Setting a Price for Carbon in the NY Wholesale Electric Market for the Layman

This post discusses the New York effort to put a price of carbon on the wholesale electric market. I think New Yorkers deserve answers to the following questions:

  • What is this proposal going to do?
  • How is it supposed to work?
  • How much will it cost?
  • What impact will it have?

This post will attempt to provide my answers to these questions to summarize my concerns with the proposal.

I have been submitting comments throughout the process (here and here) and I have posted on this here.   My comments have been 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. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I was motivated to submit comments and prepare these posts so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered. There are unintended consequences to the proposal that will result in enormous costs for a plan that will have Inconsequential tangible benefits to the environment.

Carbon Pricing

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. Economists support the idea that with a carbon price the market efficiently cuts emissions. Note, however, in order to operate efficiently the carbon price has to be applied to the whole economy.

Not surprisingly, the devil is in the implementation details. A price has to be set for each ton of carbon dioxide emitted but what should the price be and how should the emissions be measured. The disposition of the money earned by the tax is another major issue. In order to minimize regressive effects and let the market efficiently decide how best to make reductions many economists favor a revenue-neutral approach where the carbon tax revenues replace other tax revenue streams and no investments are determined by the regulators.

New York Carbon Pricing Proposal

On August 11, 2017, the New York Independent System Operator (NYISO) and the New York State Department of Public Service (DPS) jointly initiated a process to engage with stakeholders to examine the potential for carbon pricing in the wholesale energy market to further New York State’s energy policy goals. This initiative began in the fall of 2016 as a project commenced by the NYISO through its stakeholder process. The NYISO retained The Brattle Group to evaluate conceptual market design options for pricing carbon emissions in the competitive wholesale energy markets administered by the NYISO. That report, Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, (Brattle Report) forms the basis of the proposal.

The Integrating Public Policy Task Force (IPPTF) was created to solicit stakeholder feedback for the carbon pricing proposal. The IPPTF meeting materials page lists all the documents produced by NYISO and stakeholder comments. Frankly, this is a frustrating process. This is illustrated by the fact that there are meeting agendas but no meeting minutes. For example, at the May 21, 2018 meeting emissions monitoring experts from the generating industry had a panel discussion on emissions reporting to explain how CO2 is measured and reported. One of the major points was that there is a significant timing issue between the needs of the carbon pricing initiative and regulatory requirements which mandate post-monitoring quality assurance adjustments. On July 16, 2018 NYISO presented its general recommendation for emissions reporting and the ensuing stakeholder discussion ignored the expert presentation discussion of the timing issue. If minutes were available then the timing issue would have been documented. More importantly, It is not clear if the NYISO final recommendation will incorporate the concerns of the experts.

In April 2018, NYISO posted a straw proposal that outlined a potential design for incorporating the cost of carbon emissions into the wholesale electricity market of New York State. The straw proposal recommends that the DPS set the carbon price value and has suggested using the Social Cost of Carbon (SCC) as estimated by the U.S. Interagency Working Group (IWG) on the Social Cost of Carbon, starting at $43/ton CO2 today and rising to $65/ton by 2029[1]. The straw proposal recommends that all internal suppliers participating in wholesale electric energy markets pay the carbon charge. Most of the affected sources already report hourly CO2 emissions but there remain difficulties integrating their existing reporting requirements and this new requirement (primarily timing issues) and there are some affected sources that do not report CO2 that will have to develop the necessary infrastructure to report hourly data. Further complicating the problem is the issue of how to deal with imported and exported power. Finally, there has been limited discussion of the disposition of the carbon price funds but it is noticeable by its absence that the concept of returning all the money to rate payers has not been suggested. Instead, it appears that portions of this will be an additional funding mechanism for the Governor’s Reforming the Energy Vision initiative.

Carbon Price

My first concern with this proposal is the choice of the carbon price (for example my comments on the April 23, 2018 addressed this). The SCC value proposed was developed by a working group established by an Obama Executive Order to estimate the economic harm of CO2 emissions. My fundamental problem is that the IWG SCC value does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. As a result that value over-estimates the potential benefit of New York emission reductions. Ultimately the SCC relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”

Potential Costs to Consumers

Table 1 Potential Costs of the Carbon Pricing Initiative is my best estimate of potential costs. The SCC column lists the annual values from 2015 to 2029. In order to know the costs we have to know the CO2 emissions. I used NYS Regional Greenhouse Gas Initiative (RGGI) historical emissions for 2015 to 2017 and then assumed that emissions would drop 1.5% per year from the 2017 values. At a minimum, ratepayers in New York will have pay the SCC value times the CO2 emissions from the affected New York generators (SCC Charge column in Table 1).

The Brattle Report proposes breaking the SCC charge into two components: the existing RGGI costs and the carbon price to the wholesale market. The RGGI allowance prices in Table 1 are the observed values from 2015 to 2018 and the value assumed by Brattle for 2025. The RGGI costs will equal the RGGI allowance price times the CO2 emissions (RGGI Charge column in Table 1). These are costs already committed to NY ratepayers albeit they are supposed to be invested for the benefit of consumers.

The IPPTF refers to the difference between the SCC Charge and the RGGI Charge as the Residual (Residual column in Table 1). The disposition of this money has not been finalized, but we know that a portion will be returned to the Load Serving Entities to offset ratepayer costs and the rest will be invested in carbon-reducing programs.

