The New York State Energy Research and Development Authority (NYSERDA) report New York’s RGGI-Funded Programs Status Report – Semiannual Report through June 30, 2020 (“Status Report”) describes the programs New York has set up to invest the proceeds from the Regional Greenhouse Gas Initiatives. In this post I update an earlier evaluation whether the investments made from the RGGI auction proceeds are cost effectively reducing CO2.
I am a retired air pollution meteorologist who has been involved in the RGGI program process since its inception sometime in 2004. I have written extensively on RGGI because the program demonstrates practical difficulties with greenhouse gas control programs. 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.
RGGI is a market-based program to reduce greenhouse gas emissions. It is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector. According to a RGGI website: “The RGGI states issue CO2 allowances which are distributed almost entirely through regional auctions, resulting in proceeds for reinvestment in strategic energy and consumer programs. Programs funded with RGGI investments have spanned a wide range of consumers, providing benefits and improvements to private homes, local businesses, multi-family housing, industrial facilities, community buildings, retail customers, and more.” New Jersey left RGGI in 2012 and re-joined RGGI in 2020. Virginia joined in 2021 and the Governor but not the Legislature of Pennsylvania want to join in 2022.
RGGI has been touted as a successful example of a “cap and dividend” pollution control program. New York State has been involved in the program since its inception and claims it yields environmental, health, and economic benefits. Advocates for carbon pricing schemes assume that the investments from the proceeds are worthwhile so I will evaluate that presumption in this article.
In order to determine the value of emission reduction investments I will use the Social Cost of Carbon (SCC). This is supposed to represent the future cost impact to society of a ton of CO2 emitted today. It is a policy tool that attaches a price tag to the long-term economic damage caused by one ton of carbon dioxide, hence the cost to society. It was extensively by the Obama Administration to justify the Clean Power Plan, has been proposed for use in the New York Independent System Operator carbon pricing initiative and is included in New York’s Climate Leadership and Community Protection Act. At the end of 2020, the New York Department of Environmental Conservation (DEC) released a guidance document that provides social cost values for carbon dioxide, methane, and nitrous oxide for use by State agencies along with recommended guidelines for the use of these and other values by State entities.
Therefore, it is entirely fair to use the New York value of carbon as a metric to determine if the investments made from carbon pricing income are cost effectively reducing CO2 as needed to meet the CLCPA targets. New York guidance recommends using a 2% discount rate and establishes a 2021 value of $127 per metric ton. If New York investments reduce CO2 emissions at a rate below that metric, then the investment will be less than the social costs to society of the ton of CO2 removed from the New York energy system. If it is greater than $127, then the pollution reduction costs are greater than the cost to society and the investments are not a cost-effective solution.
NYSERDA RGGI Program Status
The key table in the Status Report is Table 2 Summary of Expected Cumulative Annualized Program Benefits through 30 June 2020. It provides costs, energy savings, electricity savings or renewable energy production, greenhouse gas emission savings and the calculated cost benefit ratio. The $/ton reduced metric is presented on an annual basis and as expected lifetime savings. In order to determine if the NYSERDA RGGI investments cost-effectively reduce CO2 emissions necessary for the CLCPA targets, the annual numbers must be used. More on this later.
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 20 programs with associated CO2 reduction benefits and another 18 programs with no claimed CO2 reductions. Two of the 20 programs and another is close enough meet the $127 New York Value of Carbon metric for cost effective investments. Seventeen programs and the 18 programs with no claimed reductions do not meet this cost effectiveness standard. Table 4 in the Status Report notes that the NYSERDA investments spent through June 30, 2020 total $1,139.8 million. In Table 2 of the Status Report the total incentives and total associated costs for the three programs that are cost effective total 12.3 million. In other words, 1.1% of the NYSERDA RGGI funds cost-effectively reduce CO2 emissions.
The Status Report describes the programs and after reading the summaries I am not impressed and in fact I question the results. The most cost-effective program, Multifamily Performance Program Assessments in the Green Jobs Green New York sector, had a cost effectiveness value of $61/Ton CO2e. The program provides financing and co-funding for comprehensive energy assessments and the development of an Energy Reduction Plan, serving market-rate and low- to moderate-income residential buildings with five or more units to increase adoption of clean energy in NYS. Accomplishments. According to the summary table, they managed to do a total of 316 assessments through December 2018 that resulted in 61,795 residential units served with installed measures for a cost of $3.3 million in “total incentives” and another $1.4 million in “total associated costs”. Summing the incentives and associated costs and dividing by the 61,795 residential units yields $76.06 per unit. The summary indicates that this is the cost of the comprehensive energy assessment and development of a reduction plan and that rate per unit is reasonable. But this also means that the actual costs to implement the energy reduction are not included. So how did NYSERDA claim any CO2 reduction benefits and what are the chances that the actual CO2 reductions were double-counted? Finally, note that this program is complete.
