RGGI Allowance Status March 2018

This is a post on an implication of two Regional Greenhouse Gas Initiative (RGGI) reports: the Report on the Secondary Market for RGGI CO2 Allowances – Q4’17 (Secondary Market Report) and the Market Monitor Report for Auction 39 (Market Monitor Report). It is becoming clear that timing for one unique aspect of the RGGI allowance market – the need for compliance entities to go to the open market to purchase allowances from non-compliance entities – is getting closer.

This is another in a series of posts on RGGI that discusses how RGGI has fared so far (see the RGGI posts page). I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. As a result, I have a niche understanding of the information necessary to critique RGGI. I am motivated to prepare these posts because most reports about RGGI are advocacy pieces with very few critiques. 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

There is a difference in the Regional Greenhouse Gas Initiative (RGGI) cap and auction program relative to a cap and trade program that allocates all allowances to affected sources or compliance entities. In particular, when the allowances are allocated directly to affected sources in a traditional cap and trade program the allowance bank is either allowances held by affected sources for compliance obligations or those deemed surplus by compliance entities because of investments in controls to meet their compliance obligations under the cap. The success of cap and trade programs to date is related to the fact that this enables the market to develop a least cost control strategy.

In the RGGI program allowances are purchased for compliance obligations or as an investment so there are allowances that have not been deemed surplus in the bank. This makes a difference to the allowance bank because a significant fraction of the allowances are owned by entities without a compliance obligation. I have previously noted that at some point the regulated sources are going to have to rely on non-compliance entities for allowances necessary for compliance (as the cap tightens over time) and it is not clear how the market will react.

Analysis

RGGI provides reports that describe the status of the market but does not provide the information to easily estimate the number of compliance entity allowances in the allowance bank because there is no status report that trues up emissions, allowance surrenders and allowances. This analysis calculates the size of the compliance entity allowance bank on March 16, 2018 after allowances matching emissions from the third compliance period are surrendered, allowances from the first auction in the fourth compliance period are added, and the Market Monitor Report for Auction 39 lists the share of allowances owned by compliance entities. I also estimate what the compliance entity allowance bank will be at the end of the fourth compliance period in 2020, absent the addition of Virginia and New Jersey who appear committed to join RGGI.

RGGI’s Secondary Market Reports report on allowance status but do not include emissions status. According to the Market Monitor Secondary Market Report for Quarter 4 2017 updated on 2/22/18, at the end of the fourth quarter of 2017:

  • There were 255 million CO2 allowances in circulation.
  • Compliance-oriented entities held approximately 156 million of the allowances in circulation (61 percent).
  • Approximately 175 million of the allowances in circulation (69 percent) are believed to be held for compliance purposes.
  • According to Secondary Market Report there were 255 million allowances in circulation on 12/31/2017. That value is the sum of the allowances allocated in the first and second control periods less the allowances surrendered in those control periods and allowances allocated in the third control period less the allowances surrendered in 2015 and 2016 (50% of the emissions). This report could not include the number of allowances that had to be surrendered for the entire third compliance period because the 2017 emissions were not finalized until the end of January 2018.
  • This report does not account for the surrender of allowances at the end of the third compliance period and without that information it is not possible to calculate the number of compliance entity allowances.

RGGI lists the allowance allocations by control period but for some reason does not summarize the totals but that information is necessary to generate the necessary numbers. I downloaded the allowance allocations for each compliance period from the RGGI website to Table 1 RGGI allowance allocation 2009 – 2017 data extracted from individual period spreadsheets. (Note that I did not include all the footnotes and endnotes in Table 1.) RGGI emissions data are available on the RGGI CO2 Allowance Tracking System. I downloaded the control period emissions and summed the facility totals by compliance period to generate Table 2 RGGI Control Period CO2 Emissions.

Table 3 Compliance Period Allowance Allocations and Compliance Period Emissions combines all these data. In order to check my numbers I included the annual 2015, 2016 and 2017 columns with the annual emissions allocations, emissions and 50% of the emissions surrender values to calculate the number of allowances in circulation on 12/31/2017. I get 249 million allowances in circulation compared to the Secondary Market Report value of 255 million. Because that difference does not change my findings I did not try to reconcile the reason. The compliance period emissions and allowance allocations can also be used to estimate the size of the allowance bank. I estimate that there were 85,146,494 allowances in the allowance bank after allowances for the third compliance period emissions were surrendered.

The Market Monitor Report for Auction 39 dated March 16, 2018 notes that: After settlement of allowances sold in Auction 39:

  • Thirty-five percent of the allowances in circulation will be held by Compliance-Oriented Entities.
  • Forty-five percent of the allowances in circulation are believed to be held for compliance purposes. The number of allowances that are believed to be held for compliance purposes includes 100 percent of the allowances held by Compliance-Oriented Entities and a portion of allowances held by Investors with Compliance Obligations.

In order to get the current number of compliance purpose allowances we have to use that information and the 2018 allocation data as shown in Table 4 2018 CO2 Allowance Allocation. The number of allowances in circulation equals the allowance bank calculated above (85,146,494) and the number of allowances sold in Auction 39 (13,553,767). The current number of compliance purpose allowances is 45% of the 98,770,261 total or 44,415,118.

The ultimate reason for this analysis was because I wondered when compliance entities would have to start relying on the non-compliance share to get enough allowances to meet compliance obligations. In order to project when that will happen we have to guess at how many allowances will be purchased by compliance entities in the upcoming auctions and what future emissions will be like. Table 5 Current and Projected Allowance Status lists the current status of the number of compliance entity allowances in the top section. In the middle section, Projected End of 2018, I assumed that emissions in 2018 would be the same as 2017 but looked at three scenarios for compliance entities to purchase allowances: the % purchased in the first quarter of 2018 and the historical high and low rates. In all three scenarios compliance entities will not run out in 2018. However, in the bottom section I show that if there is a 5% reduction from 2017 CO2 emissions annually for the fourth compliance period then by the end of 2020 the compliance entity share will be negative unless compliance entities purchase at least 80% of the allowances.

