In order to meet the Climate Leadership & Community Protection Act (Climate Act) the Hochul Administration has proposed the New York Cap-and-Invest (NYCI) program. The regulatory process to set up this market-based emissions trading program is underway. Not content to let the that process play out Assemblyperson Anna Kelles has introduced a bill to “amend the environmental conservation law and the public authorities law, in relation to establishing an economy-wide cap and invest program to support greenhouse gas emissions reductions in the state”. Unfortunately, the basis for this legislation is flawed because its authors do not understand what makes market-based emission reduction programs work.
I have followed the Climate Act since it was first proposed, submitted comments on the Climate Act implementation plan, and have written over 400 articles about New York’s net-zero transition. I have worked on every emissions trading program affecting electric generating facilities in New York since 1990 including the Acid Rain Program, Regional Greenhouse Gas Initiative (RGGI), and several Nitrogen Oxide programs since the inception of those programs. I also participated in RGGI Auction 41 and successfully won allowances which I held for several years. I follow and write about the RGGI cap and invest CO2 pollution control program and New York carbon pricing initiatives so my background is particularly suited for evaluating the NYCI proposal and this proposed legislation. The opinions expressed in this post do not reflect the position of any of my previous employers or any other organization I have been associated with, these comments are mine alone.
Overview
The Climate Act established a New York “Net Zero” target (85% reduction in GHG emissions and 15% offset of emissions) by 2050. It includes an interim 2030 reduction target of a 40% reduction by 2030 and a requirement that all electricity generated be “zero-emissions” by 2040. The Climate Action Council (CAC) was responsible for preparing the Scoping Plan that outlined how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible using zero-emissions electricity. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to develop the Draft Scoping Plan outline of strategies. After a year-long review, the Scoping Plan was finalized at the end of 2022. In 2023 the Scoping Plan recommendations were supposed to be implemented through regulation, PSC orders, and legislation. Not surprisingly, the aspirational schedule of the Climate Act has proven to be more difficult to implement than planned and many aspects of the transition are falling behind. NYCI is an example of a program that is taking longer to develop than is consistent with the mandates.
Capital Tonight Interview with Kelles
Susan Arbetter interviewed Kelles about her legislation on Capital Tonight. The description of the interview stated:
New York state Assemblymember Anna Kelles has introduced legislation that serves as an alternative to the state’s emerging cap and trade system.
Cap and trade is a program used to help meet climate goals by capping pollution and then authorizing tradable allowances between companies, creating a new market.
New York is currently creating a cap and trade system under its 2019 climate law.
Assemblymember Kelles is carrying legislation that would transform this system into what she’s calling a “cap and invest” system. She joined Capital Tonight’s Susan Arbetter to discuss her bill.
The video for the interview is embedded in the description. Arbetter introduced the interview with a slide “Cap and Trade” that made the following points:
- Caps emissions in New York
- Emissions credits for sale
- Companies can sell emissions credits for profit
- Proposal would reinvest revenues of credit sales in climate projects
Arbetter claims that the Kelles legislative proposal would make the market-based system a cap and invest program. There is disconnect here. The NYCI proposal is a cap-and-invest program as I have described previously. The program will cap emissions in New York. The permits to emit a ton of GHG emissions, known as allowances, will be distributed primarily though auctions. The proceeds will be used to invest in projects that reduce GHG emissions and prioritize investments in “frontline disadvantaged communities”. Arbetter’ s statement that companies can sell the allowances for profit is technically true, but the reality is that the affected companies buy what they need for their own compliance and do not purchase allowances at the auctions to play the market for profit. On the other hand, there are no limits to participation in the proposed NYCI design so traders can purchase allowances and try to make profits.
Arbetter asked Kelles what she was not happy with in the proposed NYCI design. The first reason she gave was that “instead of what we agreed to in last year’s budget to create a cap-and-invest program this is instead a cap-and-trade program”. As noted previously, the state plan is a cap-and-invest program. I think her mis-conception is that NYCI allows trading of the allowances, so it is “cap-and-trade”. NYCI also allows entities to bank or carry over unused allowances between compliance periods.
