For the past month or so I have been preparing comments on the New York State Department of Environmental Conservation (DEC) proposed revisions to their Part 242 CO2 Budget Trading Program rule. This post summarizes my Part 242 Comments addressing the background for the rule revisions and rationale used for significant rule changes. There is a second post that addresses the Regulatory Impact Statement for the proposed rule changes.
I submitted comments because I want my family to be able to afford to continue to live in New York State. The proposed rule is consistent with the Climate Leadership and Community Protection Act (“Climate Act”) that will necessarily affect the price of energy in New York and based on results elsewhere I believe those costs will ultimately be unacceptable. I have written a series of posts on the feasibility, implications and consequences of the law. I am a retired electric utility meteorologist with nearly 40 years of experience analyzing the effects of emissions on the environment. The opinions expressed in this post 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 proposed revisions to Part 242 primarily implement Regional Greenhouse Gas Initiative (RGGI) program changes set forth in the updated RGGI Model Rule. There are several substantive changes.
The proposed Program revisions will cap regional CO2 emissions at approximately 75 million tons annually beginning in 2021 and decrease the cap by 2.275 million tons annually. There are changes to the Cost Containment Reserve (CCR) that modify the CCR trigger price and the maximum amount of CCR allowances available at auction each year. This feature puts a limit on the upper bound of costs and the proposed program revisions create an Emissions Containment Reserve (ECR), that will put a lower bound on costs. Simply put if the price gets too high allowances are added and if the price gets too low allowances are subtracted.
The rule also includes a provision for a Third Adjustment for Banked Allowances that will adjust the budget for 100 percent of the pre-2021 vintage allowances held by market participants as of the end of 2020, that are in excess of the total quantity of 2018, 2019, and 2020 emissions. This provision is included to prevent a large allowance bank. If the allowance bank is larger than the fourth control period emissions then they will adjust the size of the cap.
For the most part the DEC proposed revisions simply implement the RGGI Model Rule and as such there is little chance for meaningful change based on comments received. Nonetheless, because there are issues with a couple of the proposed revisions and the Regulatory Impact Statement that provides justification of the changes, I spent quite a bit of time developing comments. The revised rule proposes to expand applicability under Part 242 to capture certain units that serve an electricity generator with a nameplate capacity equal to or greater than 15 MW and I show that the rationale used to justify this change is incorrect. RGGI recently released a guidance document that includes a schedule for the calculation of the third adjustment for banked allowances that I believe inappropriately ensures an adjustment of the allowance bank. Finally, one of the purported benefits of this regulation is that New York’s climate leadership will entice other jurisdictions to emulate New York by setting an example. However, the justification for these revisions provides New York citizens insufficient evidence to support the proposed changes and sets a poor example for others to follow.
There were three components to the comments I submitted and I will discuss one in this post. I addressed three underlying suppositions driving the proposed revisions: that RGGI has been a success and deserves to be revised, that expanding the applicability of the program to generating units greater than 15 MW but less than 25 MW is warranted, and that a binding cap is an appropriate goal. There was a section with specific comments on the text of the regulation but I will not discuss those comments in a blog post. A second post discusses the claims in the Regulatory Impact Statement (RIS) that were used to justify the proposed actions.
The underlying premise of the proposed actions is that the Regional Greenhouse Gas Initiative has been an unqualified success and deserves to be expanded and revised. Sprinkled throughout the RIS are statements such as: “contributing to a 50% reduction in CO2 from affected power plants in New York, it is estimated that the RGGI program provided $1.7 billion in avoided public health costs in New York by reducing associated air pollutants”. My comments on this topic were based primarily on the many posts that I have done on RGGI. Rather than re-hash all the background information available in my previous posts I will simply summarize the key points.
The “RGGI is a success” statements are based on a naïve comparison of emissions before and after RGGI program implementation. I compared CO2 emissions in the nine-state RGGI region for a baseline period (2006-2008) before the start of RGGI to annual emissions since. The total emissions have decreased from an annual average baseline of over 127 million tons prior to the program to just under 75 million tons in 2018. This represents a 40% decrease for the RGGI region as a whole as compared to a 50% reduction in New York State CO2 emissions. However, it is important to evaluate why the emissions decreased. When you compare emissions by the primary fuel type burned it is obvious that emissions reductions from coal and oil generating are the primary reason why the emissions decreased. Note that both coal and oil emissions have dropped over 80% since the baseline. Natural gas increased but not nearly as much.
Ultimately, the only reductions from RGGI that can be directly 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!
The proposed revisions expand applicability under Part 242 to capture certain units that serve an electricity generator with a nameplate capacity equal to or greater than 15 megawatts (MW). The only rationale provided is that “New York stakeholders raised concerns during the extensive outreach efforts that the cost of complying with RGGI might result in increased operation at units not subject to the regulatory provisions of Part 242, particularly at smaller units below the existing 25 megawatt (MW) applicability threshold”.
Sadly, New York State energy and environmental policy is more about optics than scientific facts. In order to describe this proposal based on facts I believe that, at a minimum, there would be a list of affected units, an estimate of their emissions, and an evaluation of the stakeholder concern that they might run more in the future. There is no listing of affected units and obviously no estimate of emissions. My best guess is that there will be 69 affected units. I estimated that emissions averaged 126,843 tons over a five-year period and that in the highest year the CO2 emissions were 163,042 tons. That represents about a half a percent of the total NYS emissions. The rationale is not based on a quantified estimate just a “feeling” that it might happen. In fact, elsewhere the document itself in the RIS Model Rule Policy Case Program Design Assumption description suggests that these units will run less. The modeling results compare two cases and in the Reference Case New York is a net importer of 2,709 GWh in 2031 but New York imports more in the Model Rule Policy Case due to lower in-state generation from gas units backing off”, my emphasis added in bold. Furthermore, the DEC promulgated rules late last year that will result in the retirement of most of these units anyway.