Summary

Although there is an inconsistency between my calculation methodology and the RGGI reported total allowance bank at the end of 2017, these numbers show that the compliance entity share of allowances is getting smaller. This is truly unprecedented in any cap and trade allowance program so we do not know how the market will react.

If RGGI were static then this analysis shows that this issue could come to a head before the end of the current compliance period in 2020. However, both Virginia and New Jersey have indicated that they want to join the program. I have no idea how their allowances will be allocated relative to their emissions so cannot estimate any effect on this issue.

In addition to the changing relative share of compliance entity allowances the overall market is getting tighter relative to emissions and allowances available. Theory says that in a tight market the price goes up and I personally cannot imagine that not happening. This is especially troubling because the “easy” CO2 reductions in RGGI have already been implemented.

There are two potential problems looming. Advocates for RGGI claim that the RGGI allowance price costs to the consumer are offset by investments made by the RGGI states. However, when compliance entities have to purchase allowances from non-compliance entities the cost difference between the price that the non-compliance entities relative to the price they sell to the compliance entities is a cost that consumers have to bear. Even though there were investments using the original non-compliance entity price there are no offsetting investments for the cost differential. According to this analysis there are 54 million non-compliance entity allowances. If the market reacts strongly to the overall shortage and the price goes up, the resulting added burden to the consumer could be significant.

The other problem is that for CO2 compliance, power plants have limited options. For the most part fuel switching is the most effective. Eventually if you have the allowances you can run and if you don’t have them you either don’t run or assume that you can get the allowances on the market to cover your obligations. I have been involved in cap and trade compliance programs since 1993 and I can safely say that environmental staff in electric generating companies are universally opposed to assuming that allowances will be available. As important as a potential compliance problem is the fact that the power plant cannot estimate its cost unless it knows how much it paid for allowance obligation. That is impossible unless you have the allowances in hand. I worry that the logistics of getting allowances from the non-compliance entities for compliance needs could lead to problems in this regard.

Pragmatic Earth Day Success Story

I am an air quality meteorologist and a pragmatic environmentalist. My blog usually addresses topics where I appeared opposed to mainstream environmentalist dogma so it has been asked why I even consider myself an environmentalist. I support evidence based environmental controls. Since I started work in my field in 1976 there has been tremendous air quality improvement that addressed serious health and welfare problems. I want to document some of the improvements I have been a party to as an environmentalist in the electric generating industry on Earth Day 2018.

The two primary pollutants associated with acid rain are sulfur dioxide and nitrogen oxides. They are also associated with small particulate matter. United States sulfur dioxide emissions in 1970 31.2 million tons but were only 2.7 million tons in 2016 (91% reduction). United States nitrogen oxide emissions in 1970 26.9 million tons and in 2014 12.4 million tons (54% reduction).

I have been working in New York State most of my career. According to the EPA Clean Air Markets Division, over the twenty year period 1997 to 2016, the sulfur dioxide emission rate dropped 98% from 0.83 to 0.017 lbs per mmBtu. In the same time period, nitrogen oxides emissions dropped 75% from 0.24 to 0.061 lbs per mmBtu.

I am proud of the pollution control improvements at the facilities I worked with before I retired. In particular, I supported the Huntley and Dunkirk coal-fired power plants in Western New York from 1981 to 2010. My job was to report the emissions. The earliest sulfur dioxide and nitrogen oxides data I have for those two plants is from 1984 when the sulfur dioxide emission rate was 2.04 lbs of SO2 per mmBtu and the nitrogen oxide emission rate was 0.56 lbs of NOx per mmBtu. When I retired in 2010, the sulfur dioxide emission rate was 0.527 lbs of SO2 per mmBtu (81% reduction) and the nitrogen oxide emission rate was 0.159 lbs of NOx per mmBtu (73% reduction).

We worked with the New York State Department of Environmental Conservation to implement the control equipment necessary to reduce the emissions. Sulfur dioxide emissions were reduced by changing the sulfur content of the fuel, ultimately using Powder River Basin coal from Wyoming that had a much lower sulfur content that what was used in 1984. It is a testament to the operating staff at those plants that they figured out how to use a much different coal than what the plants were designed to burn when the plants were built before 1960. Nitrogen oxides were controlled by changing the burners a couple of times to more advanced technology and ultimately by adding selective non-catalytic reduction control systems. The addition of a baghouse with activated carbon injection also markedly reduced particulate, opacity and Hg emissions. Sadly despite all these improvements the cost of coal relative to natural gas made both plants uneconomic and they have since shut down.

As a result of these emission reductions, there has been a similar reduction in air pollution concentrations. EPA provides pollutant concentration trend data that documents those reductions. At EPA’s 42 nation-wide SO2 trend monitoring sites the annual average concentration has gone from 154 micrograms of SO2 per cubic meter in 1980 to only 20.2 in 2016 (87% reduction). At EPA’s 23 nitrogen dioxide trend monitoring sites the annual average concentration has gone from 111 micrograms of SO2 per cubic meter in 1980 to only 43.7 in 2016 (61% reduction).

