On January 10, 2023 New York Governor Kathy Hochul delivered her 2022 State of the State Address and provided legislation in her Budget Bill that proposed market-based Cap and Invest program. Since then legislative amendments (Senate Bill 4008-B) to the Hochul Administration bill have been proposed. I developed this briefing for politicians that provides specific comments about the proposed legislation and background information about market-based pollution control programs. This article consolidates information from previous articles on Cap and Invest programs so there is a lot of repetitive information.
I submitted comments on the Climate Act implementation plan including one that specifically addressed the economy-wide strategy that recommended a Cap and Invest approach. I have written over 300 articles about New York’s net-zero transition because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. I also follow and write about the Regional Greenhouse Gas Initiative (RGGI) market-based CO2 pollution control program for electric generating units in the NE United States. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide 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.
I want to publicly thank my Senator, John Mannion (D 50th Senate District), for giving his time to Ken Pokalsky, (VP New York Business Council) and myself for a briefing on this topic. Ken and I both have spent a lot of time recently trying to understand the implications of the proposed Cap and Invest program but it seems like no one is listening. Ken described the general issues facing the state’s business community and his concerns (summarized here) I covered the technical side of the plan. The slides used are available and the following material was submitted as backup. Both the slides and the documentation are boiled down to the key points in the summary that was all we had time to address.
Overview Issues Summary
Market-based pollution control programs are a well-established strategy but past success does not guarantee future results. The most common market approach is to use emissions trading whereby a limit is set on pollution levels and tradable allowances equal to the cap limit are issued to affected sources. The Federal Acid Rain cap and trade program lowered sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions more than expected at far lower costs. The Regional Greenhouse Gas Initiative has generated over $1.7 billion in revenues for New York. There are differences between the goals and results of those programs relative to the New York Cap and Invest proposal that cast doubt on the optimistic projections of its proponents. More importantly, there are components in the proposed legislation that will work against future success.
There are multiple challenges for a New York only Cap and Invest program. Greenhouse gases (GHG) are difficult to reduce because there are limited control options available. There are no viable add-on controls for most GHG emissions so switching fuels has been the primary driver of recent observed emission decreases. The only remaining options are to displace the use of fossil fuels with zero-emissions resources or to run less. That raises the threat of an artificial energy shortage if there are insufficient allowances for sources to run.
This documentation describes the current status of emissions relative to the Climate Act 2030 limit of a 40% reduction in GHG emissions from the 1990 baseline. In order to meet that mandate an unprecedented buildout of wind and solar are necessary to provide the energy needed to displace fossil-fired electric generation. At the same time, electrification is the primary emission reduction strategy for buildings and transportation which is going to increase load. The Scoping Plan recommendations for changes to New York’s Energy Plan did not include a feasibility analysis casting doubts on the viability of this effort.
Of particular concern is that there are features in the legislation that undermine aspects of previous market-based pollution control programs. Climate Act § 75-0109, Promulgation of regulations to achieve statewide greenhouse gas emissions reductions (1) lays out a public stakeholder process to promulgate rules and regulations to ensure compliance with the statewide emissions reduction limits that should be allowed to play out before any new legislation is promulgated. There are numerous technical and logistical issues that must be addressed so that a Cap and Invest market-based program can be successfully implemented. Naïve legislation could thwart an effective program.
Background
Emission market-based pollution control programs have proven to be an efficient approach if implemented correctly. The reasons that such a program is being considered in New York were laid out in the Final Scoping Plan:
The Climate Action Council (Council) has identified the need for a comprehensive policy that supports the achievement of the requirements and goals of the Climate Act, including ensuring that the Climate Act’s emission limits are met . A well-designed policy would support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions. It would provide an additional source of funding, alongside federal programs, and other funding sources, to implement policies identified in this Scoping Plan, particularly policies that require State investment or State funding of incentive programs, including investments to benefit Disadvantaged Communities. Equity should be integrated into the design of any economywide strategy, prioritizing air quality improvement in Disadvantaged Communities and accounting for costs realized by low- and moderate income (LMI) New Yorkers. Pursuant to the Climate Act, a policy would be designed to mitigate emissions leakage. Finally, an economywide strategy would be implemented as a complement to, not as a replacement for, other strategies in the Scoping Plan. A well-designed economywide program will bring about change in the market and promote equity in a way that does not unduly burden New Yorkers or with the global economy.
