Layman’s Guide to My Rationale to Oppose the NYISO Carbon Pricing Concept Proposal

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. I recently published a post that translated the overview of the proposal for those outside the process. This post describes the reasons I oppose the proposal.

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 the 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.” Note, however, that the NYISO stakeholder has no obligation to respond to every comment and that they have repeatedly failed to even respond to my direct questions. This was not an inclusive stakeholder process and frankly I believe that they ignored several issues that could significantly affect the viability of the program.

Reasons to Oppose the New York Carbon Pricing Proposal

Reason #1: My first reason to worry about this proposal is because of the organizations who are in favor of it. According to a letter filed on December 17, 2018 by the Independent Power Producers of New York “We appreciate that the NYISO and DPS staff have kept this process moving to the best of their abilities, and the overwhelming, and near unanimous, NYISO stakeholder support for continued work on carbon pricing in 2019 proves that this effort continues to have momentum.” The stakeholders that speak for the ratepayer have not been very vocal in this process. To me the impression that there is overwhelming support from stakeholders is proof positive that there is money to be made and reputations to be enhanced by its supporters. I oppose this because my analyses show consumers will end up paying a lot more for nothing more than signaling virtue and lining the pockets of crony capitalists.

Reason #2: The ultimate question for this program is whether carbon pricing can actually 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 that 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 oppose this because I am not optimistic that this will work as the theory predicts because of all the complications that arise trying to address the complications introduced limiting the scope of the program to such a constrained part of the economy.

Reason #3: I do not believe that this policy represents the most efficient way to make reductions. New York has ambitious goals for CO2 reductions and has participated in the Regional Greenhouse Gas Initiative (RGGI) since its inception. I have analyzed the effectiveness of the investments made from RGGI proceeds and found that in 2016 there were $436.4 million dollars invested from the proceeds and those investments reduced CO2 emissions by 382,266 tons. The resulting rate for CO2 reductions is $1,142 per ton for proceeds invested for a direct reduction signal. One problem that is ignored by NYISO and proponents for further reductions is the fact that New York has already made most of the “easy” reductions. Consequently any further reductions will be more difficult than historical reductions. As a result the carbon pricing proposal that relies on an indirect incentive for renewable energy will have a difficult time actually making any reducitons. I don’t believe the vague signal provided by the carbon price proposal could ever provide more timely and effective investments than the site-specific signals provided by RGGI and other existing programs. I opposed this proposal because there are existing programs that are more effective actually reducing CO2 emissions.

Reason #4: Clearly in order to have a carbon pricing program at some point the cost of carbon has to be established. In order to justify its CO2 reduction agenda the Obama Administration organized a working group to estimate the economic harm of CO2 emissions They developed a value for the Social Cost of Carbon (SCC) which is an estimate of the economic harm of a ton of CO2 emissions.   The NYISO carbon pricing proposal recommends that the DPS set the carbon price value and has suggested using the 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].  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. Julian Morris critiqued the IWG SCC value and noted the effect of changing the following four assumptions:

1. Change the emissions scenario to reflect more realistic assumptions regarding the relationship between emissions and economic growth;
2. Change the time horizon from 2300 to 2100;
3. Change the discount rate from 3% to 5%;
4. Change the scope from global to U.S. only.

I want to avoid getting technical but two of these assumptions are simple to understand. Ultimately the SCC estimates rely on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. The Obama IWG considered impacts out to 2300, 282 years in the future. The idea that anyone could imagine what society will be like in 2300 and with a straight face claim their model reflects any social impacts from anything going on today strikes me as overwhelming hubris. Also note that the IWG claims impacts for the globe.   Richard Tol testified that the SCC 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.” I oppose this because as proposed New York State wants to price carbon to influence alleged impacts around the world that are well beyond the scope of any New York regulation. I also oppose this carbon pricing proposal because when these four changes to the SCC assumptions were combined, the effect was to reduce the SCC by 97%, from $43 to about $1.30. Obviously using a more realistic value for the SCC makes the program worthless.

Reason #5: One of the aspects of this process that I believe is not easily understood is the potential cost to consumer. In the first place, because the NYISO system prices work in terms of dollars per amount of energy (MWhr) all the costs are listed in those units. I have little grasp understanding what those values mean to the state as a whole so I present my costs in total dollars.