Unfortunately, there has not been a similarly large relative concentration decrease for ozone. At EPA’s 206 nation-wide ozone trend monitoring sites the annual fourth maximum of daily maximum 8-hour average has gone from 0.101 ppm in 1980 to 0.070 in 2016 (31% reduction). Ozone is much more complicated pollutant because it is not directly emitted. Instead it is created in a photo-chemical reaction between nitrogen oxides and volatile organic compounds. As a result there are many more categories of sources to control which complicates improvements.

EPA and others tout the importance on human health of reductions in particulate matter, especially with small particulate matter known as PM-2.5 (the size of the particles is 2.5 microns). EPA only provides trends of PM-2.5 since 2000 because the monitoring equipment was not deployed until then. At EPA’s 455 nation-wide PM-2.5 trend monitoring sites the annual average concentration has gone from 13.4 micrograms per cubic meter in 2000 to only 7.7 in 2016. However, there is a strong correlation between ambient concentrations of PM-2.5 with SO2 and NO2. I did a multiple regression with the 2000-2016 PM-2.5 observations with SO2 and NO2 to guess at the ambient level in 1980. I predict that PM-2.5 concentrations have dropped 68% between 1980 and 2016.

The progress the United States has made in air quality improvement gets overlooked too often today when we seem to hear mostly about problems like ozone that still need to be addressed. However, before 1970 New York City was very polluted and that, for the most part, has been cleaned up. One should also keep in mind that there were some spectacularly wrong predictions made around the first earth day in 1970. Those predictions include the following air quality predictions:

  • In January 1970, Life reported, “Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half….”
  • Paul Ehrlich predicted in 1970 that “air pollution…is certainly going to take hundreds of thousands of lives in the next few years alone.” Ehrlich sketched a scenario in which 200,000 Americans would die in 1973 during “smog disasters” in New York and Los Angeles.

Given the demonstrated improvement in air quality as opposed to apocalyptic projections of the past I hope readers keep that in mind when you hear current environmental doom and gloom stories.

Climate change soon to be main cause of heat waves in West, Great Lakes

A recent study entitled Early emergence of anthropogenically forced heat waves in the western United States and Great Lakes was publicized in the Syracuse New York Post Standard under the headline Upstate NY among first to have most heat waves due to climate change. Unfortunately, as Blair King writes “it actually represents a quite excellent example of how science is misrepresented to the public in the climate change debate.”

According to a press release: “Lopez and colleagues used climate models along with historical climate data to project future heat wave patterns. They based their findings on the projection for greenhouse gas emissions this century, known as the RCP8.5 scenario. This assumes high population with modest rates of technological change and energy conservation improvements and is often called the “business as usual” scenario. Lopez said he based the research on this climate scenario because historical greenhouse gas emissions have to date aligned with this projection.”

My concern and that of Blair King is the use of the RCP8.5 scenario. This is a representative concentration pathway that represents a forcing of 8.5 watts per meter squared that is used by climate modelers to represent the worst case atmospheric effect of greenhouse gases by 2100. Essentially this emissions scenario was developed to provide that forcing level.

Larry Kummer looked at the scenario in detail. He notes that “It assumes the fastest population growth (a doubling of Earth’s population to 12 billion), the lowest rate of technology development, slow GDP growth, a massive increase in world poverty, plus high energy use and emissions.” His post explains that RP8.5 assumes population growth at the high end of the current UN forecasts, assumes that the centuries long progress of technology will slow, and assumes no decarbonization of world power sources from new technology (e.g., solar, wind, fission, fusion) or regulations to reduce not just climate change but also air pollution and toxic waste.

Blair King explains that RCP8.5 has a storyline that describes the assumptions of the scenario in easy to understand language. He goes on to explain that the RCP8.5 scenario dates back to 2007 and is characterized by the following:

  • Lower trade flows, relatively slow capital stock turnover, and slower technological change;
  • Less international cooperation than the A1 or B1 worlds. People, ideas, and capital are less mobile so that technology diffuses more slowly than in the other scenario families;
  • International disparities in productivity, and hence income per capita, are largely maintained or increased in absolute terms;
  • Development of renewable energy technologies are delayed and are not shared widely between trade blocs;
  • Delayed land use improvements for agriculture resulting in increased pollution and increased negative land use emissions until very late in the scenario (close to 2100);
  • A rebound in human population demographics resulting in human population of 15 billion in 2100; and
  • A 10 fold increase in the use of coal as a power source and a move away from natural gas as an energy source.

Consider those assumptions against what actually has happened since 2007. I am not sure about the status of international disparities in productivity and land use improvements. However, I believe all the other parameters are not following those assumptions. Global trade is at all time highs, renewable technology is freely traded, renewable technology continues to mature and develop, and there is no sign of human population growth accelerating to reach 15 billion. Most importantly, this scenario pre-dates the fracking revolution that has flipped the use of coal and natural gas in the United States by making natural gas so cheap and plentiful. There is no reason to believe that the technology won’t expand elsewhere and markedly reduce any potential increase in the use of coal as a power source.

Lopez states that “he based the research on this climate scenario because historical greenhouse gas emissions have to date aligned with this projection.” He is either ignorant of the substantial change in greenhouse gas emissions observed in the United States or willfully ignored those numbers to misrepresent the science to the public.

My Comments on New York Carbon Pricing 3

New York’s energy planning process continues its efforts to meet the aggressive goals of a remodeled energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. I have posted on previous submittals here and here.  The following is the comment that I submitted to the State on March 29 2018.

These comments are submitted as a private retired citizen. They 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 am motivated to submit these comments so that there is at least one voice of the unaffiliated public whose primary interest is low rates and an understanding of the basis of the rationale for a carbon price. New York State energy planning based on the Reforming the Energy Vision goal to change the energy system of New York to reduce greenhouse gas (GHG) emissions 80% from 1990 levels by 2050 is trying to choose between many expensive policy options like pricing carbon in the electric sector while at the same time attempting to understand which one (or what mix) will be the least expensive and have the fewest negative impacts on the existing system. If we make a good pick then we’ll spend the least amount of a lot of money, but if we get it wrong we will be left with lots of negative outcomes and even higher costs for a long time.