In general, emission reductions based on market signals rather than explicit directives offers flexibility which should reduce costs and encourages innovation. The most common market approach is to use emissions trading whereby a limit is set on pollution levels and tradable allowances equal to the cap limit are issued to affected sources. In order to comply, the sources must surrender one allowance for each ton of pollution emitted. In order for such a program to succeed there has to be a realistic cap and reduction trajectory, the pollutant has to be have regional or global impacts, and the implementation schedule has to provide time for the market to react.
New York has participated in successful emissions trading programs. It is unfortunate that the important condition that past success does not guarantee future results has been overlooked particularly because there are conditions on the past successes. The Clean Air Act Amendments of 1990 established the Acid Rain Program to reduce acidic deposition. This was a cap-and-trade program for the electric generating sector that issued free allowances based on historical operating characteristics. Initially intended to provide a 50% reduction in sulfur dioxide and nitrogen oxides emissions it was ratcheted down because emissions were reduced lower and at costs significantly lower than expected. There is an important caveat. The original concept was that coal-fired power plants would install control equipment to get the reductions necessary. However, railroad deregulation at the same time lowered coal transportation costs so much that it enabled switching to low sulfur coal from Wyoming across the country. Power plants figured out how to burn that coal and achieved reductions on the order of 90%. The Acid Rain Program incentivized the electric industry to reduce emissions but the ultimate results were influenced by other factors.
New York was an original participating state in the Regional Greenhouse Gas Initiative (RGGI). This is a Cap and Invest program in which the affected sources purchase their allowances in auctions. New York was a primary driver for RGGI and has consistently touted its success by pointing out that carbon dioxide emissions are down by more than 50% since 2000 and that they have raised over $1.5 billion. However, I have shown that this success is conditional. The primary reason New York generating unit RGGI emissions are down is because the fracking revolution reduced the cost of natural gas so much that it displaced coal and residual oil fuels. I have determined that since the beginning of the RGGI program RGGI funded control programs have been responsible only for 5.6% of the observed reductions. I believe that RGGI had very little to do with these fuel switches because fuel costs are the biggest driver for operational costs and the cost adder of the RGGI carbon price was too small to drive the use of natural gas over coal and oil.
There is no question that RGGI has successfully raised revenues but the results of those investments are disappointing. According to the latest NYSERDA RGGI funding status report the projected costs of the current programs are $776.1 million, the net greenhouse gas emission savings are 1,656,198 tons and that works out to emission cost per ton removed of $469. If all the RGGI administrative and operating costs are included another $113 million is added to the total and the emissions cost per ton removed is $537 per ton.
There is a very important pollution control consideration. Sulfur Dioxide (SO2) emissions can be controlled with add-on pollution control equipment or by switching to a lower sulfur fuel. Nitrogen Oxides (NOx) emissions can also be controlled with add-on control equipment or by combustion modifications but fuel switching does not provide much of a reduction. On the other hand, Carbon Dioxide (CO2) add-on carbon capture and sequestration control systems are not viable as an add-on control system. The only ways to reduce CO2 is to switch to a lower emitting fuel or combust less fuel. However, combusting less fuel means that less energy (for electricity, transportation, or heating) is available to meet societal needs.
Hochul Cap and Invest Proposal
I have consolidated in one document the Hochul Administration description of Cap and Invest including links to the Climate Act Scoping Plan Toolkit , references to Cap and Invest in the Scoping Plan Executive Summary, references to it in the State of the State materials, and the relevant Chapter from the Final Scoping Plan.
