I have to give credit to the supporters for NYISO carbon pricing proposal. They are pulling out all the stops. The latest is a coalition of like-minding organizations named “Carbon Free New York” who believe “implementing the NYISO carbon pricing proposal in a timely and efficient manner and incorporating the cost of carbon into the electricity sector, New York will align its wholesale electricity markets with its public policy objectives to decarbonize the electricity sector as set forth in the Climate Leadership Community Protection Act (CLCPA)”. I seriously doubt that any of these organizations really understand the ramifications of carbon pricing.
I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003. During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting. I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs. I have followed the New York State Independent System Operator (NYISO) carbon pricing initiative since its inception and my work on that program is the primary basis for this summary.
In a post at Watts Up With That, Carbon Pricing is a Practical Dead End, I noted that carbon pricing proponents have convinced themselves that somehow this is different than a tax but, in my experience working with affected sources, it is treated just like a tax. As a result, the over-riding problem with carbon pricing is that it is a regressive tax. In that article, I described a number of other practical reasons that cap-and-invest carbon pricing or any variation thereof will not work as theorized: leakage, revenues over time, theory vs. reality, market signal inefficiency, control options, total costs of alternatives, and implementation logistics. In addition, The Regulatory Analysis Project (RAP) recently completed a study for Vermont, Economic Benefits and Energy Savings through Low-Cost Carbon Management, that raises additional relevant concerns about carbon pricing implementation.
Because the primary focus of Carbon Free New York is the NYISO carbon pricing initiative I think it is appropriate to consider the cost-effectiveness of New York’s carbon reduction investments to date. The Social Cost of Carbon (SCC) is supposed to represent the future cost impact to society of a ton of CO2 emitted today. Therefore, it is entirely fair to use it as a metric to determine if the investments made from carbon pricing income are cost effectively reducing CO2. I believe that the NYISO will base their carbon pricing on a $50 global social cost of carbon at a 3% discount rate so that is the cost benefit effectiveness threshold metric I will use.
The fundamental assumption for any carbon pricing program is that the proceeds can be invested effectively. However, the observed results for New York’s experience in RGGI suggests that this may not be the case. The New York State Energy Research and Development Authority (NYSERDA) report New York’s RGGI-Funded Programs Status Report – Semiannual Report through December 31, 2018 (“Status Report”) describes how New York invested the proceeds from the RGGI auctions. The NYSERDA RGGI Status Report Table 2 – Ranked Cost Benefit Ratio Data table lists all the programs in the NYSERDA report ranked by the annual cost benefit ratio with just that parameter. It lists 19 programs with associated CO2 reduction benefits and another 18 programs with no claimed CO2 reductions. None of the 19 programs with CO2 reduction benefits meets the $50 SCC metric for cost effective investments. Clearly the 18 programs with no claimed reductions would not be able to meet the metric either.
New York’s Existing Carbon Pricing Program
Advocates for carbon pricing programs often point to the success of RGGI, New York’s existing carbon pricing program. I looked into those claims in an article published at Whats Up with That and in a more detailed article on this website.
RGGI supporters who claim it is successful point to emission reductions of 40 to 50%. However, when I looked at the changes in generation mix it is obvious that emissions reductions from coal and oil generating are the primary reason why the emissions decreased. Both coal and oil emissions have dropped over 80% since the beginning of the program. I believe that the fuel switch from coal and oil to natural gas occurred because natural gas was the cheaper fuel and had very little to do with RGGI because the CO2 allowance cost adder to the plant’s operating costs was relatively small. There is no evidence that any affected source in RGGI installed add-on controls to reduce their CO2 emissions. The only other option at a power plant is to become more efficient and burn less fuel. However, because fuel costs are the biggest driver for operational costs that means efficiency projects to reduce fuel use means have always been considered by these sources. Because the cost adder of the RGGI carbon price was relatively small I do not believe that any affected source installed an efficiency project as part of its RGGI compliance strategy.
As a result, the only reductions from RGGI that can be traced to the program are the reductions that result from direct investments of the RGGI auction proceeds. Information necessary to evaluate the performance of the RGGI investments is provided in the RGGI annual Investments of Proceeds update. In order to determine reduction efficiency, I had to sum the values in the previous reports because the most recent report only reported lifetime benefits. In order to account for future emission reductions against historical levels the annual reduction parameter must be used. The Accumulated Annual Regional Greenhouse Gas Initiative Benefits table lists the sum of the annual avoided CO2 emissions generated by the RGGI investments from three previous reports. The total of the annual reductions is 2,818,775 tons while the difference between the baseline of 2006 to 2008 compared to 2017 emissions is 59,508,436 tons. The RGGI investments are only directly responsible for less than 5% of the total observed reductions!
While I do not dispute that the theory of a comprehensive, global carbon pricing may be a great mechanism for reducing GHG emissions, advocates for the programs overlook logistical and practical concerns when plans for limited area, one-sector pricing schemes are proposed. Trying to force fit this global theory into just the New York electricity market is an extraordinarily difficult problem. As proposed, the NYISO carbon pricing proposal will likely result in power leakage where energy and emissions are not reduced but simply shift emissions associated with power production out of the state within the inter-connected electric grid.
Advocates for carbon pricing schemes also assume that the investments from the proceeds are worthwhile, but I have found that is not the case. The indirect price signal appears to be too weak to cause meaningful reductions. Investment decisions also matter. The Regulatory Analysis Project (RAP) study: Economic Benefits and Energy Savings through Low-Cost Carbon Management notes that “Many advocates of carbon pricing begin with the proposition that the main point is to charge for carbon emissions “appropriately” and that carbon reductions will surely follow in the most efficient manner. While carbon pricing is a useful tool in the fight against climate change, there is now substantial experience to suggest that wise use of the resulting carbon revenues is equally important, or even more important, if the goal is to actually reduce emissions at the lowest reasonable cost.”