These comments are being submitted before the carbon charge setting and adjustment topic is discussed in April. The basic rationale of this policy to price carbon to offset the cost of its impacts hinges on the Social Cost of Carbon value used. I believe it is unfair and inappropriate to determine its viability based on the use of a single value so I recommend using a range and this comment provides further justification for alternative values.

I previously submitted two comments on this initiative. I have recommended that the carbon pricing initiative consider a range of SCC values including the proposed value and the values included in the Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal. In my other submitted comments I noted that there are serious issues with only including the electric sector. I noted that there are barely enough electric sector emissions available to meet the 2030 goal and nowhere near enough for the 2050 goal. Because the proposed carbon tax is on only one sector of the economy, the overall goal of carbon reductions could fail simply because driving up the price of electricity makes the conversion to electric based residential heating and transportation more difficult.

Because of the importance of the SCC on the very basis of this initiative, this comment provides another reference documenting the weaknesses of its use. I endorse the findings of Climate Change, Catastrophe, Regulation and the Social Cost of Carbon by Julian Morris as representing my views on the use of the SCC in this matter.

Julian Morris on the Social Cost Carbon

In the following section I only edit the summary of the analysis as published at the Reason Foundation for use in this comment. I refer the reader to the reference for the supporting graphs and figures and recommend reading the full document.

Federal agencies are required to calculate the costs and benefits of new regulations that have significant economic effects, but initially, different agencies applied different SCCs. To address this problem, the Office of Management and Budget and Council of Economic Advisors organized an Interagency Working Group (IWG) to develop a range of estimates of the SCC for use by all agencies. However, the IWG’s estimates were deeply flawed. In April 2017, President Trump issued an executive order rescinding the IWG’s estimates and disbanded the IWG. The question now is what value regulatory agencies should use for the SCC—if any—when evaluating rules that affect greenhouse gas emissions.

Mr. Morris writes that:

Most analyses of the social cost of carbon, including the IWG’s, have utilized “integrated assessment models” (IAMs), the basic methodology of which involves the following six steps:

  • Develop (or choose from existing) scenarios of future emissions of GHGs;
  • Use those scenarios to estimate future atmospheric concentrations of GHGs;
  • Project changes in average global temperature and/or climate resulting from these future atmospheric GHG concentrations;
  • Estimate the economic consequences of the resultant changes in temperature/climate;
  • Estimate the costs of abating specific amounts of GHG emissions;
  • Combine the estimates from steps 4 and 5 to produce an assessment of the net economic effect of different scenarios and thereby identify the optimum path of emissions.

Each step in this process is fraught with difficulty:

  1. Future emissions of GHGs are unknown—and unknowable—but likely lower than assumed in most IAMs.

Future human-related emissions of GHGs will depend on many factors, especially: the human population, the extent and use of technologies that result in energy consumption, the types of technology used to produce energy, and the efficiency with which technologies use energy.

None of these factors can be forecast with any precision. Predicting future technologies is particularly challenging. However, greenhouse gas emissions from U.S. sources have declined from their peak, mainly as a result of using more energy-dense, lower carbon fuels (and by using energy more efficiently. Global emissions are rising but at a declining rate, in spite of robust economic growth. If these trends continue, future concentrations of greenhouse gases are likely to be at the low end of estimates used by the IWG when calculating the SCC.

  1. The relationship between emissions and concentrations of greenhouse gases is complicated.

Calculating future atmospheric concentrations of GHGs, based on estimates of future human emissions, requires knowledge of the length of time that these GHGs will remain in the atmosphere. That, in turn, requires knowledge about the rate at which they will break down and/or be absorbed. This is no simple task. The rate at which GHGs such as methane and dinitrogen monoxide break down depends on such things as temperature and the amount of water vapor and other chemicals in the atmosphere with which they might react. The rate at which CO2 is taken up by plants, soil and oceans varies considerably depending on factors such as temperature and the availability of nutrients. The dynamic and interactive nature of these effects complicates the picture further.

  1. The climate is likely much less sensitive to increased emissions of GHGs than has been presumed in most IAMs, including those used by the IWG.

Early estimates of the sensitivity of the climate to increased concentrations of greenhouse gases found that a doubling of atmospheric carbon dioxide would result in a warming of between 1.5°C and 4.5°C, with a “best guess” of 3°C. But those estimates were based on poorly specified models. Tests of models using those estimates of climate sensitivity predict about twice as much warming as actually occurred. Nonetheless, the IWG used those early, inaccurate estimates. More recent estimates of climate sensitivity suggest that future emissions are likely to result in much more modest warming of the atmosphere (with a doubling of carbon dioxide concentrations resulting in a warming of 1.5°C or less).

  1. The effects of climate change are unknown—but the benefits may well be greater than the costs for the foreseeable future.

If the recent lower estimates of climate sensitivity are correct and emissions follow a relatively low path, warming will likely be modest and its effects mild. Likely effects include:

  • Warming will be greater in cold places (i.e. farther from the equator), seasons (winter), and times (night) than in warm places (equatorial regions), seasons (summer) and times (day).
  • At higher latitudes, winters will be less extreme.
  • Precipitation will increase, but not everywhere, and some places will become drier.
  • Sea levels will continue to rise slowly, as the oceans expand and land-based glaciers melt. (If current trends continue, sea level will rise by about 11 inches by 2100.)
  • The incidence of extreme weather events will not change dramatically.