Hochul has said “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” My main concern is that drawing from the experience of previous programs is not nearly as simple as implied, particularly for people not familiar with the caveats and conditions associated with previous program “success”.
Hochul’s Budget Bill claims that it would be based on “best practices” gleaned from RGGI success. It goes on to note that RGGI auction proceeds were invested in “energy efficiency, renewable energy, and other programs that save consumers money on energy bills and hasten the transition to cleaner energy”; that the proposed Cap and Invest will be specifically designed to “enable public agencies to focus the investment of allowance auction proceeds in communities with particular needs”; that
“A portion of the auction revenue generated will be returned to consumers to mitigate average costs to New Yorkers”; and that the program will be designed with the capacity to join other current or future programs.
In the previous section I noted that there are caveats to RGGI success claims. One of my primary concerns is that RGGI investments did not produce cost-effective GHG emission reductions or very many reductions. I have argued that the State has to change its investment strategies to focus on emission reductions to improve that performance because future reductions are going to depend on effective investments. The low-hanging fruit of potential reductions is disappearing and that has compliance target ramifications.
Unfortunately, many programs that save consumers money on energy bills or focus on investments in disadvantaged communities with particular needs are not very effective producing significant emission reductions. Policy makers should keep this conundrum in mind. There is no resolution to the tradeoff between the need to provide ratepayers, especially those with least ability to pay, with the means to reduce energy use and the need to make emission reductions to reach the targets.
To this point I have not addressed costs. In no small part that is because so little information is available. Hochul mentioned that there would be climate rebate fund of $1 billion and I saw somewhere that represented 30% of the total expected revenues. That yields $3.3 billion for total revenues and an economy wide allowance price of $8.66. If the allowance price equals the current RGGI price of $13 per ton, then the total revenues rises to $5 billion. The New York Value of Carbon in 2022 is $129 per ton and using that would provide $50 billion per year. If the Cap and Invest proceeds are set at the rate necessary to meet projected required emission reductions, a cost estimate using the historical cost per ton reduced from RGGI investments and tons reduced per year can be determined. Depending on the interpretation of how the funding is allocated I estimate the revenues would range between $46 and $10 billion. For this spread of revenues I estimate that this will translate to $0.08 and $1.14 per gallon of gasoline and between $0.47 and $7.04 for Mcf of natural gas.
The final Hochul goal was the capacity to join other current or future programs. There are two reasons that this is unlikely. Firstly, the Climate Act has a unique emission accounting system that is incompatible with other jurisdictions. That would have to change to join other programs. The
Climate Act emission accounting system also mandates consideration of upstream emissions. Trying to extract another jurisdiction from upstream emissions would be difficult if not impossible.
Scoping Plan Evaluation Criteria
The Final Scoping Plan recommendation included evaluation criteria for an economy-wide strategy. Those criteria included certainty of emission reductions, price certainty, prioritizing emission reductions and avoiding hotspots in disadvantaged communities, and mitigating risk of leakage.
Advocates claim that the emissions cap guarantees emission reductions consistent with the Climate Act mandate. This is a naïve presumption apparently based on the fact that all the Acid Rain Program, RGGI, and the other cap and trade programs for NOx have all had emissions compliant with the caps. EPA explains that “The cap is intended to protect public health and the environment and to sustain that protection into the future, regardless of growth in the sector.” For the Acid Rain Program, the cap was originally intended to reduce emissions by 50% but later was tightened down. In the NOx cap and trade programs the caps were set based on a technological evaluation of the control technology available to affected sources. The industry – agency issues with those caps centered on whether the agency estimates for additional control levels were reasonable. Importantly, the SO2 and NOx caps were based on the feasibility of affected source characteristics and were not binding in and of themselves.
On the other hand, the CO2 cap in RGGI and the New York cap-and-invest caps are not based on technical evaluation. I define a binding cap as one chosen arbitrarily without any feasibility evaluation. In 2030 New York GHG emissions must be 40% lower than the 1990 baseline but this is an arbitrary target mandated by the Climate Act. The Scoping Plan for this transition did not include an analysis to see if this target was feasible so I think this will be risky.