The Kelles legislation includes the following that upends the approach used in all previous market-based emission reduction systems:
§ 75-0123. Use of allowances.
1. Allowances must be submitted to the department for the full amount of greenhouse gas emissions emitted during a given compliance period. If greenhouse gas emissions emitted during a given compliance period exceed allowances submitted for such compliance period, such shortfall shall be penalized pursuant to section 75-0129 of this article.
2. 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 of such compliance period if not submitted prior to such date of expiration.
3. Allowances shall not be tradable, sellable, exchangeable, or otherwise transferable.
In addition to these limitations in NYCI there is a three-year compliance period and in the Kelles legislation there is a one-year compliance period. These differences destroy the flexibility that has made market-based emissions control program successful. All programs include penalties if an affected source is unable to surrender an allowance for each ton emitted. The limitations that allowances not used expire and that allowances “shall not be tradable, sellable, exchangeable, or otherwise transferable” are incompatible with previous programs and would be unfair to market participants.
The NYCI proposal builds on the experience of RGGI which New York State claims has been successful and has worked for market participants. NYCI offers the allowances in quarterly auctions and compliance is for a three-year period. Participants in the program will develop a bidding strategy to purchase the number of allowances that they expect to use during the compliance period. Experience in the RGGI cap-and-invest program showed that a three-year compliance period enabled affected sources to effectively match their allowance needs with their emissions. Because GHG emissions are closely tied to energy use, emissions vary with weather conditions with more emissions and allowances needed in hot or cold years and less in average conditions. The ability to bank and trade allowances enables entities to correct their projections and account for inter-annual variation.
In the Kelles proposal if each individual source did not match their allowances purchases based on projected operations to their actual emissions, then they would be stuck with excess allowances that they cannot sell or trade and will expire. That is an unfair approach. In the first place, allowances are purchased in lots of 1,000. The odds of any source emissions being in multiples of 1,000 is nearly zero and many sources total emissions are less than 1,000. As it stands now, a company with multiple sources purchases allowances for them all and allocates them to individual accounts for compliance. This practice would be outlawed by the prohibition on trading. Many participants rely on emission marketers who purchase allowances at auction for resale or facilitate trades between those companies that have excess allowances and those that need them. Small companies rely on these marketers for their allowances because they don’t have the expertise to participate in the auctions. The RGGI cap-and-invest approach enables flexibility that makes compliance cost-effective.
Another issue that Kelles said she was not happy with is that NYCI “creates an extensive secondary market”. One example she gave was that the limit on the number of allowances purchased is 25% so you “could have a situation potentially where only four entities own all the allowances” and they could exert market control and sell them for profit. This has been an on-going concern with RGGI, but they included a market monitoring component expressly to address the concern. RGGI started in 2009 and the problem has not come up. NYCI proposes to use the same mechanism.
Kelles also said that her legislation would shift the emphasis to investments rather than profits which she wants to see. When you look at a market-based emissions system from the outside, the activist community that is providing information to Kelles only see dollar signs and believe that somehow industry is profiting from the program at the expense of consumers. I also think that academics have contributed to this perception because they believe that the allowances are treated as marketable commodities by the compliance entities. In reality, entities affected by these emissions trading programs prioritize compliance above all and rarely treat the allowances as a source of profit. It is simply wrong to think of these programs as evil because there are some profits involved. Those profits incentivize the flexibility that in the big picture reduces overall costs.
The activists who are influencing Kelles rank protections to disadvantaged communities very high. There are very few examples where emissions market programs have adversely affected those communities and most studies disagree. The bigger problem with this concern is that market-based emissions programs are not designed to address local issues. Kelles said that emitters are predominantly in disadvantaged communities, and it is “necessary to reduce the GHG emissions that are negatively impacting those communities”. Greenhouse gases do not have direct health-based air quality impacts so activists use co-pollutants for the adverse impacts claims. That ignores the fact that there are programs in place designed to address co-pollutants emitted by sources in disadvantaged communities. Clearly the reason we are reducing GHG emissions is to influence global climate change so claiming negative local impacts is a stretch. Moreover, it is necessary to put what we can do to affect climate change impacts in context. In 2021 CO2 emissions in the Chinese energy sector increased by 400 million tons. Total New York GHG emissions for all greenhouse gases and all sectors in 2021 were 268 million tons so eliminating New York emissions Anything we do will be completely replace by emissions elsewhere in less than a year.