While increased temperatures in warm places and seasons may result in higher mortality among those who are less able to cope with higher temperatures, warmer winters will reduce the number of people who die from cold. Since 20 times as many people currently die from cold as die from heat, modest warming will reduce temperature-related deaths. These effects will be tempered by the use of heating and cooling technologies, but the costs of additional cooling will be more than offset by reduced expenditure on heating.While rising temperatures have the potential to increase the incidence of some diseases, such as diarrhea, these effects are likely to be moderated by the adoption of better technologies, including piped clean water and sewerage.

Increased concentrations of carbon dioxide and higher temperatures are likely to increase agricultural output in many places. While agricultural output may fall in other places, this effect is likely to be moderated by the adoption of new crop varieties and other technologies. On net, crop production is likely to rise in the U.S. and globally.

Many economic models of climate change, including two of the three IAMs used by the IWG assume very limited adaptation. Yet the history of human civilization is one of adaptation. Food availability per capita and access to clean water have risen dramatically over the past half-century, reducing malnutrition and water-borne diseases and increasing life expectancy. Rising wealth and the adoption of new technologies have reduced mortality from extreme weather events by 98% in the past century. It seems highly likely that continued innovation and more widespread adoption of adaptive technologies will continue to reduce mortality, mitigating most—if not all—the adverse consequences of rising temperatures.

  1. The costs of reducing future emissions of GHGs are unknown—and will depend very much on the extent and timeframe of any reduction.

Proponents of taking action now argue that any delay would increase the total cost of emissions reductions—because baseline emissions (i.e. the emissions that would occur without any mandated reductions) would be higher and the size of any such future reduction would have to be greater. But such arguments presume both significant increases in baseline emissions and a need dramatically to reduce such emissions. If the trends in technology identified earlier do continue, growth in baseline GHG emissions will continue to slow and in the longer term may even fall without any government mandates. Indeed, it is possible that baseline emissions in the future (i.e. after 2050) will be consistent with a pathway of emissions that results in atmospheric GHG concentrations that generate net benefits.

Even if baseline emissions rise to a level that justifies intervention in the future, that does not necessarily justify reducing emissions now. Humanity currently relies predominantly on carbon-based fuels for energy generation, and the costs of alternative sources of energy are in most cases relatively high. (If alternative sources of energy were less expensive, then it would make economic sense to adopt them.) Continued innovation will almost certainly result in lower emissions per unit of output in the future, so the costs of reducing a unit of GHG emissions in the future will be lower than they are today.

  1. When combining benefits and costs, the IWG used inappropriately low discount rates, giving the false impression that the benefits of reducing emissions are greater than the costs. At discount rates that reflect the opportunity cost of capital, the current costs of taking action to reduce GHG emissions now and in the near future are almost certainly greater than the benefits.

OMB guidelines state that, for the base case, “Constant-dollar benefit-cost analyses of proposed investments and regulations should report net present value and other outcomes determined using a real discount rate of 7%. This rate approximates the marginal pretax rate of return on an average investment in the private sector in recent years.”

Unfortunately, when discounting the benefits and costs associated with global warming, many analysts have used discount rates that do not reflect the opportunity cost of capital. For example, the IWG provided an estimate of the SCC at a 5% discount rate, but it is the highest rate given. In its guidance, the IWG emphasized the SCC calculated at a 3% discount rate. Its rationale for using the lower rate is that future benefits from avoiding climate change costs relate to future consumption, rather than investment. Policies to address climate change would affect both consumption and investment, but for the purposes of evaluation what matters is the effect on investment, since it is the effect of policies on investment decisions that will determine rates of innovation and hence economic growth, the ability to adapt to climate change, and future consumption. In other words, while future consumption is of primary concern, due to its relationship to human welfare, return on investment is the key factor determining future consumption. Thus, the appropriate discount rate is the rate of return on capital.

Changing the Assumptions

Changing the assumptions made in the IWG’s models can have a dramatic effect on estimates of the SCC. Anne Smith and Paul Bernstein of National Economic Research Associates ran the IAMs used by the IWG making four changes:

  1. They changed the emissions scenario to reflect more realistic assumptions regarding the relationship between emissions and economic growth;
  2. They changed the time horizon from 2300 to 2100;
  3. They changed the discount rate from 3% to 5%;
  4. They changed the scope from global to U.S. only.

When all these changes were combined, the effect was to reduce the SCC by 97%, from $43 to about $1.30. Smith and Bernstein’s analysis did not change any assumptions regarding climate sensitivity or other relevant climate parameters that might have been misspecified in the IAMs used by the IWG. Kevin Dayaratna, Ross McKitrick and David Kreutzer assessed the effects of using more-recent empirical estimates of climate sensitivity to calculate updated SCC estimates using two of the IWG models. They found that, for one model, the average SCC fell by 30%–50% and for the other it fell by over 80%. Moreover, at a 7% discount rate, one of the models generated a negative SCC.

If all of the adjustments made by Smith and Bernstein were combined with those made by Dayaratna et al. it seems likely that the SCC would fall to well below $1. Indeed, given uncertainties in the various parameters used, it seems difficult to avoid the conclusion that for practical purposes the SCC is effectively $0.

What About Catastrophic Climate Change?

Some economists have objected that conventional measures of the SCC fail adequately to account for the possibility of catastrophic climate change. However, such criticisms are based on assumptions concerning the probability of catastrophe that have no empirical basis. A recent attempt to estimate the SCC by surveying experts to find out what they would be willing to pay to avert catastrophe is so riddled with defects as to be of no utility.