There is another concern. A quick perusal of the programs listed with no reduction benefits demonstrates justifiable cynicism of yet another government program controlled by politicians. The programs range from practical to clear pork barrel. New York wants to be able to track emissions from generation sources within the State and from imported sources to create “tradable generation attribute certificates”. Rather than fund the NY generation attribution tracking program through the general fund it is convenient to fund this through RGGI auction proceeds. The research projects are another segment of funding where there is a justifiable rationale for funding projects that have no reduction benefits short-term because they could lead to long-term reductions. At the extreme of clearly unjustified funding is the Brookhaven National Laboratory Ion Collider. I have no idea the tortured logic that was used to justify spending any RGGI funds on this.
CO2 Cost Benefit Ration Annual vs. Expected Lifetime Savings
Earlier I noted that in order to determine if the NYSERDA RGGI investments cost-effectively reduce CO2 emissions necessary for the CLCPA targets, the annual numbers must be used. While there may be a rationale to include the lifetime expected cost benefit savings relative for financial comparisons, in order to determine CO2 reduction cost-effectiveness for the CLCPA targets or the New York Value of Carbon it is inappropriate. I did a post on the New York Clean Energy Dashboard last year that made that point and heard from the Senior Manager of Communications at NYSERDA claiming that when comparing clean energy program investments to the Social Cost of Carbon, the more appropriate comparison point is the expected lifetime value. I responded with an explanation why that was untrue but did add the distinction between financial comparisons and carbon social costs to my post.
The New York Value of Carbon Guidance includes a section entitled “Estimating the emission reduction benefits of a plan or goal” with an example that states:
The net present value of the plan is equal to the cumulative benefit of the emission reductions that happened each year (adjusted for the discount rate). In other words, the value of carbon is applied to each year, based on the reduction from the no action case, 100,000 tons in this case. The Appendix provides the value of carbon for each year. For example, the social cost of carbon dioxide in 2021 at a 2% discount rate is $127 per metric ton. The value of the reductions in 2021 are equal to $127 times 5,000 metric tons, or $635,000; in 2022 $129 times 10,000 tons, etc. This calculation would be carried out for each year and for each discount rate of interest.
This example makes the same mistake. The Integrated Working Group damages approach value is the net present benefit of reducing carbon dioxide emissions by one ton. The calculation methodology determines that value from the year of the reduction out to 2300. It is inappropriate to claim the benefits of the annual reduction over any lifetime. Consider that in this example, if the reductions were all made in the first year the value would be 50,000 times $127 or $6,350,000, but the guidance approach estimates a value of $37,715,000.
When I was developing a response to NYSERDA’s communications manager, I contacted Dr. Richard Tol, Professor of the Economics of Climate Change at Vrije Universiteit Amsterdam and a Professor of Economics at the University of Sussex who has direct experience estimating the social cost of carbon. I asked the following question:
There is a current proceeding where NYSERDA is claiming that their investments are cost-effective but they use life-time benefits. I concede that the ratepayer cost-benefit calculation should consider the life-time avoided costs of energy and can see how that reasoning might also apply to the social cost of carbon. However, in the following definition, SCC is the present-day value of projected future net damages from emitting a ton of CO2 today, I can interpret that to mean that you shouldn’t include the lifetime of the reduction. Am I reading too much into that?
He graciously responded that the use of life-time savings or costs is inappropriate in the following:
Apples with apples.
The Social Cost of Carbon of 2020 is indeed the net present benefit of reducing carbon dioxide emissions by one tonne in 2020.
It should be compared to the costs of reducing emissions in 2020. The SCC should not be compared to life-time savings or life-time costs (unless the project life is one year).
Dr. Richard S.J. Tol
MAE Professor Department of Economics,
Room 281, Jubilee Building
University of Sussex, Falmer, Brighton BN1 9SL, UK
I have contacted DEC about the Value of Carbon example error. The DEC response noted that “we will be making additional updates to the Value of Carbon guidance and this would be one update that could be addressed”. In my correspondence with NYSERDA I offered the opportunity to discuss why the lifetime savings cost effectiveness metric is appropriate for social cost comparisons but never received an answer.
According to the NYSERDA 2003-2017 Patterns and Trends document the 2017 estimated New York CO2 emissions from fuel combustion were 157 million metric tons. The total annualized cost benefit ratio ($ per ton of CO2 reduced from NYSERDA’s RGGI investments is $587 per ton. If New York has to rely on NYSERDA to reduce fuel combustion emissions to zero for the CLCPA, then the cost would be $91.948 billion.
NYSERDA’s continued use of the $ per CO2 expected lifetime savings metric without qualification that it is inappropriate to use to compare to any social cost of carbon metric or for comparison of reductions necessary for the CLCPA targets is disappointing at best. There is no excuse to continue this charade. Of course, the fact that only 1 .1% of the NYSERDA RGGI funds cost-effectively reduce CO2 emissions programs suggest that this would be an embarrassment.
The CLCPA has set three greenhouse gas emission targets: 40% reduction in GHG emissions by 2030, 85% reduction in GHG emissions by 2050, and 100% carbon-free Electricity by 2040. The ultimate problem is there is no requirement to determine whether these goals are financially possible. The NYSERDA performance is not encouraging.