The following graph lists NY GHG emissions by sector from 1990 to 2030. The data from 1990 to 2020 is from the New York 2022 GHG emission inventory. Electric sector emissions are available through 2022 and I used those with estimates based on recent averages to project emissions for the other sectors in 2021 and 2022. The emissions shown for 2023-2030 simply represent the straight-line interpolation between the 2022 emissions and the 2030 emission limits consistent with the state’s Climate Act mandate that 2030 emissions must be 40% less than the 1990 baseline emissions.
I estimate that meeting the 2030 emissions limit will require a 4.5% annual decrease from each sector from 2023 to 2030. That is an unprecedented reduction trajectory. Those percentages translate to annual reductions of 2.73 million metric tons of CO2e (MMT) for the electricity sector, 0.97 MMT for agriculture, 5.32 MMT for buildings, 1.59 MMT for industry, 4.89 MMT for transportation, and 1.88 MMT for the waste sector.
The Climate Act has exemptions for certain sectors. All components in the agriculture sector are not required to meet the 40% mandate and energy-intensive and trade exposed industries also get some sort of a pass. Even a cursory examination of the data in the graph suggests that the presumption that a binding cap will necessarily ensure compliance is magical thinking. The historical trend in electricity sector emission reductions appear similar to the trend necessary to meet the 2030 target but the historical trend was caused by fuel switching and there are no more reductions to be had in that regard. In order to reduce electricity sector emissions, the energy output will have to be displaced with wind and solar. Waste sector emissions have been more or less constant since 1990. An entirely new technology has to be implemented in the next seven years to get a 4.5% per year reduction in emissions.
Transportation can only reduce emissions if the transition to zero-emissions vehicles accelerates a lot. When I point out that there has been no feasibility analysis, my concern is that the Scoping Plan did not analyze whether the necessary technologies are likely to be available and deployed as needed and there was no consideration of what if questions. At the top of that list is “what if technology rollout is delayed?”
Another Scoping Plan criterion was price certainty. The RGGI design includes s price control mechanism. If the price gets higher than the RGGI ceiling price, additional allowances are added to the auction. If the price gets too low, then subsequent auctions reduce the number of allowances available. Obviously, adding allowances to limit high prices is incompatible with the compliance certainty criterion. Also note that these mechanisms only affect auction prices. There will be a secondary market price that will be largely unaffected by any similar mechanisms in the Cap and Invest program. The important point is that the cost of allowances that consumers pay is the uncontrollable secondary market price.
The Climate Act, Scoping Plan, the Hochul Budget Bill and at least one amendment to the Budget Bill establish a goal of prioritizing emission reductions and avoiding hotspots in disadvantaged communities. Chapter 6. Advancing Climate Justice in the Scoping Plan states:
Prioritizing emissions reduction in Disadvantaged Communities should help to prevent the formation or co-pollutant emissions despite a reduction in emissions statewide. A broad range of factors may contribute to high concentrations of pollutants in a given location that create a hotspot. The result can be unhealthy air quality, particularly for sensitive populations such as expectant mothers, children, the elderly, people of low socio-economic status, and people with pre-existing medical conditions.
The poster child for egregious harm from hotspots is fossil-fired peaking power plants. I believe the genesis of this contention is the arguments in Dirty Energy, Big Money and I have shown that that analysis is flawed because it relies on selective choice of metrics, poor understanding of air quality health impacts, unsubstantiated health impact analysis, and ignorance of air quality trends. In this context, I have seen indications that there are some people who believe that GHG emissions themselves have some kind of air quality impact exacerbated in disadvantaged community hot spots. That is simply wrong – there are no health impacts associated with carbon dioxide emissions at current observed ambient levels. Dirty Energy, Big Money and arguments in the Scoping Plan are based on co-pollutant emissions (NOx and PM2.5) that allegedly cause impactful hot spots that result in unhealthy air quality. Note that all facilities in New York State have done analyses that prove that their emissions do not directly produce concentrations in the vicinity of power plants that contravene National Ambient Air Quality Standards (NAAQS) mandated to protect human health and welfare. Trying to make the Cap and Invest program, that is appropriate for controlling GHG emissions to mitigate global warming, also address a neighborhood air quality problem already covered by other air quality rules is not in the best interests of a successful Cap and Invest program. I do not know how the allowance tracking system could be modified to address hot spots without creating major unintended consequences.
