On December 7, 2018, the New York Independent System Operator (NYISO) released a draft for discussion purposes only for the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force. This post attempts to summarize this proposal. I have translated the text of the overview of the concept for those outside of the process to date.
New York Carbon Pricing Proposal History
On August 11, 2017, 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. 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.
Over the past year the involvement of the DPS has steadily declined so now it is primarily a NYISO process. Over this time the stakeholder process has considered a straw proposal, draft recommendations, and this latest document “continues to build on these prior documents and represents continued refinements of the market concepts based on additional input received from stakeholders, both during IPPTF meetings and in writing and the analytical information provided to the task force.”
Overview of Carbon Pricing Concept
Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force, Page 4
The NYISO would incorporate the social cost of carbon emissions into the NYISO-administered wholesale energy markets using a carbon price in dollars per ton of carbon dioxide emissions. The NYISO would apply the carbon price by debiting each energy supplier a charge for its carbon emissions at the specified price as part of its settlement. Suppliers would embed these additional carbon charges in their energy offers (referred to as the supplier’s carbon adder or adjustment in $/MWh) and thus incorporate the carbon price into the unit commitment, dispatch, and price formation through the NYISO’s existing processes. In addition to charging internal emitting generators, the NYISO would charge imports and credit exports the LBMP carbon impact to prevent the carbon charges on internal generation from causing emissions leakage and costly distortions.
Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, a carbon charge would raise the energy market clearing prices whenever carbon-emitting resources are on the margin (referred to as the carbon pricing effect on LBMPs, or LBMPc). All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions. A carbon charge would also provide incentives for innovative low carbon technologies that may not yet be developed. Low carbon dioxide emitting New York resources, including efficient carbon-emitting units, renewables, hydropower, and nuclear generators, would benefit from higher net revenues. Load Serving Entities (LSEs) would continue to be charged the LBMP for wholesale energy purchases, which would account for the carbon adder of the marginal units. The NYISO would return the carbon charge residuals (Carbon Residuals), collected from carbon dioxide emitting suppliers and net imports, to LSEs.
Translation of the Overview (Indents are the translations of the Overview text)
The NYISO would incorporate the social cost of carbon emissions into the NYISO-administered wholesale energy markets using a carbon price in dollars per ton of carbon dioxide emissions.
The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. The carbon price will be set at the social cost of carbon (SCC) which will be determined by the DPS “pursuant to the appropriate regulatory process”. The choice of the carbon price provides the entire basis for this approach and that issue has not been considered in this process. I have commented on that problem (for example my comments on the April 23, 2018 ). 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 with that SCC value is that it 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.” In addition, the Trump Administration has proposed a different and far lower value for the SCC. For me the bottom line is that most of New York State ratepayers are aware of the ramifications of this value and the possibility that it could add a billion dollars per year to the rates of the state.
The NYISO would apply the carbon price by debiting each energy supplier a charge for its carbon emissions at the specified price as part of its settlement.
The carbon dioxide emissions from every energy supplier will be estimated for the same time period as the settlement prices by the NYISO.
Suppliers would embed these additional carbon charges in their energy offers (referred to as the supplier’s carbon adder or adjustment in $/MWh) and thus incorporate the carbon price into the unit commitment, dispatch, and price formation through the NYISO’s existing processes.
The carbon price will calculated as the SCC value times the tons emitted. It is very likely that the carbon price will set the clearing price for the settlements. New York is an unregulated electric market and the NYISO is the interface between the suppliers and load serving entities who provide the power to consumers. The price NYISO pays the suppliers is the Locational Based Marginal Price (LBMP). Each supplier submits a bid to provide power at a specific price. The NYISO keeps track of how much power is produced and who provides it. Suppliers get paid the highest price bid that provides power to the grid for each hour.
In addition to charging internal emitting generators, the NYISO would charge imports and credit exports the LBMP carbon impact to prevent the carbon charges on internal generation from causing emissions leakage and costly distortions.
