Question

3. Coal industry releases 60 million tons of greenhouse gases into the environment each year? It is estimated that 1.4 billion in capital will be needed to reduce its annual emission by 5% in next five years. After five years more capital will be spent to reduce greenhouse gases further. a). What is the implicit cost of a ton of greenhouse gas? b). If Country A produces 3 billion tons of greenhouse gases per year, how much capital must be spent to reduce total emission by 3% over the next five years based on your answer in Part (a)?

Explanation / Answer

a).

Implicit cost is also known as the opportunity cost of undertaking the given activity.

In the given case, $1.4 billion in capital will be used to reduce the GHG emissions. This money could have been instead used on infrastructure spending or other environmental practices to curb pollution. This is the implicit cost of reducing GHG emissions.

b).

As per the given information, in order to reduce 5% of 60 million tons = 3 million tons of GHG, $1.4 billion capital will be required.

Thus, to reduce 3% of 3 million tons = 0.09 million tons of GHG, capital required will be = (1.4×0.09)/3 = $0.042 billion

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