The Brattle Report analysis of the impact on customer costs uses average annual values and concludes that the carbon charge would have “approximately zero net impact on customer costs”. However, the point of my hourly analyses in my comments submitted on July 5, 2018 is that I think that the carbon charge will raise net energy costs. When I calculated the hourly impact I estimate that the total cost would have been $3,027,266,788 (Energy Increase column in Table 1). Importantly, none of the difference ($1,728,574,766) between this value and the SCC Charge (Energy Impact column in Table 1) will be returned to customers.

Impact

New York State has never provided an estimate of the effect of its clean energy programs on global warming. Governor Cuomo’s plan to “rebuild, strengthen and modernize New York’s energy system is called Reforming the Energy Vision (REV). The ultimate goal of REV is to change the energy system of New York to reduce greenhouse gas (GHG) emissions 80% from 1990 levels by 2050 (“80 by 50”).  In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation.

The ultimate impact of the REV 80% reduction of 188.7 million metric tons on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.0028°C by the year 2050 and 0.0058°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000 foot increase in elevation above sea level. The projected temperature difference is the same as going down 18 inches. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south 0.4 miles.

My calculated values for temperature change are based on the “consensus” estimates of the Intergovernmental Panel on Climate Change which I personally believe over-estimate the impact of temperature changes caused by greenhouse gas emissions. My calculations show that REV and the carbon pricing initiative cannot claim that any observable impacts for the projected small change in temperature due to these emissions reductions.

Conclusion

This post did not delve into the many technical issues associated with implementing carbon pricing in general and as proposed in the straw proposal. Nonetheless, it raises basic questions. The increase in energy prices beyond the carbon price itself is an unintended consequence that will basically double the costs of the program. At the end of the day those enormous costs will have inconsequential tangible benefits to the environment. Even if you believe that we need to do something about climate change these numbers do not support this proposal.

[1] See New York Public Service Commission Order Adopting a Clean Energy Standard (2016) pp. 49, 51, and 131 http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7B1A8C4DCAE2CC-

449C-AA0D-7F9C3125F8A5%7D, and U.S. Government (2015) Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. May 2013, revised July 2015.

New York Codifying NIMBYism

On July 12, 2018, the New York State Department of Environmental Conservation (NYSDEC) Commissioner issued a decision for a proposal to construct and operate a new underground liquefied petroleum gas (LPG) storage facility for the storage and distribution of propane in the town of Reading in the Finger Lakes region of New York. The decision denied the permit applications for the proposed project on the grounds the facility would have a significant adverse impact on community character in the local area and the Finger Lakes region.

This blog supports evidence-based environmental decision making. When infrastructure is proposed it always affects someone who lives nearby. Not in My Back Yard (NIMBY) environmental issues are the reaction of those who don’t want to have any impacts on their personal lives. Because there are no quantitative measures for community character this is an emotion-based decision that sets the precedent that if enough people complain about something in their backyards then the NYSDEC will rule in their favor.

The Project as Described in the Decision

Finger Lakes LPG Storage, LLC originally proposed to build a facility that would store propane and butane in existing solution-mined underground caverns in the Syracuse salt formation. As originally proposed, a maximum of 2.10 million barrels (88.20 million gallons) of LPG in the form of liquid propane and butane was to be stored in the caverns seasonally, displacing some of the brine currently filling them. The stored LPG was to be withdrawn by displacement of propane with brine when demand occurred during the heating season, and displacement of butane with brine during the gasoline blending season.

During storage operations, the brine displaced by LPG or butane was proposed to be stored and contained in two double-lined brine ponds. One 2.25 acre pond would have had a capacity of approximately 0.17 million barrels (7.14 million gallons). The second pond was 6.35 acres, and would have a capacity of approximately 0.80 to 0.81 million barrels (33.6 to 33.9 million gallons)

The facility would connect to an existing interstate pipeline for shipment of LPG into and out of the facility. As originally proposed, LPG was also to be shipped out by truck, and by rail. The original project included the construction of a new rail and truck LPG transfer facility, consisting of a six-rail siding capable of allowing loading and unloading of 24 rail cars within 12 hours, and a truck loading station capable of loading four trucks per hour.

In response to local stakeholders, modifications were proposed to reduce the scale and environmental impacts of the project. The modifications eliminated the proposal to store liquid butane at the facility and reduced propane storage capacity from 2.1 million barrels to 1.5 million barrels; eliminated the project’s rail and truck loading facilities so all deliveries of liquefied petroleum gas would be by pipeline; eliminated one of the brine ponds; and, for lack of a better term offered bribes as they proposed to “provide resources ranging from financial resources to technical resources (mining data) to support community initiatives for the preservation and improvement of water quality in the area, including Seneca Lake”.

Community Character Impacts

The decision discusses community character as follows:

Community character is specifically referenced by the State Environmental Quality Review Act (SEQRA). SEQRA defines “environment” to include “the physical conditions which will be affected by a proposed action, including . . . existing patterns of population concentration, distribution, or growth, and existing community or neighborhood character” (ECL 8-0105[6]; see also 6 NYCRR 617.2[l]). Unique to each case is the “community” to be evaluated – it will relate to the type of action that is being proposed, the factual circumstances and the nature of the impacts. For some projects, the “community” may be only the municipality in which the proposed action would occur. Here, the interests of a range of communities within the vicinity of Seneca Lake, as in part reflected by the submissions of the Seneca Lake Communities in this proceeding, are clearly relevant to the analysis. The evaluation of community character in this specific matter is not solely limited to the communities (Town of Reading and County of Schuyler) in which the proposed facility would be sited but entails an evaluation of communities in and around Seneca Lake and the Finger Lakes region whose economies and environmental interests are directly intertwined.

