Setting a Price for Carbon in the NY Wholesale Electric Market for the Layman

This post discusses the New York effort to put a price of carbon on the wholesale electric market. I think New Yorkers deserve answers to the following questions:

  • What is this proposal going to do?
  • How is it supposed to work?
  • How much will it cost?
  • What impact will it have?

This post will attempt to provide my answers to these questions to summarize my concerns with the proposal.

I have been submitting comments throughout the process (here and here) and I have posted on this here.   My comments have been submitted as a private retired citizen. They do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I was motivated to submit comments and prepare these posts so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered. There are unintended consequences to the proposal that will result in enormous costs for a plan that will have Inconsequential tangible benefits to the environment.

Carbon Pricing

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. Economists support the idea that with a carbon price the market efficiently cuts emissions. Note, however, in order to operate efficiently the carbon price has to be applied to the whole economy.

Not surprisingly, the devil is in the implementation details. A price has to be set for each ton of carbon dioxide emitted but what should the price be and how should the emissions be measured. The disposition of the money earned by the tax is another major issue. In order to minimize regressive effects and let the market efficiently decide how best to make reductions many economists favor a revenue-neutral approach where the carbon tax revenues replace other tax revenue streams and no investments are determined by the regulators.

New York Carbon Pricing Proposal

On August 11, 2017, the New York Independent System Operator (NYISO) and the New York State Department of Public Service (DPS) jointly initiated a process to engage with stakeholders to examine the potential for carbon pricing in the wholesale energy market to further New York State’s energy policy goals. This initiative began in the fall of 2016 as a project commenced by the NYISO through its stakeholder process. The NYISO retained The Brattle Group to evaluate conceptual market design options for pricing carbon emissions in the competitive wholesale energy markets administered by the NYISO. That report, Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, (Brattle Report) forms the basis of the proposal.

The Integrating Public Policy Task Force (IPPTF) was created to solicit stakeholder feedback for the carbon pricing proposal. The IPPTF meeting materials page lists all the documents produced by NYISO and stakeholder comments. Frankly, this is a frustrating process. This is illustrated by the fact that there are meeting agendas but no meeting minutes. For example, at the May 21, 2018 meeting emissions monitoring experts from the generating industry had a panel discussion on emissions reporting to explain how CO2 is measured and reported. One of the major points was that there is a significant timing issue between the needs of the carbon pricing initiative and regulatory requirements which mandate post-monitoring quality assurance adjustments. On July 16, 2018 NYISO presented its general recommendation for emissions reporting and the ensuing stakeholder discussion ignored the expert presentation discussion of the timing issue. If minutes were available then the timing issue would have been documented. More importantly, It is not clear if the NYISO final recommendation will incorporate the concerns of the experts.

In April 2018, NYISO posted a straw proposal that outlined a potential design for incorporating the cost of carbon emissions into the wholesale electricity market of New York State. The straw proposal recommends that the DPS set the carbon price value and has suggested using the Social Cost of Carbon (SCC) as estimated by the U.S. Interagency Working Group (IWG) on the Social Cost of Carbon, starting at $43/ton CO2 today and rising to $65/ton by 2029[1]. The straw proposal recommends that all internal suppliers participating in wholesale electric energy markets pay the carbon charge. Most of the affected sources already report hourly CO2 emissions but there remain difficulties integrating their existing reporting requirements and this new requirement (primarily timing issues) and there are some affected sources that do not report CO2 that will have to develop the necessary infrastructure to report hourly data. Further complicating the problem is the issue of how to deal with imported and exported power. Finally, there has been limited discussion of the disposition of the carbon price funds but it is noticeable by its absence that the concept of returning all the money to rate payers has not been suggested. Instead, it appears that portions of this will be an additional funding mechanism for the Governor’s Reforming the Energy Vision initiative.

