Earlier I described the Federal Energy Regulatory Commission (FERC) technical conference regarding Carbon Pricing in Organized Wholesale Electricity Markets held on September 30, 2020. On October 15, 2020 FERC proposed a policy statement to “clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. I also described the proposed policy statement that seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules.”
The post on the policy statement mentioned that I intended to personally comment on the concerns I raised in my personal blog post on the FERC technical conference. I submitted comments as a private citizen. The technical conference convinced FERC commissioners that carbon-pricing was an “efficient” market-based tool but nobody asked and no one proved that they work. In my opinion the first rule of efficient policy is that it works. I believe that those who support carbon pricing on theoretical economic grounds are overlooking or are unaware of practical issues I have raised. Cynic that I am, I think the primary value to FERC and the RTO/ISO operators is that the carbon price makes their lives easier. That it will have significant impacts on consumers and not do anything for the climate is somebody else’s problem.
In order to determine whether any carbon pricing proposal will affect the justness and reasonableness of rates I argued that the Commission must consider whether the proposal will reduce carbon dioxide emissions at a cost below some standard of reasonableness. There is a cost where the abatement costs exceed any estimates of the cost impacts of CO2 on the climate. Despite its flaws the Social Cost of Carbon (SCC), the present-day value of projected future net damages from emitting a ton of CO2 today, is a widely used metric to establish a reasonable value. Because my primary concern is New York’s Climate Leadership and Community Protection Act (CLCPA) I proposed using New York’s proposal to use the Interagency Working Group 2016 estimates that translate into a 2020 value of carbon dioxide of $53-421 per ton, with a central value of $79-125 per ton”.
The FERC notice of the proposed policy statement on Carbon Pricing in Organized Wholesale Electric Markets states that “We agree that proposals to incorporate a state-determined carbon price in RTO/ISO markets could, if properly designed and implemented, significantly improve the efficiency of those markets”. I argued that there are practical reasons why it is impossible to properly design and implement a carbon pricing scheme that will affect efficiency of those markets in the best interests of the public.
Carbon pricing is a climate policy approach that charges sources for the tons of carbon dioxide that they emit. A Resources for the Future (RFF) summary lists several attributes that they claim makes carbon pricing more attractive than other potential policies to reduce carbon dioxide emissions:
- Carbon pricing allows emitters to choose the most efficient method to reduce emissions.
- An economy-wide carbon price applies a uniform price on CO₂ emissions regardless of the source.
- A carbon price encourages individuals and businesses to reduce their carbon emissions more than conventional regulations.
- A carbon price creates a new revenue stream that can be used in a number of ways.
I compared those attributes to the real-world of carbon pricing.
RFF states that “carbon pricing allows emitters to choose the most efficient method to reduce emissions”. In the context of power plants under FERC jurisdiction this is mostly irrelevant. In the first place, there are no cost-effective add-on controls for CO2 reductions, so fossil-fired electrical generators only have limited options. For an individual power plant operator, the only effective approach is to switch to a lower emitting fuel. Power plants can also be replaced in whole or part by alternative generation, but the business model of most de-regulated generating companies precludes the option to develop replacement generation. I have shown that in RGGI the market participants don’t behave as expected by economic market theory so the markets don’t necessarily behave as the economists think they should. As a result, all the modeling and laboratory testing economic results “proving” market efficiency should be viewed cynically. I believe that even though carbon pricing advocates have convinced themselves that somehow carbon pricing is different than a tax, the reality is that because of the limited options for compliance any carbon price is treated just like a tax by electric generating operators. Because energy taxes are inherently regressive, the carbon price result is not in the best interest of low-income ratepayers.
There is another aspect to carbon emissions reductions that is relevant to FERC. In order to replace firm, dispatchable fossil-fired capacity the total costs to make in-kind replacement with renewable wind and solar have to be included. No one at the technical conference addressed how a carbon price signal for generators would lead to the development of the transmission and ancillary grid support services necessary to support intermittent and diffuse wind and solar generation. An electric system carbon price requires any generator that emits CO2 to include a carbon price in their bid which serves to provide the non-emitting generators with more revenue. However, solar and wind generators are not paying the full cost to get the power from the generator to consumers when and where it is needed. Because solar and wind are intermittent, as renewables become a larger share of electric production energy storage or energy now provided by traditional generating sources will be needed but there is no carbon price revenue stream for energy storage. Because solar and wind are diffuse, transmission resources are needed but solar and wind do not directly provide grid services like traditional electric generating stations. Energy storage systems could provide that support but they are not subsidized by the increased cost to emitting generators. When the carbon pricing proposal simply increases the cost of the energy generated, I think that approach will lead to cost shifting where the total costs of fossil fuel alternatives have to be directly or indirectly subsidized by the public.