The final evaluation criterion in the Scoping Plan is mitigating risk of leakage. Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around geographically rather than reducing it. Ideally the carbon price should apply to all sectors across the globe so that leakage cannot occur. Preventing leakage in an area as small as New York is impossible because, for example, car owners on the border will simply cross the border to purchase fuel. Any program conditions to limit emissions in smaller areas of New York will guarantee problems.
Cap and Invest Concerns
Implementation of a Cap and Invest program requires consideration of a myriad of technical and logistical issues best addressed by subject matter experts unencumbered by restrictive legislation. Climate Act § 75-0109, Promulgation of regulations to achieve statewide greenhouse gas emissions reductions lays out a public stakeholder process to promulgate rules and regulations to ensure compliance with the statewide emissions reduction limits that should be allowed to play out before any new legislation is promulgated.
There are numerous technical and logistical issues that must be addressed so that a Cap and Invest market-based program can be successfully implemented. Previous Cap and Trade programs relied on emissions estimates from instruments and EPA has developed a comprehensive and transparent reporting methodology. Instruments cannot be used to estimate emissions from every automobile in the state so emissions estimates based on fuel use must be used. The logistics to develop such a system will take time and must be considered when deadlines are set.
The arbitrary 40% reduction by 2030 target codifies an aggressive reduction schedule by limiting allowance availability in the Cap and Invest proposal. The required emission reductions per year to meet the 2030 mandate are so aggressive that it is unlikely that there will be sufficient allowances available for all sectors to meet that mandate. The result will be an artificial energy shortage that will limit electric production as well as gasoline and natural gas availability. The stakeholder process must develop a plan to address this potential outcome.
The stakeholder process cannot operate in a vacuum. In order for the stakeholder process to function properly the Hochul Administration is going to have to commit to some revenue target and allocation of funds. Although emission reduction priorities in certain areas of the state is a noble concept it is incompatible with the global impacts of GHG emissions. More importantly putting it into practice is extraordinarily difficult.
Senate Bill 4008-B
The legislative amendments (Senate Bill 4008-B) to the Hochul Administration bill should be rejected out of hand because they are not based on how emissions market systems work. They represent nothing more than ideological misunderstanding of these systems. If implemented the Cap and Invest program will fail. The problematic provisions address hot spots, allowance banking, allowance trading, and emission offsets.
I already addressed hot spots above.
The allowance banking proposed amendments to Hochul’s budget bill include a new section to the existing Climate Act law. Proposed § 75-0123. Use of allowances states that:
- Allowances must be submitted to the department for the full amount of greenhouse gas emissions emitted during such compliance period. If greenhouse gas emissions exceed allowances submitted for the compliance period, such shortfall shall be penalized pursuant to section 75-0129 of this article.
- Any allowances not submitted at the end of the compliance period in which they are issued by the authority shall automatically expire one hundred eighty days after the end such compliance period if not submitted prior to such date.
The provision for expiring allowances would prohibit allowance banking. Allowance banking is a feature of all existing cap and trade programs and is one of the reasons that they have been successful. Banking enables affected sources to handle unexpected changes in operation, compliance monitoring problems, and long-term planning.
The authors of this amendment have not figured out that the primary source of GHG emissions is energy production. One major difference between controlling CO2 and other pollutants is that there are no cost-effective control technologies that can be added to existing sources to reduce emissions. Combine that with the fact that CO2 emissions are directly related to energy production, the result is that after fuel switching the primary way to reduce emissions is to reduce operations. Consequently, CO2 emission reductions require replacement energy production that can displace existing production.