Caiazza Conclusions

As Mr. Morris notes “The question now is what value regulatory agencies should use for the SCC—if any—when evaluating rules that affect greenhouse gas emissions.” I do not believe that this proceeding is an appropriate place to determine the most appropriate single value of the SCC to use. However, it would be clearly appropriate to consider a SCC range not only because there are technically justifiable differences in the key input assumptions but also because the SCC value originally proposed for this program was based on the flawed Obama Administration IWG assumptions that did not follow OMB guidance on the use of discount rates.

The analysis by Mr. Morris concludes that “it seems difficult to avoid the conclusion that for practical purposes the SCC is effectively $0.” Therefore, I recommend that this initiative determine what SCC value represents a breakeven point for implementing this program. It is only possible for policy makers to appropriately implement this initiative if they understand there is a reasonable and justifiable range of potential costs of carbon on society. The basic rationale of this policy hinges on the SCC value used and it is unfair to determine its viability based on the use of a single value.

Carbon Price SCC Value Recommendation

I recommend that the carbon pricing initiative consider a range of SCC values including the proposed value in the Brattle Report entitled Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, the values included in the Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal, and because Climate Change, Catastrophe, Regulation and the Social Cost of Carbon concludes that “it seems difficult to avoid the conclusion that for practical purposes the SCC is effectively $0” that the breakeven point be calculated where the calculated value of the social cost of carbon benefit out-weighs the costs of a price on carbon.

Page 22 Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals Section V. Market Design Issues with a Carbon Charge, A. Establishing the Appropriate Carbon Price and Adjustments Over Time:

The first option is to set the carbon charge at the value New York ascribes to carbon abatement. The New York NYPSC has adopted using the SCC as estimated by the U.S. Interagency Working Group on the Social Cost of Carbon. The SCC serves an estimate of the damages associated with an incremental increase in carbon emissions. Specifically, the NYPSC has tied ZEC payments to the SCC, starting at $43/ton CO2 today and rising to $65/ton by 2029.

Page 44 Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal in section 3.4.1. Estimating Forgone Domestic Climate Benefits

Table 3-7 presents the average domestic SC-CO2 estimate across all the model runs for each discount rate for the years 2015 to 2050. As with the global SC-CO2 estimates, the domestic SC-CO2 increases over time because future emissions are expected to produce larger incremental damages as physical and economic systems become more stressed in response to greater climatic change, and because GDP is growing over time and many damage categories are modeled as proportional to gross GDP. For emissions occurring in the year 2030, the two domestic SC-CO2 estimates are $1 and $7 per metric ton of CO2 emissions (2011$), using a 7 and 3 percent discount rate, respectively.

For emissions occurring in the year 2015, the two domestic SC-CO2 estimates are $1 and $5 per metric ton of CO2 emissions (2011$), using a 7 and 3 percent discount rate, respectively.

Smithsonian Capture the Sun Harness the Wind

I am so tired of the Smithsonian’s unquestioning devotion of renewable energy in spite of obvious warning signs that I wrote a letter to the editor. In the April 2018 Smithsonian there is an article entitled “The Future’s so Bright (He’s Gotta Wear Shades)” by Dan Solomon and a related graphic article “Capture the Sun, Harness the Wind” by 5W Infographics. These articles are essentially puff publicity pieces for the renewable energy industry that clearly shows the bias in Smithsonian on renewable energy. Nonetheless they cannot escape inconvenient facts.

The most obvious problem with Solomon’s article on the bright future of renewable energy in Georgetown Texas is that renewable energy looks great for the early adopters but the reality of a 100% reliable electric system lies beneath that success. The situation is exactly the same as a pyramid scheme where the first ones in reap benefits. When Solomon’s article notes that “about 2% of the time the Georgetown utility draws electricity derived from fossil fuels”, an unbiased article would have followed up on the implications of that. The primary support for the fossil fuels necessary to keep Georgetown lights on comes from everybody else. As more rent-seekers pile onto the renewable energy bandwagon pyramid the costs necessarily increase for those on the outside. As you dig deeper it becomes apparent that price support for the rest of the electric system not only becomes more likely but because solar and wind don’t support grid services it becomes increasingly likely that another layer of support has to be added at some point over 30% renewable penetration. At this time Georgetown is not paying for that.

The first graph in the graphic article shows “The comparison to coal” which charts the 2016 actual coal and renewable sources electricity generation and projects changes in their use out to 2050. Comparing the 2016 coal use of 1,216 billion kwhr and 573 billion kwhr renewable source estimate of 573 with EIA numbers shows that those numbers are close enough to not quibble. However, the title of the article refers to sun and wind and the electricity generation in those categories is lumped together with hydro, biomass, geothermal, and other gases. As far as I can tell solar and wind account for less than half of the 573 billion kwhr number. On the other hand most of the future renewable growth will occur in the wind and solar sectors but the graphic does not provide that information. Neither article mentions just how much wind and solar generation will be needed to meet the projected 2050 number.

Another graphic notes that 800 MW of energy storage were built in the United States in the last five years and expects that amount will be built in just 2020. The important number is how many MW hours will be available from the energy storage built because that defines how much storage will be available to counteract renewable’s intermittency. Solomon’s article also did not address how much storage would be needed for Georgetown to get off the grid. Neglecting to point out that because intermittent renewables struggle to generate power over a third of the time we will likely have to over-build renewable capacity and add massive amounts of energy storage biases the renewable argument.

One of the inconvenient facts illustrated but not noted in the graphic article is jobs per energy produced. If you divide the number of coal-industry employees in 2016 into the total coal generation you get 24.3 million kWh produced per employee. If you divide the sum of the solar and wind employees in 2016 into half of the reported renewable sources generation you get 0.8 million kWh produced per employee. Coal is 30 times more man-power efficient. While that may be good for employment it does not portend well for cost.