So how did the project affect “existing patterns of population concentration, distribution, or growth, and existing community or neighborhood character”? There would have been visible infrastructure. In the original proposal a compressor building, two ponds, a rail and truck loading facility, and I assume some sort of office building with process control equipment but in the revised proposal one pond and the rail and truck loading facility were eliminated. In the original proposal 24 rail cars could have been loaded and moved out within 12 hours and four trucks per hour could have entered and left the facility but the impact of that traffic was eliminated by the applicant’s modifications.

The Community Character section of the decision has to be read to be believed. Excerpts include “impacts to noise and aesthetic resources as revealed on the current record are essential components in the evaluation of impacts on community character in the context of this proposed project.” “The proposed facility with its “industrial” image is seen to be in conflict with the local and regional setting.” Summed up by this: contrary to future progress as planned by local, regional and state officials the project would “overlay an indelible industrial impact on the cultural landscape of Seneca Lake”. The section supports its descriptions of these impacts by referencing a couple of analyses and statements in opposition from local municipalities.

The final plan would have a couple of buildings and a pond, no truck or rail loadings, but would have added a few commuters to the cultural landscape. It is amazing to me how the final decision could conclude that “continuing this proceeding by directing adjudication of issues discussed below would not and cannot overcome the project’s significant adverse environmental impacts on community character.”

Conclusion

Ultimately by this criterion, what could have been built in New York State in the past? Surely the Erie Canal had a significant environmental impact on community character so by this reasoning it would not have been built. The same could be said for any factory, railroad or highway. Apparently the future for New York development is primarily dependent upon social considerations of the local communities and the economic infrastructure in the tourism sector. If the local communities don’t want it in their back yards then it is not going to happen.

Stop This Nonsense

I am tired of the constant drumbeat from those who are convinced that greenhouse gas emissions are going to cause an inevitable horror show of environmental impacts and that we need to stop emitting those emissions else we are doomed. In science you should look at the range of possibilities and probabilities. The fact is that though those horrific forecasts are possible, they are pretty unlikely. It is much more likely that any impacts will tweak weather to be a little more severe and a little more frequent if there is any effect at all.

The problem is that these prophesies of doom are driving all kinds of New York State policies that allegedly will prevent catastrophe. If New York implements all the programs the Cuomo administration wants to do so that we reduce our emissions 80% from 1990 levels by 2050 the global temperature increase prevented will be the same as going south a half a mile.

Jo Nova said it well: I say, just stop. Stop installing infrastructure we don’t need, stop subsidizing it, stop pretending we need green electrons. Stop pretending we need “storage” to solve a problem we never had. Stop buying electricity at inflated prices from generators which don’t make it when we need it. People wanting to make money selling solar power can pay for the batteries themselves. Start spreading the costs of this pointless experiment as fairly as we can instead of dumping it on electricity consumers who don’t have solar and on taxpayers who have never had the opportunity to vote whether they support these massive investments.

Here is the bottom line. There will be no measurable effect so all this is virtue signaling and the cost for New York is billions. No one is saying that if we control greenhouse gases that historical severe weather won’t happen. A much better investment of our tax and energy dollars would be to make society more resilient to the observed weather impacts of the past.

NYS Carbon Pricing: Implications of Observed CO2 on Peak Hour of 2017

New York’s energy planning process continues its efforts to meet the aggressive goals of a reformed 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 been following the process and submitting comments as an unaffiliated public party to the process. This post describes a vivid example of the difficulties of implementing economic theory related to carbon dioxide reduction programs.

 Introduction

I am motivated to submit comments in this process so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered by the Integrating Public Policy Task Force (IPPTF). The questions in these comments are related to the total costs of the program.

This post is based on comments 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. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding or have any idea of the ramifications of incorporating the cost of carbon emissions into New York State (NYS) wholesale electricity markets. The basis of this initiative is a Brattle Group analysis that outlined a scheme to incorporate a state policy defined cost of carbon in the wholesale market to improve the overall efficiency of the New York Independent System Operator (NYISO) energy and capacity markets.

As of the date of this post one thing that has been conspicuously absent from the discussions has been the total expected cost. In my latest submitted comments I argued that it would be beneficial for all stakeholders to have the NYISO provide an analysis of historical data that shows what would have happened to the markets if the carbon price were in effect. I illustrated the problem estimating this cost by considering one historical hour. It appears that there is a significant overlooked component to this initiative. One feature of a carbon price scheme is usually revenue neutrality where the carbon costs are returned to the consumers to make it less regressive. However, in the New York State wholesale electric market case it looks like in addition to the carbon price itself there will be a general increase in market clearing prices. There is no mechanism to make that component revenue neutral.

Input Data

In order to evaluate the emissions data I obtained data from the United States Environmental Protection Agency Clean Air Markets Division (CAMD) website for July 19, 2017 at hour 17. The CAMD website has hourly data for all emissions sources affected by national emissions trading programs. There are significant limitations to the data for this application but they should be indicative of the situation. I manually added the NYISO electric load control zones, made some guesses about whether some small units should be included or not, estimated CO2 emissions at some sources that are not required to provide that data, and revised some inconsistent numbers. There also is an inherent flaw in this approach because the EPA data set includes gross load whereas the NYISO loads are net loads. Also note that I excluded combined heat and power units and steam units from these calculations. My data are available upon request and the submitted comments describe the methodology in more detail.