Carbon Price

My first concern with this proposal is the choice of the carbon price (for example my comments on the April 23, 2018 addressed this). The SCC value proposed was developed by a working group established by an Obama Executive Order to estimate the economic harm of CO2 emissions. My fundamental problem is that the IWG SCC value does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. As a result that value over-estimates the potential benefit of New York emission reductions. Ultimately the SCC relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”

Potential Costs to Consumers

Table 1 Potential Costs of the Carbon Pricing Initiative is my best estimate of potential costs. The SCC column lists the annual values from 2015 to 2029. In order to know the costs we have to know the CO2 emissions. I used NYS Regional Greenhouse Gas Initiative (RGGI) historical emissions for 2015 to 2017 and then assumed that emissions would drop 1.5% per year from the 2017 values. At a minimum, ratepayers in New York will have pay the SCC value times the CO2 emissions from the affected New York generators (SCC Charge column in Table 1).

The Brattle Report proposes breaking the SCC charge into two components: the existing RGGI costs and the carbon price to the wholesale market. The RGGI allowance prices in Table 1 are the observed values from 2015 to 2018 and the value assumed by Brattle for 2025. The RGGI costs will equal the RGGI allowance price times the CO2 emissions (RGGI Charge column in Table 1). These are costs already committed to NY ratepayers albeit they are supposed to be invested for the benefit of consumers.

The IPPTF refers to the difference between the SCC Charge and the RGGI Charge as the Residual (Residual column in Table 1). The disposition of this money has not been finalized, but we know that a portion will be returned to the Load Serving Entities to offset ratepayer costs and the rest will be invested in carbon-reducing programs.

The Brattle Report analysis of the impact on customer costs uses average annual values and concludes that the carbon charge would have “approximately zero net impact on customer costs”. However, the point of my hourly analyses in my comments submitted on July 5, 2018 is that I think that the carbon charge will raise net energy costs. When I calculated the hourly impact I estimate that the total cost would have been $3,027,266,788 (Energy Increase column in Table 1). Importantly, none of the difference ($1,728,574,766) between this value and the SCC Charge (Energy Impact column in Table 1) will be returned to customers.

Impact

New York State has never provided an estimate of the effect of its clean energy programs on global warming. Governor Cuomo’s plan to “rebuild, strengthen and modernize New York’s energy system is called Reforming the Energy Vision (REV). The ultimate goal of REV is to change the energy system of New York to reduce greenhouse gas (GHG) emissions 80% from 1990 levels by 2050 (“80 by 50”).  In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation.

The ultimate impact of the REV 80% reduction of 188.7 million metric tons on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.0028°C by the year 2050 and 0.0058°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000 foot increase in elevation above sea level. The projected temperature difference is the same as going down 18 inches. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south 0.4 miles.

My calculated values for temperature change are based on the “consensus” estimates of the Intergovernmental Panel on Climate Change which I personally believe over-estimate the impact of temperature changes caused by greenhouse gas emissions. My calculations show that REV and the carbon pricing initiative cannot claim that any observable impacts for the projected small change in temperature due to these emissions reductions.

Conclusion

This post did not delve into the many technical issues associated with implementing carbon pricing in general and as proposed in the straw proposal. Nonetheless, it raises basic questions. The increase in energy prices beyond the carbon price itself is an unintended consequence that will basically double the costs of the program. At the end of the day those enormous costs will have inconsequential tangible benefits to the environment. Even if you believe that we need to do something about climate change these numbers do not support this proposal.

[1] See New York Public Service Commission Order Adopting a Clean Energy Standard (2016) pp. 49, 51, and 131 http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7B1A8C4DCAE2CC-

449C-AA0D-7F9C3125F8A5%7D, and U.S. Government (2015) Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. May 2013, revised July 2015.

Author: rogercaiazza

I am a meteorologist (BS and MS degrees), was certified as a consulting meteorologist and have worked in the air quality industry for over 40 years. I author two blogs. Environmental staff in any industry have to be pragmatic balancing risks and benefits and (https://pragmaticenvironmentalistofnewyork.blog/) reflects that outlook. The second blog addresses the New York State Reforming the Energy Vision initiative (https://reformingtheenergyvisioninconvenienttruths.wordpress.com). Any of my comments on the web or posts on my blogs are my opinion only. In no way do they reflect the position of any of my past employers or any company I was associated with.

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