Other than the fact that the duck curve is graphically interesting I am not sure why that was included in the graphics article. More importantly it illustrates a problem. When you have large amounts of solar on the system something has to be available to make up for the evening demand. That is where storage becomes necessary. In order to keep the lights on you also need enough storage to cover those days when there isn’t any sun. Dale Ross’s flippant we are in West Texas so “Cloudy, Really?” comment aside a quick check of the climatological data indicates that it is mostly cloudy 28% of the time in Georgetown. Obviously despite the claim that Georgetown is powered entirely by renewable energy the fact is that is not true.

The Solomon article has multiple instances of conveniently neglected facts to make the story. It notes that the City was able to get guaranteed rates of 20 years for wind power and 25 years for solar power. It would have been appropriate to note that these types of facilities have very little operational experience that long so the guarantees might not be as iron-clad as implied. Solomon quotes Adam Schultz as saying that solar and wind have gotten so much cheaper that “I can’t even tell you the costs because costs have been dropping so rapidly”. If that is the case then why do both solar and wind need direct subsidies? Finally, blowing off the environmental impact of renewables on birds by saying that more birds are killed by cats and buildings reminds me of the two wrongs don’t make a right parable. Furthermore, what about the bats? The fact is that because renewable energy is diffuse, wildlife issues are a legitimate concern.

Those are the superficial errors illustrating biases. The reality is that because wind and solar are diffuse the electric grid is essential for keeping the lights on. Digging down into this problem is more complicated but necessary for the complete unbiased story of renewables. I recommend this post by Planning Energy at the Climate Etc. blog for an overview of the transmission planning difficulties raised by wind and solar energy. In brief, the modern power grid is a connected complex machine that balances various electrical and mechanical properties over thousands of miles. The system must be stable that is to say stay in synchronism, balance loads and generation and maintain voltages following system disturbances. The grid is built upon heavy rotating machinery at hydro, nuclear, and fossil-fired generating stations that provides that stability. Wind and solar power do not provide any stability support. Up to some point the present day grid is resilient enough to overcome that problem but at some point it has to be addressed. I don’t doubt that it can be addressed successfully but the costs necessary to do that are unknown and were certainly not a consideration in either article.

The reality of solar and wind renewable power not addressed in this article is that it is likely only to completely supplant fossil fuels in limited locations where both solar and wind potential are high, industrial load requirements are negligible, and the weather is mild in the winter because both resources are intermittent and diffuse. Texas has large wind and solar resources because of geography and because it is so large there is enough space to generate significant amounts. Georgetown TX does not have heavy industry that requires high amounts of electricity constantly so they can pretend to be powered entirely be renewable energy. Finally, Georgetown does not have to contend with winter impacts of higher latitudes particularly home heating. The solar resource is much reduced simply because the days are shorter but you must also consider reductions due to snow covered rooftop solar cells.

Climate Ambition Must Confront Energy Realities

Sean Sweeney recently authored an intriguing article entitled “A Bridge to Somewhere? Progressive Democrats’ “Climate Ambition” Must Confront Energy Realities”.   This post addresses an unexpected agreement on some aspects for two individuals from opposite ends of the climate change debate.

Sean Sweeney is director of the International Program for Labor, Climate and Environment at the Murphy Institute at City University of New York, and coordinator of Trade Unions for Energy Democracy. His article published in the New Labor Forum mentions deniers in the first paragraph and states that the 2017 hurricane season was severe enough to “warrant climate change to be declared a national emergency?” At the other end of the spectrum when I look at a papers based on actual data I find that “since 1900 neither observed continental United States landfalling hurricane frequency nor intensity show significant trends, including the devastating 2017 season.” As a result I do not believe that climate change is a national emergency.

Nonetheless we find common ground. I agree with Sweeney that “the more ambitious the targets, the harder it is to answer questions about how they will be reached.”

Sweeney describes two bills introduced in Congress in 2017 that represent progressive Democrats’ climate ambition. A Senate bill introduced in April 2017 by Senators Jeff Merkley, Bernie Sanders, and Ed Markey. It calls on the United States to transition 100 percent off of fossil fuels by 2050. The “100 × 50” Act would impose new federal mandates requiring “zero carbon” vehicles, while barring federal approval of oil and gas pipelines. The House bill, submitted by Tulsi Gabbard on September 7, 2017, along with six other representatives seeks to end fossil-fuel use in the United States as early as 2035—a full fifteen years earlier than the 2050 target date proposed by Sanders and Merkley. Titled “Off Fossil Fuels for a Better Future Act” (OFF Act) would also mandate the United States to transition to 80 percent clean renewable energy by 2027 and 100 percent by 2035.

Both bills mandate moratoria on any new coal, oil, and gas projects (extraction and infrastructure, including power plants, pipelines, and export terminals). Sweeney and I agree that these are ambitious goals. I agree with him when he states “Ambition surely has its place, but committing to a crash diet on the morning of January 1 is one thing, being fifty pounds lighter in time for the July 4th weekend is something else altogether.” I also agree that with him when he notes that “the difference between aspirational targets and actual accomplishments is not always acknowledged by leading green nongovernmental organizations (NGOs).” I believe he is also correct when he notes that “Mandating electricity retailers to source 80 percent of their power from renewables does not answer the question how that power might be produced, integrated into the grid, or who will do the work.” As noted on my other blog, the aspirational plans to reduce New York State emissions certainly signal the virtue of the Governor of New York but it is not at all clear how those plans will be implemented, whether anyone is looking to see if there are unintended consequences between competing components of the plan, and, most importantly in my mind, how much will they cost.

