GMAT – Section 1: Test 1

The nation of Alberia has instituted a carbon-sharing system in order to limit the amount of carbon dioxide that is released from the nation’s industries and power plants. Under the system, each business that is subject to the new rules is given a maximum level of carbon dioxide that may be emitted each year based on the size of the particular business.

The equipment at Alberia’s various industrial plants vary greatly in age and efficiency at reducing greenhouse gases such as carbon dioxide. Retrofitting a plant with new equipment in order to comply with the new regulations can be very expensive. For this reason, the new rules allow for various industries to trade carbon credits at an established market rate. Specifically, industries that produce a level of carbon dioxide that is below their allotted allowance can sell their deficit, or carbon credit, to other companies that surpass their allotted allowance.

While the cost of expensive retrofits may be avoided by purchasing carbon credits, many businesses are nonetheless incentivized to undergo retrofitting for the purpose of gaining public favor. Over the past decade, the drive to make business more environmentally friendly has been largely driven by the citizens of Alberia, who view trading carbon credits as a way that businesses may circumvent meaningful improvements to their practices.

A study has shown that if the cost of retrofitting equipment is less than or equal to the cost of purchasing carbon credits for a twelve-year time period, assuming constant production and no change in the regulatory requirements, the industrial plants will choose to execute the retrofits. Otherwise, the plants will choose to continue to buy carbon credits.

The nine largest power plants in Alberia are all currently producing levels of carbon dioxide (CO₂) that exceed their allotment per the limits imposed by the national government. For each power plant, the table lists the type of power plant (by fuel), power output, allowed level of CO₂ production, actual level of CO₂ production, and the cheapest cost of retrofitting the plant to be in compliance with the imposed limits. Assume that the lowest cost retrofit does not result in a power plant having surplus carbon credits to trade. The current market rate at which carbon credits are being sold is €4 per ton of CO₂.