The Economics of the Environment:
i) Explain the use of the discounting in the assessment of the viability of environmental projects and discuss the issues in the use of discounting for evaluating the costs and benefits of environmental projects.
A new hydro power station is proposed. The power station would cost $3 billion dollars to build. It is estimated that the plant would be able to generate one million megawatts of electricity per annum which can be sold at a price of 40 cents per kilowatt hour.
Ongoing costs are estimated to remain constant at $2 million per annum.
i) Using a 5% discount rate, is the project economically viable over a ten year period? Use an excel spreadsheet to answer the question. Include the spreadsheet in your answer.
ii) Undertake a sensitivity analysis to show how the viability of the project changes if the discount rate is:
a) 2% and b) 8%
Explain your findings.
i) Outline the economic rationale for pricing greenhouse gas emissions and the arguments against these policies.
ii) Discuss the main differences in terms of economic principles between the previous Australian government’s “Clean Energy” policy and the current government’s “Direct Action” plan, given that both aim to reduce greenhouse gas emissions.
iii) Explain how each policy approach is likely to influence investment in new technology aimed at reducing greenhouse gas emissions.