Energy Markets

The NYISO manages the state’s power grid and de-regulated energy market. In order to understand the implications of carbon pricing on New York electricity market costs some background information is necessary. There is an overview of the price setting approach used in the NYISO document NYISO Markets:

The energy market provides a mechanism for Market Participants to buy and sell energy at prices established through a competitive auction process designed to meet energy demands, or “loads,” with the least-cost resources available; or, through contractual, bilateral transactions where quantities and prices are arranged directly between wholesale suppliers and “load-serving entities” (LSEs) such as utilities. For energy purchases arranged through the NYISO’s auctions, the NYISO administers day-ahead and real-time auctions, resulting in a two-settlement process that sets the price of energy based on market and grid conditions at specific times. Further, the NYISO’s auctions reflect geographic conditions , establishing “Locational Based Marginal Prices” (LBMP) for energy that reflect local demand and supply conditions as well as any constraints that may exist when moving energy across the grid to meet demand. The first settlement is based upon the day-ahead bids and the corresponding schedule and prices, or day-ahead commitment. The second settlement is based upon the real-time bids and the corresponding real-time commitment (RTC) and real-time dispatch (RTD). Market Participants may participate in the DAM and/or the real-time market. Roughly 94% of energy is scheduled in the day-ahead market, while the remaining 6% is accounted for in the real-time market. About 40% of the energy settled in the day-ahead market is scheduled through bilateral contracts.

CO2 Summary

The NYISO Zone CO2 Cost July 19 2017 at hour 17 table lists the gross load, heat input, CO2 mass, and CO2 rate in lbs per mmBtu and tons per MWhr for the entire state, by LBMP zone and aggregating Downstate and Upstate zones. The source data show that the hourly CO2 emissions range from 681 tons per hour at the remaining coal plant to 1.2 tons for a partial operating hour at a natural-fired turbine. More importantly the CO2 emission rate (lbs/mmBtu) data only lists three general emission rates corresponding to natural gas, oil, and coal fuels. If the results for this hour are generally consistent throughout the year then the efficacy of this program to lower CO2 emissions is questionable. There are slight differences within these rate categories but there are relatively minor. The New York Department of Environmental Conservation recently announced a new regulation that will for all intents and purposes ban the future use of coal so this program cannot be expected to shut down the use of coal. The oil generating units do not burn oil for economic reasons so this program cannot be expected to change the use of those units relative to natural gas units. The difference in CO2 emission rate for the natural gas units is so small that this program cannot be expected to lead to the use of lower emitting units. Therefore, this program will not likely cause fuel switching due to the price of carbon.

Carbon Prices

According to the NYSERDA Patterns and Trends report, in 2014 the electric sector CO2 emission rate was 39,406,671 tons per year. If the carbon price is $50 per ton then we can expect this program to generate a minimum of over $1.5 billion dollars per year. The hourly carbon price based only on emissions ($50 per ton times the total tons in the previous table) gives a state-wide cost of $440,373 with $173,995allocated Upstate and $266,978 allocated Downstate.

The Brattle report proposed that the only impact to consumers would be directly related to the carbon price. However, the NYISO has not done an analysis of the potential impact of the carbon price on the wholesale electric market to determine if there could be a general increase in market clearing prices. If that is the case then the consumers will be paying a whole lot more than just the carbon price and there will be no way to even to try to make any extra costs revenue neutral.

 I used the hourly data to estimate LBMP zone costs in theNYISO Zone CO2 Cost July 19 2017 at hour 17 table. I assumed that the zone cost equals the total load times the maximum CO2 rate (tons per MWhr) times the Social Cost of Carbon (Tab “LBMP”). Because of the magnitude of the carbon price I also assumed that the price of carbon sets the price of the most expensive unit in the zone. If that presumption is correct then the results are far different than the example estimate simply multiplying emissions by the cost of carbon. The total statewide cost is $773,644 and the Upstate portion is $209,394 and Downstate is $564,251. Note that most of the additional cost is due to a $306,048 increase Downstate because the Upstate cost only increases $35,999.

Conclusion

Based on this example I believe it is necessary and appropriate for the NYISO to provide estimates of the expected historic market response to the carbon price for an entire year based on hourly LBMP values. The NYISO knows the marginal economic unit and can use the USEPA data to show the marginal and maximum emission rates, CO2 mass/MWH and CO2 mass/mmBtu. At the proposed price of carbon that analysis could determine what would happen to the LBMP prices.

In addition to the financial impacts we can estimate what kind of impacts the carbon price will have on generation patterns. Based on the CO2 rates in the example hour it appears that we will find very small shifts in the marginal economic unit. Only when we have annual results can we verify whether this proposed program will have any effect on carbon emissions.

Finally, the analysis I recommend will not only estimate how the carbon price will affect LBMP prices but also provide information about where those revenues end up.  If my assumption that the LBMP prices are based on the maximum emission rate but the residual that goes back to the consumers is based on the actual rates for each generator then the only facility that fully pays its residual is the maximum emission rate unit. All the other units contribute less to the consumer. The NYISO should provide the analysis so that we can determine what portions of the LBMP price increases remain with which generator sectors and what residuals could be returned to the LSEs. Finally, we can estimate the portion of LBMPs that could be credited to new renewables.