Kelles also stated that she was not happy that NYCI is considering not obligating the electricity sector to participate in NYCI. She suggested that because there are power plants in disadvantaged communities that not including them eliminates the ability to protect residents there. I believe that the decision to exclude the electricity sector at the start is a practicality issue. They already are covered in RGGI and the agencies do not have sufficient resources to include them and everything else at the same time. My impression was that the electricity sector will be added later. With respect to her concern about the power plants in disadvantaged communities that whole issue is a contrived artifact of environmental justice activists. The presumption of egregious harm from power plants in disadvantaged communities is based on selective choice of metrics, poor understanding of air quality health impacts, and ignorance of air quality trends.
There also was a discussion of the emissions intensive and trade exposed industries provisions. These are industries that will be put to disadvantage when they try to compete against companies outside New York that do not have the NYCI costs. Kelles claims that her plan is to encourage them to transition to renewable energy infrastructure without acknowledging the competitive implications of that transition. I frankly have not followed the particulars of this aspect because I think it is hopeless. There will be inevitable increased costs and, at some point, industries will not be able to compete. The Business Council of New York memo in opposition to the legislation addresses these concerns.
Discussion
I am going to limit this article to the issues raised in the Arbetter interview. There are some other examples where the poor understanding of components of these programs that led to the success of previous programs will be hampered or destroyed by this legislation. The examples included are sufficient to show the legislation is flawed because its authors do not understand what makes market-based emission reduction programs work.
First, and foremost, market-based emission reduction programs are trading programs. The ability to buy, sell, or trade allowances and bank them for later use enables the flexibility that makes these programs a cost-effective solution. Eliminate them and there is no assurance that they will work like previous programs.
NYCI is called a cap-and-dividend program because the primary way that allowances will be distributed is through an auction. The proceeds from the auction are the dividends that will be invested to reduce emissions and minimize impacts to disadvantaged communities of the inarguably regressive energy costs necessary to implement the zero-emissions by 2040 Climate Act mandate.
In my opinion, the guardrails around the allowance costs are so inflexible that NYCI is basically a carbon tax. The Kelles legislation would remove any pretense that the program is anything but a tax. There are some advantages to that and some disadvantages too but I think that if there is any legislation is passed it should be to set a carbon tax because that is the responsibility of the legislature.
There is no question that disadvantaged communities have had disproportionate historical impacts. However, cap-and-invest programs are not the appropriate tool to protect them and reduce their environmental impacts because cap-and-invest programs are designed for regional and global pollutant reductions. There are regulations in place that address local impacts and the Department of Environmental Conservation is implementing additional regulations to strengthen and enhance those safeguards. The demands of environmental justice activists that have influenced this legislation unfortunately demand zero impacts without any consideration of pragmatic tradeoffs. For example, the focus on peaking power plants ignores the vital role those facilities play to keep the lights on despite results that show that the alleged impacts are over-stated.
Conclusion
The fundamental flaw in the Climate Act is the presumption by its authors that getting to net-zero emissions was only a matter of political will. There never has been an open and transparent feasibility analysis to clearly account for the necessary costs and threats to system reliability but all indications are that this cannot work as outlined in the Scoping Plan.
On the other hand, the NYCI proposal builds on the existing RGGI model. That program has shown how a cap-and-invest program can ensure compliance and raise money for investments fairly. The Kelles legislation ignores the factors that made RGGI work and eliminates them. That will ensure that the program does not provide any pretense of cost-effective reductions.
The presumption of the Hochul Administration and the Kelles legislation is that a cap-and-dividend program will work as well as previous programs. I think the real debate should be whether that is a justified position because I think the differences between the ambition of this program and previous programs is far greater. When the results of previous programs are considered the odds that NYCI will work as hoped are not very good.
Pragmatic Environmentalist of New York 