It has been a long time since I have posted anything about the New York State Carbon Pricing Initiative. A couple of recent events precipitated my desire to do another post especially as it relates to New York’s Climate Leadership and Community Protection Act (CLCPA). This post describes my concerns with carbon pricing in general and the New York proposal in particular.
Reason to Post
I am posting because of two recent items. According to Marie French in Politico’s New York Energy September 18, 2019 edition:
“The state’s top utility regulator said Gov. Andrew Cuomo’s administration continues to await evidence on whether carbon pricing offers a better way to achieve New York’s energy policy goals before offering a verdict on the proposal’s fate. Public Service Commission Chairman John Rhodes spoke to a gathering of energy industry executives at the Independent Power Producers of New York’s annual fall conference at the Gideon Putnam. He was asked head-on about the administration’s position on carbon pricing and reiterated the wait-and-see tack taken by policymakers thus far. “When carbon pricing was first proposed, we were interested and as it’s been shaped and subjected to analysis we have remained interested,” Rhodes said. “But from the very beginning we stated the basis on which we would be interested … which is as long as it’s a more effective instrument of state policy.” The New York Independent System Operator (NYISO) has been grappling with how to implement carbon pricing since a process was kicked off by Rhodes and then-NYISO leader Brad Jones in August 2017. NYISO has indicated it doesn’t plan to take a vote on the proposal without support from the Cuomo administration, and the state would have to set the price for carbon under the scheme.”
The other item is a video entitled How carbon pricing can help support the CLCPA posted by the NYISO on August 14, 2019. The video features NYISO principal economist Nicole Bouchez who explains “how injecting a “social cost of carbon” into wholesale electricity markets provides an efficient dispatch mechanism for selecting energy resources with the lowest emissions. This offers the state another tool for achieving its aggressive carbon reduction goals.”
It sounds to me like the Administration is nervous about this approach and so won’t make a commitment. Bouchez who has spent the last 18 months or so developing the proposal is lobbying for its use. I have not been following the proposal this year because my comments to the NYISO during their development phase last year were ignored and this year it went to a different phase with a different committee that does not even allow comments from outside parties. I have plenty of other things to do to so wasting my time commenting on this topic to an organization that ignores comments was not a priority. I will post once again on this topic for your edification.
New York Carbon Pricing
In its simplest form, the carbon pricing initiative would add a carbon cost adder to all electric generation sources in New York. This is supposed to reflect the social cost of carbon dioxide emissions. My last post on this initiative translated the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force for an outside the New York Capital District energy wonk audience. Upon further review of that post I still stand by all of my concerns. There are significant logistical issues associated with implementation of the proposed scheme. NYISO has consistently downplayed those issues. I am concerned that implementation will be a logistical nightmare for the people who have to do the work but that is not my biggest worry. There are so many unknowns in how this will work that I think it is likely that there will be inadvertent gaming of the system and the potential for intentional gaming that will not be in the interest of the public’s need for just and reasonable electric rates.
When I came back to this topic after stepping away from the nitty-gritty details of this initiative for eight months, I realized that my primary concern was not in the details of the application but in the theory. For some reason my top viewed post at my blog is Academic RGGI Economic Theory of Allowance Management and there is a similar problem with the carbon pricing theory. Economist theorize that the CO2 allowances in the Regional Greenhouse Gas Initiative are treated as storable commodities. As such the current price and the plan for accumulation of allowances should depend on the expected long-run total supply compared to the expected long-run total demand. However, in the real-world, allowances are not treated as storable commodities by the affected sources. Instead, allowances are treated as compliance requirements with short-term horizons by sources who own the most allowances. I am not about to disagree that they should not be taking a longer-term view but the reality is that for a variety of reasons it does not happen that way. Eventually I predict that the departure from reality in the theory that has driven the RGGI plan will cause problems because the latest round of revisions to the rule depended on the theory more than the history of the program.
For the NY carbon pricing initiative, I have a similar concern rationalizing theory and practice. The theory says that when the price of electricity is raised by pricing carbon, the increased costs at the higher CO2 emitting facilities will reward existing lower emitting units and will incentivize investment in new lower emitting facilities. If the market is efficient then the most cost-effective reductions will occur and everyone will be happy. I think that there are a number of practical reasons that this will not work as proposed in the New York market.
My most general concern is that the carbon pricing initiative is just for the electric sector in one market. Ideally you want a carbon price on all sectors across the globe. I don’t think that is ever going to happen because of the tradeoff between the benefits which are all long term versus the costs which are all short term. I don’t see how anyone could ever come up with a cost scheme that equitably addresses the gulf between the energy abundant “haves” and those who don’t have access to reliable energy. Trying to force fit this global theory into the New York electricity market will likely bring up many unintended consequences. The biggest problem is simply leakage between New York and every other neighboring electric market.
I also don’t think that advocates for this approach have fully considered how reductions could be implemented. Who is going to invest in the alternatives? Existing fossil-fired generating sources in New York are on death row if we are to believe that the CLCPA target to eliminate CO2 emissions from the electric sector by 2040. Even if there were cost-effective add-on CO2 controls for existing sources, I doubt that anyone would invest given that end date. I don’t think that there are any existing power facilities with room for much in the way of diffuse renewable generation. Solar cells could work but there isn’t enough room for much at existing facilities.
Ultimately, I think that the investment problem boils down to an indirect signal versus a direct signal. In a recent post, I analyzed NYSERDA’s investment of RGGI auction proceeds. Comparing different programs, I concluded that the more there is a focus on direct investments in emission reductions the better the cost benefit ratio. On one hand it could be seen as intuitively obvious but the point is that carbon pricing proposals rely on a completely indirect impetus for emission reductions. As such those proposals, as theoretically appealing as they may be, may be much less cost effective than suggested.
That same post showed that RGGI investments are not very cost efficient. New York will likely propose to use the Obama era Social Cost of Carbon value which is $50 in 2019. The best NYSERDA investment program category cost benefit ratio is three times greater than that value. The cost benefit ratio for all the NYSERDA investments is over nine times greater than the $50 SCC value. If a mix of investments has this poor a record of cost efficiency then how could can an indirect price signal at that level trigger any response? It may well be that the carbon price SCC value is not a strong enough signal to drive investment.
Before New York commits to this “bright and shiny object” that advocates can brag about, someone should do some analysis of market price signals for actual investments. While the theory might sound grand, if the proposed signal does not actually drive investments the only thing this will do is raise electricity prices. Among the many logistical implementation issues is how the money collected will be equitably returned to ratepayers. Even if there were a logical and equitable way to apportion costs back across the state, the Cuomo Administration has a record of diverting funds intended for climate mitigation to suit its purposes.