Environmental Advocates of New York “RGGI at a Crossroads” Report

Environmental Advocates of New York recently released a report, “RGGI at a Crossroads”, that details the allocation of funds raised by the Regional Greenhouse Gas Initiative (RGGI) in New York State. I have previously posted on New York State’s RGGI Operating Plan which is supposed to determine the best use of RGGI auction proceeds and thought it would be instructive to compare the two analyses.

This is another in a series of posts on RGGI (see my RGGI posts page).  I have been involved in the RGGI program process since its inception. Before retirement I was actively analyzing air quality regulations that could affect electric generating 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. 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.

The overview for RGGI at a Crossroads states:

For the past seven years, the Cuomo Administration has used funding made available to New York through the Regional Greenhouse Gas Initiative (RGGI) for some authentic climate mitigation purposes as well as some highly questionable ones. While programs like Green Jobs – Green New York, 76West, and the Drive Clean Rebate owe their success to RGGI funding; the Governor has also diverted RGGI funds to subsidize power rates for Long Islanders and plug budget holes. These diversions are bad policy precedents that squander the opportunity to better the environment. An upcoming revision to state regulations offers the Governor an opportunity to take his hand out of the cookie jar and invest RGGI proceeds in a way that will propel New York to the forefront of climate justice.

I agree with Environmental Advocates that the Cuomo Administration has used funding for some highly questionable purposes. The Administration claims that climate change is an existential threat but still is not above taking money to mitigate that alleged harm to further political goals. The Environmental Advocates analysis does a good job uncovering a number of areas where RGGI funding decisions have deviated from the original intent of the program. I concur with their conclusion that RGGI’s purpose has always been to supplement and not supplant the state’s existing clean energy initiatives.

In my previous analysis I showed that New York investments from the RGGI allowance auction revenues are expected to only reduce emissions 89,531 tons at an average investment rate of $81.5 million. It turns out that, based on historical results, the RGGI investments are only expected to provide about 10% of the needed future emissions reductions mandated by RGGI. This is important because it means that supplanting existing programs that also reduce CO2 emissions are further contributing to a potential future problem meeting the RGGI allowance cap.

In general I agree with the RGGI at a Crossroads recommendation that a priority for RGGI proceeds should be investments that directly benefit low-income communities. I am firmly convinced that Cuomo’s clean energy plans will significantly increase costs to all ratepayers and it is important that we protect those least able to afford those increases. Unfortunately, the recommendations developed through a collaborative process involving the New York City Environmental Justice Alliance, UPROSE, PUSH Buffalo, New York Lawyers for the Public Interest, New York Working Families, and Environmental Advocates of New York include program funding for programs that only peripherally impact low income ratepayer rates. In my opinion, especially considering the fact that RGGI funded CO2 mitigation has not been particularly effective, the emphasis should be on energy efficiency and energy conservation for lower income ratepayers. If higher rates occur, funding should also be provided for

Cuomo Pledges No New Natural-Gas Fired Power Plants

On May 10, 2018, a Food and Water Watch organizer cornered Governor Andrew Cuomo on the topic of natural-gas fired power plants. According to their press release, “Tonight in New York City, Governor Andrew Cuomo committed on camera that he would reject any new natural-gas fired power plants”.   It is not often that I have any sympathy for the Governor but in this case I do.

The press release headline is that Governor Cuomo pledged to not permit any new gas power plants. I leave it to the reader to review the video “proof” and decide if this was a substantive pledge.   My transcription of the conversation between Laura Shindell, the organizer with Food & Water Watch and Andrew Cuomo:

Shindell: “Will you protect our climate and communities by rejecting all fracking infrastructure?”

Cuomo: “I have.”

Shindell: “The Sheridan Hollow power plant in Albany and CPV power plants…”

Cuomo: “That is not fracked.”

Shindell: “The fracking infrastructure pipelines and power plants that transport …”

Cuomo: “Pipelines we have. “

Shindell: “Yes”

Cuomo: “Power plants that burn gas we have all over the state. We would have to close them and that is the long term plan.”

Shindell: “And will that conflict with your climate goals”

Cuomo: “Yes, they do”

Shindell: “to remove all fossil fuels? So building Cricket Valley and CPV make it harder for us to make your own climate goals”

Cuomo: “We are not building any new ones. But we have to find a replacement for the old ones.”

Shindell: “Cricket Valley is getting built now”

Cuomo: “It was approved like eight years ago. I have not approved any new ones and I won’t. Thank you”

According to the Food and Water Watch press release:

Asked about new natural-gas fired power plants, Cuomo said, “I have not approved any new ones, and I won’t.” The press release notes correctly that several power plants, including the CPV plant in Orange County and the Cricket Valley power plant in Dover, NY have in fact been approved on Cuomo’s watch. The governor was clear in saying that these plants conflict with the state’s climate goals, adding: “We’re not building any new ones.”

Unfortunately neither Cuomo nor Shindell are energy literate. Shindell does not want the proposed combined heat and power plant in the Sheridan Hollow neighborhood of Albany. On my companion blog I posted an analysis that showed there is no viable alternative to replace the existing system. The existing system needs steam and there is no renewable energy technology that provides steam.  Either you replace with a much cleaner natural gas system or use the existing old dirtier power plant.

Cuomo was correct to say that we have to find a replacement for old natural gas fired power plants when he said that he won’t approve any new natural gas-fired power plants. I hope that he knows, but did not want to extend the conversation to explain, that if we have to replace old natural gas-fired power plants some, if not all, will have to be with natural gas fired power plants.

