sustainability

  1. A Spanish electrical utility is deciding how to generate electricity now (time t=0) and in the future (times t=1,2): with coal, or with a wind farm and water storage (see https://www.npr.org/sections/parallels/2014/09/17/349223674/tiny-spanish-island-nears-its-goal-100-percent-renewable-energy for an example).
  • Option A. Continue using coal, charging customers less than with wind and water. Assume that the customers use the saved money for non-environmentally-damaging purposes.
  • Option B. Build a wind farm and water storage system at time t=0 at a cost of 14 million euros. In each period, compared to coal it will cost 2 million euros more to generate power and provide other environmental benefits to people in the region of 7 million euros. The additional costs to the utility are paid back by charging customers 6.5 million euros more in each period.
  • Option C. At time t=0, use coal, charge customers the same as with wind (earning the additional 6.5 million euros) and invest the proceeds in developing a better and bigger wind farm and water storage system to be built at a cost of 20 million euros at time t=1. In each of time periods 1 and 2, compared to coal it will cost 1 million euros more to generate power and provide other environmental benefits of 13 million euros, and the additional costs to the utility are paid back by charging customers 7.5 million euros more.

In each case, the market interest rate is 24% per time period. (For purposes of part b., think of each period as eight years and calculate a simple average annual rate for comparison with appropriate social discount rates discussed by G&P).

  1. Would the utility build the wind farm under these conditions? If so, when? (5 points)
  2. Given your calculations and understanding of the environmental effects of coal and wind power systems, which option is (i) dynamically efficient (A, B, or neither)? (ii) Which is neoclassically sustainable? (iii) Which is ecologically sustainable?
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