On November 7, 2018 NYISO posted a synthesis report entitled Brattle Group, Resources for the Future & Daymark Energy Advisors Analysis Synthesis that summarized the approach methodology, analyses and results for three independent studies of the proposed carbon pricing initiative. I have relied primarily on that report for data referenced in this post.

In Synthesis Report Table 1, Comparison of State-Wide Increase in Wholesale Energy Prices Due to Carbon Charge, the total wholesale energy cost ranges from $17.9 per MWh to $22.2 per MWh. In order to estimate the total increase wholesale energy prices due to the carbon charge I assumed 150,000,000 MWh so the expected cost will range between $2.7 billion and $3.3 billion in 2025. Remember this program will increase those prices every year going forward.

However, the Synthesis Report reports the following changes in consumer costs:

Brattle and RFF both find aggregate customer costs would increase slightly in 2025 due to a carbon charge, increasing $0.7/MWh and $0.8/MWh respectively. Brattle finds customer cost impacts fall over time. Daymark does not report changes in customer costs.

So how do billions eventually magically turn into no impact to the consumer?

The first component of the carbon price is the direct cost. In the carbon pricing plan each ton of CO2 emitted is charged the social cost of carbon. This depends on the total emissions but for this analysis let’s assume that would equal $1.5 billion leaving between $1.2 and $1.8 billion in 2025. I leave it to the reader to estimate how likely it is that the State of New York will actually return all the money collected without sneaking in transaction costs or some other politically driven fee but I assume, contrary to all previous NYS programs, that is the case.

It is important to understand that adding the cost of carbon drives up the overall wholesale electricity. I did my own static calculation using 2015 and 2016 load and marginal emission rate data to estimate the effect of the carbon charge. The carbon charge increases costs not only due to the carbon price itself but also increases generator net revenues. My analysis showed that in 2015 the total cost of the net revenues due to higher wholesale prices is $3.027 billion as compared to $1.321 billion calculated by applying the SCC to actual CO2 emissions. The increase in costs due to the change in market clearing price will not be returned to consumers. The impact of increases to energy costs as it relates to energy producers with costs lower than the clearing price has not been addressed. In particular, what portion of the increased wholesale price goes to the existing renewables, nukes, and all the fossil gens with costs lower than the clearing price? I cannot support this because I think those added costs will never offset consumer prices.

The NYISO synthesis report claims otherwise. One of the driving reasons for the carbon price proposal is that existing renewable subsidies are difficult to administer. The Synthesis report claims significant reductions in the cost of the Renewable Energy Credits and Zero Emission Credit subsidies will offset some of the wholesale electricity increase due to the carbon price. Frankly I think that there is regulatory agency support for this initiative simply because it will reduce their administrative responsibilities.

There are several other alleged consumer benefits. The NYISO analysis claims that the carbon price will induce renewable generation to be built where it is more profitable, that is to say in downstate New York. There is no consideration of increased siting difficulties downstate. However, if you believe in their hopeful assessment then they claim that there will be reduced transmission constraint costs.

Their cost analysis modeling also makes “market adjustments to the static analysis” and assumes that because this program is so successful that further renewable energy subsidies won’t be needed. Sum up all these modeling results and they claim there won’t be a significant consumer impact.

I don’t trust these modeling results. There are too many ways that input assumptions and modeling parameters can be tweaked to impact the final results. I do not support this proposal because no one has satisfactorily explained how all the increased costs of wholesale electricity that I calculated can be so easily offset. They did not do a sensitivity analysis to examine the impacts of a range of assumptions so we don’t know their impacts.

Reason #6: I think that all carbon reduction proposals should clearly state the potential impact of the proposed action on global warming. New York State has never provided an estimate of the effect of any of its clean energy programs or direct emissions control programs on global warming. 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 Brattle analysis estimates that the change in CO2 estimates of reductions in system-wide CO2 emissions due to a New York carbon charge will be 1.5 million metric tons and Resources For the Future estimates 1.2 million metric tons. The impact of these reductions on projected global temperature rise would be at most a reduction, or a “savings,” of approximately 0.000022°C by the year 2050 and 0.000046°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 less than half an inch. 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 44 feet. I oppose this because it clearly will have no effect on global warming.

[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.