For example, there are around 70 old, small (~15 to 25 MW), peaking combustion turbines in New York City that are inefficient and have high NOx emission rates. The NYS Department of Environmental Conservation has been threatening to promulgate new pollution limits that will either require new pollution control equipment or shutdown. Because they are so old it does not make much sense to invest in expensive control equipment so the more likely option is to shut them down and replace them with a new modern, efficient and very low emitting facility.

The fact of the matter is that there is no viable alternative for completely replacing 1000 MW of peaking turbines that need to be replaced. Some of the peak can be shaved and there are other options to make the system more efficient so you might not need all 1000 MW. Turbines can run for hours so even if you cut the peak hour load by half they can still provide 3000 MWh of generation if they run six hours. Because renewable energy is diffuse and intermittent New York City has to rely on transmission to get enough renewable power to cover normal load much less peak load. Importantly, there is a requirement to rely on in-city generation when storms threaten to sever transmission lines into the city based on lessons learned from the July 1977 New York City blackout. Absent any consideration of economics or tradeoffs the only solution is natural gas fired power plants or run the risk of another blackout.

According to the Food and Water Watch press release:

After the exchange, Food and Water Watch activists pledged to hold Governor Cuomo accountable to his new commitment to reject new fracked gas power plants. “The age of fossil fuels is over, and it’s exciting to hear Governor Cuomo commit to reject new fracked gas power plants. Since he acknowledged that fracked gas plants conflict with New York’s climate goals, Governor Cuomo should rescind existing permits for power plants like CPV and Cricket Valley as well.  The governor can rest assured the climate movement will hold him to his words,” said Laura Shindell.

I can only hope that at some point energy facts and tradeoffs between alternate sources of energy will be considered so that natural gas power plants can be developed where they are appropriate and necessary. Alas it is an election year and the energy illiterate climate movement appears to be calling the shots.

Carbon Pricing Initiative Discussion of Social Cost of Carbon

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. As part of that process a recent meeting had a presentation on the social cost of carbon. I submitted the following comments.

Introduction

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. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I am motivated to submit these comments so that there is at least one voice of the unaffiliated public whose primary interest is low electricity rates.

This attempt to incorporate carbon pricing in wholesale electric prices flies in the face of carbon price theory. In theory, the idea is to apply a carbon price across all energy sectors in as broad a market as possible so that market forces determine the most cost-effective solution. This plan to put a price on carbon on one sector in one state is therefore bound to fail to do anything other than raise NYS electricity prices at the expense of all NYS ratepayers.

I have an understanding of the basis of the rationale for a carbon price as embodied in the SCC as discussed in the April 23, 2018 IPPTF meeting. Based on the discussion at the meeting I got the impression that even many of those in attendance who have heard of the SCC don’t understand the short-comings of the parameter. Therefore, I am submitting a third set of comments that addresses the SCC presentations at the meeting. I also want to point out a recent article to readers unfamiliar with the SCC: Julian Morris, Climate Change, Catastrophe, Regulation and the Social Cost of Carbon.

Social Cost of Carbon Presentation

Bethany Davis Noll gave a presentation (Agenda 2 – Social Cost of Carbon) on the SCC at the April 23 meeting. I submitted comments on 10/31/17 advocating a range of values for the SCC. I argued that there are three technical reasons that the single value the IWG developed and proposed for use in this initiative should not be used exclusively: global benefits, discount rates and equilibrium climate sensitivity. Ms. Noll addressed two of those topics in her presentation but ignored the more important climate sensitivity issue.

The IWG SCC value considers global benefits and impacts not just New York State benefits and impacts. In other words New Yorkers are being asked to pay today for some estimated far future impact mostly elsewhere. Given that the State has limited resources to provide benefits to New Yorkers today is reason enough to consider whether the State can afford that luxury.

The EPA RIA for the revised Clean Power Plan includes an “interim” SCC value that uses a domestic rather than international social cost of carbon value which I think makes more sense for New York policy. Ms. Noll’s presentation argues that it is more appropriate to consider global impacts. The presentation responds to the use of domestic only damages as follows:

    • But existing models cannot accurately calculate a domestic‐only estimate because they were not built to include spillover effects.
    • Even if the models could calculate an accurate domestic‐only number, the calculation ignores the need to spur reciprocal actions from other countries to curb emissions.

Ms. Noll only gave one spillover effect example but a Columbia Journal of Environmental Law paper addresses the spillover effect in more detail:

In 2010, the interagency working group used the results of one economic model as well as the U.S. share of global GDP to generate an “approximate, provisional, and highly speculative” range of 7–23% of the global SCC as an estimate of the purely direct climate effects to the United States. Yet, as the interagency group acknowledged, this range is almost certainly an underestimate because it ignores significant, indirect costs to trade, human health, and security likely to “spill over” to the United States as other regions experience climate change damages.

In the paper spillover effects described include:

  • Climate change disruption of the economies of other countries will spill over to the US as decreased availability of imported inputs, intermediary goods, and consumption goods and “may cause supply shocks to the U.S. economy. Shocks to the supply of energy, technological, and agricultural goods could be especially damaging. As seen historically, economic disruptions in one country can cause financial crises that reverberate globally at a breakneck pace.”
  • The human dimension of climate spillovers includes migration and health effects. Water and food scarcity, flooding or extreme weather events, violent conflicts, economic collapses, and a number of other climate damages could precipitate mass migration to the United States from regions worldwide.
  • Infectious disease could also spill across the U.S. borders, exacerbated by ecological collapses, the breakdown of public infrastructure in poorer nations, declining resources available for prevention, shifting habitats for disease vectors, and mass migration.
  • Climate change is predicted to exacerbate existing security threats—and possibly catalyze new security threats—to the United States.