Despite our agreement on this aspect I cannot overstate how much I disagree with his statement that those two climate bills are “informed by the core findings of the scientific community”. These targets are arbitrary, reflect a mis-reported 97% consensus and the idea that a portion of the scientific community funded to the tune of over $2.5 billion dollars in 2016 would come up with any conclusion other than “it is a problem and you need to fund us more” is naïve. I agree with Dr. Judith Curry “we do not know how much humans have contributed to the recent observed warming and there is disagreement among scientists as to whether human-caused emissions of greenhouse gases is the dominant cause of recent warming, relative to natural causes.” As a result I do not support mitigating greenhouse gas emissions.

Finally, Sweeney states that “If either bill became law, it would amount to a declaration of war on fossil-fuel interests, because much of the present-day stock market value of coal, oil, and gas companies is based on their below-the-ground reserves.” While I agree that this would be a declaration of war on fossil-fuel companies, I think it represents a much bigger target. I believe that fossil fuels have been one of the greatest things to happen to mankind. Until there are in-kind, same price replacements for the ubiquitous use of fossil fuel in society this targets the way of life of everyone. There is a massive lack of understanding relative to what keeps the lights on and enables our affluent and mobile lifestyles. Once you understand that cutting CO2 to the levels proposed will be extraordinarily difficult it is clear that it will be expensive and it is going to affect our lifestyle. For example, electrification of the transportation and residential heating sectors will be required. Sponsors of these bills owe it to their constituents to explain just how expensive it will be and what will have to change in our lifestyle.

Indian Point Replacement Power – NYISO Official Conclusion

I just became aware of a report by the New York Independent System Operator (NYISO) entitled Generator Deactivation Assessment, Indian Point Energy Center dated December 13, 2017 that is the official response to the question of replacement power for the retirement of Indian Point. This post compares their conclusions with my guesses in earlier posts.

In January 2017 New York’s Governor Andrew Cuomo announced the closure of Entergy’s Indian Point Energy Center (IPEC) located 25 miles north of New York City by April 2021. Cuomo claims that Indian Point produces 2,000 megawatts of electrical power and that “more than enough replacement power to replace this capacity will be available by 2021”. Since that announcement NYS agencies have been analyzing the potential impacts of the shutdown and the NYISO study summarizes their evaluation of the Entergy deactivation notice for IPEC. Entergy reported that it intends to deactivate the 1,299 MW unit 2 on April 30, 2020 and the 1,012 MW unit 3 on April 30, 2021.

NYISO Conclusions

As required by their rules, NYISO performed an analysis of resource adequacy and, in coordination with New York Transmission Owners, transmission security analyses of the New York Control Area to determine whether shutting down IPEC would cause problems with their standards for reliability and capacity. The conclusion was that subject to the assumptions of the study there would be no violations of their standards so “Entergy has satisfied the applicable requirements under the NYISO’s Generator Deactivation Process to retire the Generators on or after its requested deactivation date”.

NYISO assumed that three major generation facilities currently under construction would be available in the base case for this assessment that impact the findings: Bayonne Energy Center II Uprate (Zone J, 120 MW), CPV Valley Energy Center (Zone G, 678 MW), and Cricket Valley Energy Center (Zone G, 1,020 MW). All three are natural-gas fired combustion turbines. The assessment found that “reliability criteria would be met without Indian Point Energy Center throughout the Study Period under the assumed and forecasted base case system conditions.”

In addition, NYISO performed a scenario assessment to evaluate the reliability of the system without those three generation facilities. That scenario concluded “These scenario results demonstrate that, without the expected new generation facilities currently under construction, additional replacement sources of power would be necessary to maintain reliability following deactivation of IPEC.” They noted that “Resource needs could potentially be met by combinations of solutions including generation, transmission, energy efficiency, and demand response measures” and estimated that generic addition of at least 200 MW by 2023 anywhere in the Lower Hudson Valley would resolve the deficiency through a five-year horizon and that to address the deficiency through 2027, additional resources would range from 400 MW to 600 MW depending on type and location of the resources within the Lower Hudson Valley.

My Analyses

I prepared four previous posts on Indian Point replacement power. The first and a subsequent update considered New York State projects that had been permitted to see if there was replacement power in the pipeline that could replace its output. I also analyzed whether renewables and energy efficiency were a realistic alternative and concluded that approach was unlikely to succeed. Finally, I looked at a proposal from the New York Battery and Energy Storage Technology Consortiums to use energy storage as a potential replacement for Indian Point. I concluded that this would also not likely succeed.

Ultimately my conclusion that CPV Valley Energy Center, Cricket Valley Energy Center and the proposed Champlain Hudson Express transmission project could provide replacement power for IPEC is very similar to the NYISO conclusion that CPV Valley Energy Center, Cricket Valley Energy Center and the Bayonne Energy Center II Uprate project could provide the replacement power. The only difference is that my replacement scenario did not export jobs from New York to New Jersey and including the transmission project that uses hydro power from Quebec would have lower emissions. In either case, Cuomo’s claim that there would be no net increase of emissions due to the closure is flat out wrong.

The NY Riverkeeper blog claims that the three gas plants are not needed to replace IPEC. That post seizes on the alternative scenario that concludes that: “resource needs could potentially be met by combinations of solutions including generation, transmission, energy efficiency, and demand response measures.” In addition to my criticisms of their preferred alternatives in my previous posts, there is a timing issue. The plan is to deactivate one unit on April 30, 2020 and the other on April 30, 2021. No significant generation facilities can get through the NYS Article Ten permitting process in less than five years so alternative resources would not be available for the proposed shutdown schedule.