This sentence suggest that this is simple but in reality this is much more complicated and could doom the entire plan. Not only does the NYISO have to estimate the carbon dioxide emissions from the sources in its control area where it has enough information to determine what was running and at what level now they have to make an estimate of the carbon emissions from imports where they do not have that information. This is outside my area of expertise but the experts who have commented on this do not seem impressed that the plan proposed will work. I am also uncomfortable because I suspect this complexity will lend itself to unintended gaming.
Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, a carbon charge would raise the energy market clearing prices whenever carbon-emitting resources are on the margin (referred to as the carbon pricing effect on LBMPs, or LBMPc).
It is not unreasonable to assume that the increase in cost due to the carbon price will put CO2-emitting resources on the margin all the time because of the cost of fuel and CO2. I have estimated that if carbon pricing was in effect in 2015 the total cost to be $3.027 billion and in 2016 $2.985 billion which are both more than double the direct tax of Social Cost of Carbon (SCC) times the annual CO2 emissions ($1.321 billion in 2015 and $1.248 billion in 2016).
The NYISO analyses claim that there will not be any significant cost increase to the consumer. They assume that the actual carbon price costs will be completely returned to the consumers despite New York’s poor record in the past. Other cost increases are supposed to be balanced by decreases in other costs: lower subsidies to renewables from other state programs, lower subsidies to nuclear power from a state program, and an assumed shift of renewables to high load areas (Downstate NY) because of the price signal. The assumed shift of renewables is controversial because it ignores all the siting constraints that have so far reduced renewable development downstate.
All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions.
One of the great ironies of this program is the fact that because different fossil-fired sources have different rates and the highest emitting rate sets the marginal price then all the fossil-fired sources with lower rates will get a windfall equal to the difference in the CO2 rates times the SCC. The NYISO has never quantified how the carbon prices monies will be allocated across source categories.
A carbon charge would also provide incentives for innovative low carbon technologies that may not yet be developed.
In theory this sounds possible but in practice this pricing signal will likely be so weak that development of new low carbon technologies due to this program is unlikely. There are so many incentives already in place the suggestion that this will drive development is implausible.
Low carbon dioxide emitting New York resources, including efficient carbon-emitting units, renewables, hydropower, and nuclear generators, would benefit from higher net revenues.
While this is true, as noted above the NYISO has never quantified how much of the higher net revenues would go to which of these categories. It is likely that it will significantly add to the revenues of carbon-emitting units.
Load Serving Entities (LSEs) would continue to be charged the LBMP for wholesale energy purchases, which would account for the carbon adder of the marginal units.
This is just noting that the existing revenue system will remain in place.
The NYISO would return the carbon charge residuals (Carbon Residuals), collected from carbon dioxide emitting suppliers and net imports, to LSEs.
All the cost estimates assume that all the carbon price money will be returned to the consumer. I think that it is unlikely that at least some of the money won’t be diverted to cover the cost of returning this money. In addition, New York does not have a good record investing proceeds from the Regional Greenhouse Gas Initiative (RGGI) as originally intended. New York lawmakers have twice diverted RGGI proceeds directly into the general fund. Moreover, as shown by the Environmental Advocates of New York, the Cuomo Administration has used RGGI funds to replace other funding sources for existing programs rather than funding the original intent which was for additional programs.
Conclusion
The ultimate question that must be resolved is whether carbon pricing can work in the wholesale electric market sector in New York State. I agree that the theory of a carbon price on the whole economy and all energy sectors lets the market decide how best to reduce carbon is attractive. However, in this application it would only apply to one energy sector in one region of the economy. I am not optimistic that this will work as advertised.
I attempted to translate the text for those outside the process. I also mentioned some of the issues with this policy in this post. The comments I submitted late last summer provide more details for my concerns. There are many implementation concerns that NYISO has glossed over that I believe are significant problems. Ultimately, I fear that this policy will be implemented with much hoopla and self-congratulations by the advocates of the program and the consumers of New York will be saddled with another program that increases costs without any tangible benefits to society.
Pragmatic Environmentalist of New York 