Ultimately whether or not a domestic SCC approach fails to include spillover effects matters only if decision makers decide that those effects should be a driver of NYS policy. While these spillover scenarios could entail a variety of serious costs to the United States the question for New York is whether the surety of increased costs of a price on carbon to our wholesale electric market is appropriate relative to those speculative effects. If we decide that we should worry about those effects then it is as important to decide whether New York should fund mitigation efforts like a carbon price or adaptation efforts that avoid climate damages to foreign countries to reduce the chance that these impacts will radiate benefits back to New York. It is likely that investments in foreign infrastructure adaptation will be a more cost-effective response.

The Columbia Journal of Environmental Law paper also claims that the need to spur reciprocal actions from other countries to curb emissions is a rationale for a global rather than a domestic SCC. The paper states that:

Game theory predicts that one viable strategy for the United States to encourage other countries to think globally in setting their climate policies is for the United States to do the same, in a tit-for-tat, lead-by-example, or coalition-building dynamic.

The fundamental issue for New York is that even the domestic SCC is not really appropriate for this program. If a New York SCC economic model were developed the direct impacts to New York would be a fraction of any global SCC value. I believe that our potential to lead-by-example potential is proportional to our proportional NY-only SCC value. As a result, advocates for this policy must explain how this New York action will lead to a “coalition-building dynamic” that will have anything more than a symbolic effect on global policies as opposed to simply adding cost to New York electric bills.

In previous comments I noted that the IWG SCC value did not follow Office of Management Budget Circular A-4 guidance that states that regulatory analyses “should provide estimates of net benefits using both 3 percent and 7 percent.” The 7 percent rate is intended to represent the average before-tax rate of return to private capital in the U.S. economy. The 3 percent rate is intended to reflect the rate at which society discounts future consumption, which is particularly relevant if a regulation is expected to affect private consumption directly.

In response to the 7 percent discount rate used in the “interim” SCC value in the EPA RIA for the revised Clean Power Plan Ms. Noll noted that:

    • The7 % discount rate obscures the harm that emissions will have on the younger and future generations.
    • It was rejected by the IWG as inappropriate.

I am not enough of an expert on economics to argue these points. However, I am a cynic and suggest that the fact that it was rejected by the IWG was as much because when it was used it indicated much less cost as any other reason.

Throughout Ms. Noll’s presentation and the Columbia Journal of Environmental Law paper the harms of climate change impacts were repeatedly emphasized. For example, the paper includes the following: “greenhouse gas pollution can impose great harms”, “significantly increased risks of severe harms”, and “A handful of geographic regions may experience short-term benefits from climate change, such as temporary agricultural gains in colder regions, but even in those areas, long-term, catastrophic scenarios would bring significant harms.” The problem is that the estimates of catastrophic impacts are directly related to the likelihood of high sensitivity of temperature to carbon dioxide levels.

My fundamental problem with the IWG SCC value is that they did not use the latest value of the Equilibrium climate sensitivity (ECS). This is the expected change in temperature when the atmospheric CO2 concentration doubles. As noted, the costs of this warming are dominated by the higher possible values of the ECS. This problem was documented on July 23, 2015 by Patrick Michaels who presented relevant testimony to the House Committee on Natural Resources.  Excerpts:

“In May 2013, the Interagency Working Group produced an updated SCC value by incorporating revisions to the underlying three Integrated Assessment Models (IAMs) used by the IWG in its initial 2010 SCC determination. But, at that time, the IWG did not update the equilibrium climate sensitivity (ECS) employed in the IAMs. This was not done, despite there having been, since January 1, 2011, at least 14 new studies and 20 experiments (involving more than 45 researchers) examining the ECS, each lowering the best estimate and tightening the error distribution about that estimate. Instead, the IWG wrote in its 2013 report: “It does not revisit other interagency modeling decisions (e.g., with regard to the discount rate, reference case socioeconomic and emission scenarios, or equilibrium climate sensitivity).”

“Clearly, the IWG’s assessment of the low end of the probability density function that best describes the current level of scientific understanding of the climate sensitivity is incorrect and indefensible. But even more influential in the SCC determination is the upper bound (i.e., 95th percentile) of the ECS probability distribution. Apart from not even being consistent with the AR4, now, more than five years hence, the scientific literature tells a completely different story. And this is very significant and important difference because the high end of the ECS distribution has a large impact on the SCC determination—a fact frequently commented on by the IWG2010.”

I previously commented that Dr. Judith Curry had prepared a table of different values of the ECS that illustrates the relative impacts of the indefensible cherry picking of a value that suited the agenda of the IWG rather than a more recent value.

Because the extreme values are a key driver of the ECS, the 95th percentile values are of most interest. Refer back to the Michaels testimony above to see that the IWG had lower values available to it for years but chose not to use them.

Furthermore, a paper just published by the Journal of Climate concludes that high estimates of future global warming from most computer climate simulations are inconsistent with observed warming since 1850. The implication is that future warming will be 30 to 45% lower than suggested by the simulations. This continues the trend of more recent data reducing the likelihood that temperature is highly sensitive to CO2 and therefore reduces the probability of the high impact “harms” that advocates for this carbon pricing initiative claim justify the use of the IWG SCC value.

