I have been following the concept of carbon pricing for quite some time. While I agree that the theory that setting a carbon price could lead to the least-cost decarbonization, I also believe that there are a whole host of practical problems that mean it won’t work as suggested by the theory. One of the problems I have noted is that the actual costs of decarbonization are very large and that means a carbon price would also have to be high. In this post I try to estimate the carbon price needed to fund the CO2 reductions necessary to meet New York’s Climate Leadership and Community Protection Act (CLCPA) goal to eliminate fossil-fired generation by 2040.
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. This represents my opinion and not the opinion of any of my previous employers or any other company I have been associated with.
Background
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 a carbon price is different than a tax but, in my experience working with affected sources, it is treated just like a tax simply because the affected sources have no options to cost-effectively reduce emissions. As a result, they just add the carbon price to their cost of doing business – just like a tax. As a result, the over-riding problem with carbon pricing is that it is a regressive tax raising the price to those least able to afford it. 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.
In this post I will estimate a cost for decarbonizing the electric sector by 2040, project the CO2 emissions between the present and 2040 and calculate the carbon price needed to make those reductions.
Decarbonization Costs
The first step is to estimate how much electric capacity will be needed in 2040 so I can figure out how much additional wind and solar energy will be needed when fossil fuels are eliminated from New York’s electric generation fuel mix in 2040. Until I see a convincing argument otherwise, I believe that distributed solar, utility-scale solar, on-shore wind and off-shore wind will provide nearly all the additional energy needed to decarbonize New York’s electric generating sector. The Citizen’s Budget Commission not only provided a great summary of the CLCPA but also made estimates of the renewable capacity needed as shown in the Forecast of 2040 Capacity (MW) Resources to Meet CLCPA Goals table.
The second step is to estimate the cost of replacement power. A recent blog post at the edmhdotme blog determined the excess cost of weather dependent renewable power generation in the EU provided a technique and a reference to calculate those costs. The U.S. Energy Information Administration (EIA) Annual Energy Outlook 2020 published Cost and Performance Characteristics of New Generating Technologies in January 2020. The document includes a table with Total overnight capital costs of new electricity generating technologies by region that includes development costs for New York City and Long Island (NYCW) and Upstate New York (NYUP).
The Estimated CLCPA Cost for Wind and Solar Additional Capacity Needed for Citizen’s Budget Commission Projected Load table lists the estimated costs for each category. For the grand total I assumed all the renewables would be in the Upstate New York region. I could not find an EIA estimate for installed costs for residential solar but I did find a National Renewable Energy Laboratory (NREL) comparison of the 2018 costs which found that residential PV $2.17 per watt and that utility-scale PV with a one-axis tracker was $1.13 per watt. I estimated the residential solar costs in the table by using the 2.17 to 1.13 ratio from the NREL presentation. The grand total is $169.5 billion.
In 2019 New York electric sector CO2 emissions were 24,866,404 tons. In 2040 they are supposed to be zero. If the annual reduction is 1,184,115 tons this goal will be met. The sum of all the CO2 emitted with that annual reduction is 273,530,329 tons between now and 2040. If the carbon price is set so that the money obtained for the cumulative emissions is sufficient to pay for the $169.5 billion needed for the additional wind and solar capacity, then the carbon price would have to equal $619.54 per ton as shown in the Projected CO2 Emissions through 2040, Total Costs, and Revenues table.
This is an initial estimate of costs. The $169.5 billion capacity cost does not include the cost to provide storage when the intermittent solar and wind are unavailable, the cost to modify the transmission system to move the diffuse solar and wind where needed, or the cost to provide additoinal transmission support so that the grid can deliver power where needed. Nor does it include the cost to replace generation because the expected life-time of these renewable resources is on the order of 20 years. This is also an estimate of the costs only for power generation so the costs to electrify heating, cooking, and water heating needs and the transportation sector are not included. On the other hand, there should be some reduction of the costs for renewable generation development over time but the scale of that reduction likely is much lower than these unincluded costs.
Conclusion
I have previously stated that market signal inefficiency, the total costs of alternatives, and decreasing revenues over time were three practical reasons that carbon pricing is a practical dead end. This post quantifies these issues. This estimate only considered the installed costs of residential solar, utility-scale solar, on-shore wind and off-shore wind but estimates that the carbon price would have to be $681 per ton to provide enough money to build those facilities. This is an inefficient market signal because the Obama-era Interagency Working group social cost of carbon with a discount rate of 3% and considering global benefits is $50 in 2020 which is an order of magnitude less than the projected carbon price. Also note that in the Projected CO2 Emissions through 2040, Total Costs, and Revenues table the revenues go down significantly over time. Because the expected lifetime of the wind and solar resources is on the order of 20 years there will be a continuing need for funding these projects and there won’t be any carbon price revenues available.
My fundamental problem with the CLCPA is that it presumes that the target reductions mandated by the act are technically and financially feasible. No other jurisdiction remotely approaching the size of New York has reduced its emissions anywhere near the CLCPA targets so there are technical challenges. This analysis of carbon pricing feasibility projects enormous costs even without including storage and transmission requirements. Besides the fact that these costs are far above the purported negative externality cost in the social cost of carbon, they are so large that I cannot imagine a scenario where they would be willing accepted by the citizens of the State. Pielke’s Iron Law of Climate, “While people are often willing to pay some price for achieving climate objectives, that willingness has its limits”, surely will be the inevitable result of these programs.
Pragmatic Environmentalist of New York 
If you think it necessary to limit the use of hydrocarbon energy sources, I believe the only ethical way is to ration it, as was done during WWII. At that time, the Government had the choice of either pricing or rationing but chose the latter because of the ethical issue. Pricing it only increases the cost of the hydrocarbon fuel and the price of everything made from or by it, disadvantaging those with lower income. If both Bill Gates and the Joe Btzflk ‘s of the world each get say 5 gallons of gas per week, at least it’s fair.
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I agree that would be fair. I would love to see the reaction to it however. Imagine the rich and powerful were told that they could not fly wherever they want whenever they want. I agree that it is just not fair to disadvantage those with lower income.
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