RFF and the economists at the FERC Technical Conference all agree that an economy-wide carbon price that applies a uniform price on CO₂ emissions, regardless of the source, is the ideal solution. On the other hand, speakers at the conference admitted that this ideal implementation was unlikely. Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around the globe rather than actually reducing it. Economic leakage is a problem where the increased costs inside the control area leads to business leaving for non-affected areas. There also is an economic leakage effect in electric systems where a carbon policy in one jurisdiction may affect the dispatch order and increase costs to consumers in another jurisdiction. As a result, work arounds are necessary to address leakage which complicates the implementation and may lead to unintended consequences.
RFF’s third attribute stated that ‘A carbon price encourages individuals and businesses to reduce their carbon emissions more than conventional regulations”. There are several problems with this ideal. In a situation where there is a specific target like New York’s CLCPA 2040 target for zero emissions from the electric sector, it is necessary to consider the total costs and then the necessary carbon price. In order for a carbon price to effectuate this change the carbon price has to equal the cost of the conversion divided by the total tons emitted over the implementation period. I conservatively estimated the cost for New York to meet the state’s goal of a zero-emissions electric sector by 2040 as $620 per ton. The cost for converting the country by 2035 as has been proposed would be much higher because the number of years in the implementation period is shorter and the reduction costs themselves would be higher because New York’s starting point for emissions is relatively lower. Recall that the highest social cost of carbon value that New York is considering is no more than $421 per ton.
The second problem is that individuals and businesses also have limited opportunities to reduce carbon emissions. One commentator points out that “The only logical reason for a carbon tax is to reduce emissions. Such a tax might help to reduce energy consumption, but only at punitive levels, because energy demand is so inelastic. Therefore, the real intention is to make fossil fuels so expensive that renewables can eventually become competitive, along with carbon capture and sequestration, hydrogen heating etc.”
In order for a carbon price to be more effective than conventional regulation the funds received will have to be spent effectively. I have evaluated the results of the investments made by regulatory agencies to date in RGGI measured as the cost per ton reduced. The RGGI states have been investing investments of RGGI proceeds since 2008 but their investments to date are only directly responsible for less than 5% of the total observed reductions. Furthermore, from the start of the program in 2009 through 2017, RGGI has invested $2,527,635,414 and reduced annual CO2 emissions 2,818,775 tons. The resulting cost efficiency, $897 per ton reduced, far exceeds the range of SCC values representing the value of reducing CO2 today to prevent damages in the future.
Theory says that the carbon price alone can incentivize lower emitting energy production and that the market choices will be more efficient than government-mandated choices. Ultimately the market signal question is whether the SCC value is sufficient to incentivize the market to invest in zero GHG emitting generation resources. There is no sign that RGGI motivated the market to act and it is not clear that the carbon pricing schemes proposed under the purview of FERC will provide enough incentive either.
The final RFF attribute stated that “A carbon price creates a new revenue stream that can be used in a number of ways.” This attribute is more of a concern on the value of the approach than a direct impact on the electric generation sector. The revenue stream from a carbon pricing stream could be very large. In the classical theory of carbon pricing those revenues are re-distributed to offset other taxes so that the consumers come out whole. In practice all or part of the revenues have usually been diverted away from direct consumer rebates to fund carbon reduction programs. If carbon reduction programs are dependent upon a continuing revenue stream there is a fundamental problem. As CO2 is reduced revenues decrease and eventually either the carbon price has to increase to a very high level or the revenues used to fund mitigation programs will be insufficient to make further reductions.
In order to convince me that carbon pricing has a hope of working in the US electricity market I would need to see an estimate of the cost to convert the nation’s electric system to zero emissions and combine that with recent emissions to develop a cost per ton for the transition. I believe that the cost for converting the country by 2035 would be much higher than any estimate of the social cost of carbon.
If the estimated emissions reduction cost per ton is higher than the social cost of carbon, then the costs to mitigate climate change effects are greater than the alleged impacts. A rational alternative response would be to invest in research and development to produce cheaper zero emissions electric generating resources and finance adaptation measures until such time that cost-effective zero-emission resources are available. I asked if FERC does not hold the States to this just and reasonable standard then who will?
I concluded that RTO/ISO market rules that incorporate a state-determined carbon price in RTO/ISO markets cannot be just and reasonable for the rate payers whatever the value to the RTO/ISO market operators. I note that among the advocates for carbon pricing at the Technical Conference were RTO/ISO operators who apparently believe that carbon pricing will make their regulatory responsibilities easier. However, a carbon price will have significant impacts on consumers and not cost effectively reduce CO2 emissions.