Conclusion

For the purposes of this effort to develop a system that could put a price on carbon in the New York State wholesale electric market I agree that the IWG SCC estimate minus the RGGI cost is the appropriate parameter to use. However, when the time comes for policy decision makers to decide whether to proceed, a range of SCC values should be provided.

The fundamental problem is that the IWG SCC value does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. As a result that value over-estimates the potential benefit of New York emission reductions. The final report must also explain the rationale for NYS ratepayers to definitely increase our cost of electricity with a price on carbon is appropriate relative to the speculative effects of any SCC value.

Ultimately the SCC relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”

Temperature Related Deaths

Environmental advocates claim heat results in more deaths than any other weather-related event but I recently read a conflicting claim about weather-related deaths. The New York City Environmental Justice Alliance released a new report, NYC Climate Justice Agenda 2018 – Midway to 2030: Building Resiliency and Equity for a Just Transition, that claims “Extreme heat results in more deaths than any other weather-related event”. On the other hand, a study in Lancet, “Mortality risk attributable to high and low ambient temperature: a multicountry observational study”, notes that “most of the temperature-related mortality burden was attributable to the contribution of cold”. I did some research and now I think I know what is going on for these two differing claims.

The NYC Climate Justice Agenda bases their claim that extreme heat causes more deaths than cold based on an EPA reference. The EPA extreme heat webpage uses data from the National Oceanic and Atmospheric Administration Natural Hazard Statistics: Weather Fatalities website. The home page for that site lists 508 fatalities from all weather events in 2017, including 107 from extreme heat, 26 from extreme cold, 10 from winter storms, 1 from ice, and 3 from avalanches. Those data that show that the more people died due to extreme heat than other cause, narrowly beating out flash floods, and that more people die from heat than cold-related events. The data for the website are compiled from information in the National Weather Service (NWS) storm events database.

The Global Warming Policy Foundation April 9 2018 newsletter reported that 48,000 Britons died this winter due to cold weather.   Those numbers are obviously far different than the NWS data. The Lancet paper by Gasparrini et al. notes that:

Although consensus exists among researchers that both extremely cold and extremely hot temperatures affect health, their relative importance is a matter of current debate and other details of the association remain unexplored. For example, little is known about the optimum temperatures that correspond to minimum effects for various health outcomes. Furthermore, most research has focused on extreme events and no studies have comparatively assessed the contribution of moderately high and low temperatures. The underlying physiopathological mechanisms that link exposure to non-optimum temperature and mortality risk have not been completely elucidated. Heat stroke on hot days and hypothermia on cold days only account for small proportions of excess deaths. High and low temperatures have been associated with increased risk for a wide range of cardiovascular, respiratory, and other causes, suggesting the existence of multiple biological pathways.

I believe that the reason for the difference in the two conclusions is explained by this statement by Gasparrini et al.: “The dose-response association, which is inherently non-linear, is also characterised by different lag periods for heat and cold—i.e., excess risk caused by heat is typically immediate and occurs within a few days, while the effects of cold have been reported to last up to 3 or 4 weeks.”

According to the NWS instructions for storm data preparation the storm data report documents:

  • The occurrence of storms and other significant weather phenomena having sufficient intensity to cause loss of life, injuries, significant property damage, and/or disruption to commerce;
  • Rare, unusual, weather phenomena that generate media attention, such as snow flurries in South Florida or the San Diego coastal area; and
  • Other significant meteorological events, such as record maximum or minimum temperatures or precipitation that occur in connection with another event.

The key point is that the storm data report makes a distinction between direct and indirect deaths.  Only direct deaths are tabulated when a local weather office prepares the storm report. For example, in winter storms deaths from heart attacks from shoveling snow are indirect.  If a person wanders outside and freezes to death that’s a direct death. Furthermore, while indirect deaths are included in the storm narratives the numbers are not included in the tabulated data and storm reports are prepared within days of the event so any indirect deaths due to excessive cold caused by weeks-old impacts would not be included. Details on the difference between direct and indirect deaths are found in the instruction document on pages 9 to 12.

In their study of Gasparrini et al. found that temperature is responsible for 7.7% of mortality. Cold was responsible for “most of the burden”. Although in the study over 90% was attributed to cold the paper noted that “This difference was mainly caused by the high minimum-mortality percentile, with most of the mean daily temperatures being lower than the optimum value”. I interpret that to mean that some of the difference was due their classification methodology. In line with the indirect death distinction it is notable that over 85% of the mortality attributable to temperature was related to moderate cold. Offhand I think there must be more causes of death associated with freezing weather than hot weather. For example, auto accidents on icy roads has to cause more deaths than any hot weather impact on travel.

In conclusion, there is a data base that does show that extreme heat results in more deaths than any other weather-related event. However, the database used to justify that claim only includes direct deaths. An epidemiological study that does include indirect deaths concludes the majority of deaths are associated with moderate cold weather.

Relative to climate change policy the distinction between heat and cold is important. If the argument is that we must mitigate human impacts on climate to reduce mortality due to temperature than because a warming climate will result in less moderate cold then that means warming will have a beneficial effect. An unintended consequence of climate change mitigation through the implementation of renewable energy is the universal increase in cost. Given the impacts on indirect deaths I believe that increased heating cost will adversely affect mortality if low income people cannot afford to keep their homes warm enough to prevent potential health impacts of cold weather. Finally, the fact is that climate is a reason many more people move to Phoenix AR than move to the “ice box of the nation”, International Falls, MN, suggests we are better able to adapt to warm than cold.

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.