A feature of RGGI that addresses the link between energy use and CO2 emissions is a three-year compliance period with banking. It is included because it was recognized that in a year when it is either really cold or really hot GHG emissions go up as energy use goes up. In a year when it is mild, energy use goes down and emissions go down. To address that variability RGGI has a three-year compliance period and allows sources to bank allowances for this balancing inter-annual variability. The inevitable result of this amendment language would be insufficient allowances in a year with high energy use and that translates to an artificial shortage of energy.
There also is a provision addressing allowance trading. There is no better example of ideological passion over-riding reality than language in the proposed amendments to Hochul’s budget bill that prohibits allowance trading. Proposed § 75-0123. Use of allowances states that:
3. Allowances shall not be tradable, saleable, exchangeable or otherwise transferable.
Words cannot describe how little I think of the authors’ understanding of cap and invest based on this language. Cap and invest programs are a form of cap-and-trade programs. Anyone who thinks that a program that excludes allowance exchanges has no concept whatsoever of how these programs are supposed to work and how they have been successfully working.
There is one aspect of the proposed cap and invest legislation that is conspicuous by its absence – offsets. In RGGI a CO2 offset allowance represents “a project-based greenhouse gas emission reduction outside of the capped electric power generation sector.” In the California program Offset Credits are issued to “qualifying projects that reduce or sequester greenhouse gases (GHG) pursuant to six Board-approved Compliance Offset Protocols.” Recall that Hochul stated that “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” Furthermore, the Climate Act has a net-zero target. In other words, emissions from certain sectors that can never be expected to reduce their GHG emissions to zero (like aviation) will have those emissions offset by programs that reduce or sequester GHG emissions.
In a rational world, it is obvious that the agriculture and forestry sectors that are the likely sources of most offsets in New York would get incentives to develop offsets compliant with qualification protocols used in other successful programs. After all the Climate Act needs offsets to meet its net-zero targets and offset programs are components of the similar, successful programs New York wants to emulate.
New York’s Climate Act is not rational. Chapter 17 in the Final Scoping Plan explains why offsets are not mentioned:
The inclusion of offset programs in some cap-and-invest programs, such as RGGI, has engendered some criticism, particularly from environmental justice organizations that contend that the availability of offsets reduces the certainty of emission reductions from the regulated sources. In any cap-and-invest program adopted to meet Climate Act requirements, the role of offsets would have to be strictly limited or even prohibited in accordance with the requirements of ECL § 75-0109(4). Under that provision, DEC would have to ensure that any Alternative Compliance Mechanism that is adopted would meet various requirements specified in that provision of the Climate Act. Therefore, offsets would have little, if any, role under a cap-and-invest program designed to comply with the Climate Act.
In short, because there was “some criticism” from environmental justice organizations, the Progressive Democrats in control of the Administration and Legislature are excluding this “important cost-containment element” used in other successful programs. Given that offsets are a necessary component for meeting the net-zero by 2050 target I expect that a different subsidy will be used to incentivize offsets.
Conclusion
I have tried very hard to not get involved with politicians over my career because I don’t think there is much interest in my nuts-and-bolts concerns. Unfortunately for me, the Climate Act is at its heart a political construct. In order to try to get some rationality into the implementation process it is apparent that I have to engage with politicians. In that regard, Senator Mannion is to be commended for listening to the technical side of the Cap and Invest proposal and I appreciate his time very much.
There have been a couple of positive notes. According to Buffalo Business First, New York DEC Commissioner Basil Seggos says the regulations forming the state’s cap-and-invest program likely won’t be ready before a deadline this year. Both Senator Mannion and Ken Pokalsky said they don’t believe the Cap and Invest program language will be included in the final Budget Bill. That suggests that there will be time to develop a plan that addresses all the technical and logistical issues inherent in a New York only Cap and Invest program without legislative naïve interference.
Pragmatic Environmentalist of New York 