The RIS mentions a binding cap with respect to two aspects of the proposed rule. During the last program review the RGGI states decided to set the regional emissions cap in 2021 to 75,147,784 tons and then reduce it by 2.275 million tons per year thereafter, resulting in a total 30 percent reduction in the regional cap from 2020 to 2030. In addition, the RGGI states included a budget adjustment for banked allowances if the allowance bank exceeded the total quantity of 2018, 2019, and 2020 emissions at the end of the fourth control period. The RIS claims this will “help create a binding cap”.
My interpretation of a cap and trade “binding cap” is that it requires emission reductions from affected sources as a result of the control program itself and not because of other factors. During the program review process, environmental stakeholders insisted that a “binding cap” was necessary despite significant reductions. In this instance I think there are considerations that make that a poor choice. This topic is important enough to warrant its own post but I will briefly address my concerns here.
There is an important difference between cap and trade programs for SO2 and nitrogen oxides (NOx) emissions and cap and invest programs for GHG emissions. In particular, there are add-on control options for SO2 and NOx whereas there isn’t any cost-effective option for CO2. As a result, affected sources could directly control their SO2 and NOx compliance and, more importantly, the cap limit can be set based on technologically available control performance. In RGGI and other GHG emissions programs, there are limited direct options for the affected sources and, going forward especially, compliance is going to have to rely on indirect reductions, i.e., someone will have to build a zero-emitting plant that displaces enough output from a fossil plant so that enough allowances are available to cover the affected source requirements. As a result, the ultimate control strategy for an emissions marketing CO2 control program is to run less and hope power is available from somebody else.
Future emission limits are based on past RGGI success but I have shown that most of the success was the result of fuel switching to a lower priced fuel. A recent report from the Department of Energy’s Lawrence Berkeley National Laboratory, “The Impact of Wind, Solar, and Other Factors on Wholesale Power Prices: An Historical Analysis—2008 through 2017,” confirms that emission prices have been a minor factor in wholesale electric price changes in the NYISO. The factors that affect wholesale electric prices determine the change in costs of production which in turn govern how much a particular unit operates. During the ten-year period of the study “falling natural gas prices were the dominant driver of overall market-wide average price drops, reducing average annual wholesale prices by $7–$53 per megawatt-hour (MWh) over the last decade”. Note that in Figure ES-1 Impact of Wind, Solar, and Other Factors on Wholesale Power Prices from that document that the $53 per MWh reduction was for the NYISO.
There is a limit to fuel switching, New York has closed all its coal-fired power plants and I believe the fuel-oil fired power plants cannot reduce emissions any more without shutting down. While there are still opportunities elsewhere in RGGI the fact is that there is a limit to this option. Combine this with the fact that past RGGI investments have not been particularly effective (only responsible for 5% of the observed reductions) that means that a binding cap will be inevitable. While there are mechanisms that are supposed to address the risk that affected sources will be unable to obtain allowances to run and have to shut down, the concern that this is uncharted territory and has risks to reliability remains.
Third Adjustment to the Allowance Bank
The RGGI model rule includes a Third Adjustment for Banked Allowances that will adjust the budget for 100 percent of the pre-2021 vintage allowances held by market participants as of the end of 2020, that are in excess of the total quantity of 2018, 2019, and 2020 emissions. That translates to: if the allowance bank is larger than the fourth control period emissions then they will adjust the size of the cap. This provision is included to prevent a large allowance bank going forward and is directly related to the binding cap arguments.
The clear intent of the adjustment was that there should be a limit on the size of the allowance bank going forward in 2021 based on the status after the emissions through the end of 2020 were surrendered. On April 20, 2020 RGGI quietly posted a guidance document, RGGI Compliance: CO2 Budget Source Fact Sheet (“Fact Sheet”), that sets a schedule in the “dates to remember” section that states the final true-up of allowance surrender for fourth control period emissions will occur on April 2, 2021. Using that schedule, the comparison of fourth control period emissions and the allowance bank occurs before reconciliation thus ensuring the third allowance bank adjustment.
The rationale for the timeline necessary to compare the fourth control period emissions to the allowance bank on April 2, 2021 ignores reality. According to the Fact Sheet, the states need 31 days to ensure compliance for each CO2 budget source. The compliance test compares the certified number of allowances submitted by each affected source against the certified number of tons emitted for each CO2 budget source. Given that the Potomac Economics Report on the Secondary Market for RGGI CO2 Allowances for Q1 2020 released on March 13, 2020 included the allowances that were deducted for 2019 interim compliance based on the March 1, 2020 compliance certification submittals there is every reason to expect that there is a report that lists the emissions and allowances so that this comparison is a trivial effort. This mismatch in dates will artificially reduce the allowances available for auction in 2021 (and beyond) and is not consistent with the discussions surrounding banked allowance adjustments during the public review of the Model Rule.
I recently listened to the June 24 meeting of the New York Climate Action Council Policy in which New York’s climate leaders repeatedly expounded on the importance of science driving New York policy. However, as the implementation of this regulation shows, it is more about rhetoric than science. In this regulation, smaller combustion sources are to be regulated. The hypothesis is that they will be regulated because they will run more but there is no evidence provided why that might be the case. In fact, they don’t even describe which units will be affected and how much they emit. If science was the driving factor the hypothesis for each rule change would be tested to prove the case for the proposed action.