Update on Climate Leadership & Community Protection Act Emissions and the Value of Carbon

On July 18, 2019 New York Governor Andrew Cuomo signed the Climate Leadership and Community Protection Act (CLCPA), which establishes targets for decreasing greenhouse gas emissions, increasing renewable electricity production, and improving energy efficiency. Earlier this month I documented issues with the benefits calculations methodology that I expect will be used to show that the “benefits” of Greenhouse Gas emission reductions outweigh the costs.  The New York State Department of Environmental Conservation (DEC) recently updated their Value of Carbon guidance and this post describes the changes and, more importantly, the lack of one change I recommended.

I have written extensively on implementation of the CLCPA because I believe the solutions proposed will adversely affect reliability and affordability, will have worse impacts on the environment than the purported effects of climate change, and cannot measurably affect global warming when implemented.   I briefly summarized the schedule and implementation: CLCPA Summary Implementation Requirements.  I have described the law in general, evaluated its feasibility, estimated costs, described supporting regulations,  summarized some of the meetings and complained that its advocates constantly confuse weather and climate in other articles.  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.

Background

The DEC updates to their Value of Carbon Guidance are available at Value of Carbon Guidance and updated supplemental materials. The most notable change is that DEC settled on a 2 percent discount rate as the central value, but will also report impacts at one and three percent.  All calculated values are updated in the new version as a result of this action. 

In my previous post I noted that the Guidance includes a recommendation how to estimate emission reduction benefits for a plan or goal.  I believe that the guidance approach is wrong because it applies the social cost multiple times for each year of an emission reduction.  I submitted comments and recommended that the Guidance be revised.  When I reviewed the recent revisions, I noted that the there was no change to the guidance so I sent a follow up email asking whether my concern had been discussed.  My correspondence with DEC on this topic is available here. 

In brief my concern is that the Guidance section entitled “Estimating the emission reduction benefits of a plan or goal” includes the following example:

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 $123 per metric ton. The value of the reductions in 2021 are equal to $123 times 5,000 metric tons, or $635,000; in 2022 $124 times 10,000 tons, etc. This calculation would be carried out for each year and for each discount rate of interest.

I explained that it is inappropriate to claim the benefits of the annual reduction over any lifetime or to compare it with avoided emissions.  Consider that in this example, if the reductions were all made in the first year the value would be 50,000 times $123 or $6,150,000, but the guidance approach estimates a value of $36,410,000 using this methodology. The social cost calculation sums projected benefits for every year subsequent to the year the reductions are made out to the year 2300.  Clearly, using cumulative values for this parameter is incorrect because it cumulatively counts those benefits repeatedly.  I also contacted social cost of carbon expert Dr. Richard Tol about the use of lifetime savings and he stated that “The SCC should not be compared to life-time savings or life-time costs (unless the project life is one year)”.  Note that Dr. Tol is using the social cost of carbon nomenclature rather than value of carbon label. 

I received the following response:

We did consider your comments and discussed them with NYSERDA and RFF. We ultimately decided to stay with the recommendation of applying the Value of Carbon as described in the guidance as that is consistent with how it is applied in benefit-cost analyses at the state and federal level. 

When applying the Value of Carbon, we are not looking at the lifetime benefits rather, we are looking at it in the context of the time frame for a proposed policy in comparison to a baseline. Our guidance provides examples of how this could be applied. For example, the first example application is a project that reduces emissions 5,000 metric tons a year over 10 years. In the second year you would multiply the Value of Carbon times 10,000 metric tons because although 5,000 metric tons were reduced the year before, emissions in year 2 are 10,000 metric tons lower compared to the baseline where no policy was implemented. You follow this same methodology for each year of the program and then take the net present value for each year to get the total net present value for the project. If you were to only use the marginal emissions reduction each year, you would be ignoring the difference from the baseline which is what a benefit-cost analysis is supposed to be comparing the policy to. 

The integration analysis will apply the Value of Carbon in a similar manner as it compares the policies under consideration in comparison with a baseline of no-action. 

Discussion

DEC believes that their comparison of policies under consideration relative to the no-action baseline is appropriate but they ignore the ultimate purpose of the value of carbon.  At the end of the day, it should be used to determine whether the control policies instituted to meet the reduction targets of the CLCPA provide social value by reducing GHG emissions at a control rate ($ per ton) that are less than the projected social costs. Instead, the integration analysis will compare not only the emission reductions per year but also the avoided emissions relative to a no-action baseline over the time frame of the policy. 

 The calculation of avoided emissions is a public relations ploy along the lines of the claim that an emissions reduction policy is equivalent to taking so certain number of cars off the road.  It may be a very nice number but what is it good for?  Consider, for example, the CLCPA target of a 40% reduction in greenhouse gas (GHG) emissions from 1990 levels by 2030.  In order to evaluate compliance with that target the state will calculate emissions in 2030 and compare them to 1990 levels.  Evaluation of the CLCPA targets includes no consideration whatsoever of avoided emissions or cumulative reductions.

More importantly, in the context of the value of carbon, it is absolutely incorrect to use avoided emissions or lifetime reductions.  DEC’s Value of Carbon guidance defines the social cost of carbon as:

An estimate, in dollars, of the present discounted value of the future damage caused by a metric ton increase in emissions into the atmosphere in that year or, equivalently, the benefits of reducing emissions by the same amount in that year. It is intended to provide a comprehensive measure of the net damages—that is, the monetized value of the net impacts—from global climate change that result from an additional ton of emissions.

Glaringly, there is no mention of avoided emissions or cumulative reductions.

Conclusion

If the societal benefits of GHG emission reductions are greater than the control costs for those reductions, then there is value in making the reductions.  If that is not the case then New York should re-think its mitigation targets and policies and concentrate on “no regrets” policies such as adaptation and resiliency investments.  If New York wants to make a contribution to climate change mitigation, then money should be invested in research and development to produce mitigation measures that are cheaper than the social costs.

It is obvious listening to the Climate Action Council meetings that the “plan” is to prove the value of the advisory panel emission reduction recommendations by calculating the social costs and comparing them to the reduction costs.  Obviously, this is “thimble and the pea” time and the CLCPA hucksters will be inflating the benefits at every opportunity and discounting the costs at the same time.  DEC’s response to my comment concluded that “The integration analysis will apply the Value of Carbon in a similar manner as it compares the policies under consideration in comparison with a baseline of no-action”.  In the first place the concept of a value on carbon is contrivance designed to justify mitigation policies. Secondly the DEC values of carbon proposed exceed the Federal values to further inflate the “benefits” by choosing assumptions that get higher values.  To top it all off, now we know that the CLCPA integration analysis will use the values of carbon incorrectly to further inflate the benefits.

Another theme in the Climate Action Council meetings is constant reference to their allegiance to the “science”.  In this instance the science says apply the value of carbon only to emission reductions and not to avoided emissions or cumulative emission reductions.  That fact is inconvenient so the real “science” is ignored.