Author: rogercaiazza

On December 7, 2018, the New York Independent System Operator (NYISO) released a draft for discussion purposes only for the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force. I recently published a post that translated the overview of the proposal for those outside the process. This post describes the reasons I oppose the proposal.

New York Carbon Pricing Proposal History

On August 11, 2017, 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. 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.

Over the past year the involvement of the DPS has steadily declined so now it is primarily a NYISO process. Over this time the stakeholder process has considered a straw proposal, draft recommendations, and the latest document “continues to build on these prior documents and represents continued refinements of the market concepts based on additional input received from stakeholders, both during IPPTF meetings and in writing and the analytical information provided to the task force.” Note, however, that the NYISO stakeholder has no obligation to respond to every comment and that they have repeatedly failed to even respond to my direct questions. This was not an inclusive stakeholder process and frankly I believe that they ignored several issues that could significantly affect the viability of the program.

Reasons to Oppose the New York Carbon Pricing Proposal

Reason #1: My first reason to worry about this proposal is because of the organizations who are in favor of it. According to a letter filed on December 17, 2018 by the Independent Power Producers of New York “We appreciate that the NYISO and DPS staff have kept this process moving to the best of their abilities, and the overwhelming, and near unanimous, NYISO stakeholder support for continued work on carbon pricing in 2019 proves that this effort continues to have momentum.” The stakeholders that speak for the ratepayer have not been very vocal in this process. To me the impression that there is overwhelming support from stakeholders is proof positive that there is money to be made and reputations to be enhanced by its supporters. I oppose this because my analyses show consumers will end up paying a lot more for nothing more than signaling virtue and lining the pockets of crony capitalists.

Reason #2: The ultimate question for this program is whether carbon pricing can actually work in the wholesale electric market sector in New York State. I agree that the theory of a carbon price on the whole economy and all energy sectors that lets the market decide how best to reduce carbon is attractive. However, in this application it would only apply to one energy sector in one region of the economy. I oppose this because I am not optimistic that this will work as the theory predicts because of all the complications that arise trying to address the complications introduced limiting the scope of the program to such a constrained part of the economy.

Reason #3: I do not believe that this policy represents the most efficient way to make reductions. New York has ambitious goals for CO2 reductions and has participated in the Regional Greenhouse Gas Initiative (RGGI) since its inception. I have analyzed the effectiveness of the investments made from RGGI proceeds and found that in 2016 there were $436.4 million dollars invested from the proceeds and those investments reduced CO2 emissions by 382,266 tons. The resulting rate for CO2 reductions is $1,142 per ton for proceeds invested for a direct reduction signal. One problem that is ignored by NYISO and proponents for further reductions is the fact that New York has already made most of the “easy” reductions. Consequently any further reductions will be more difficult than historical reductions. As a result the carbon pricing proposal that relies on an indirect incentive for renewable energy will have a difficult time actually making any reducitons. I don’t believe the vague signal provided by the carbon price proposal could ever provide more timely and effective investments than the site-specific signals provided by RGGI and other existing programs. I opposed this proposal because there are existing programs that are more effective actually reducing CO2 emissions.

Reason #4: Clearly in order to have a carbon pricing program at some point the cost of carbon has to be established. In order to justify its CO2 reduction agenda the Obama Administration organized a working group to estimate the economic harm of CO2 emissions They developed a value for the Social Cost of Carbon (SCC) which is an estimate of the economic harm of a ton of CO2 emissions.   The NYISO carbon pricing proposal recommends that the DPS set the carbon price value and has suggested using the 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].  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. Julian Morris critiqued the IWG SCC value and noted the effect of changing the following four assumptions:

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

I want to avoid getting technical but two of these assumptions are simple to understand. Ultimately the SCC estimates rely on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. The Obama IWG considered impacts out to 2300, 282 years in the future. The idea that anyone could imagine what society will be like in 2300 and with a straight face claim their model reflects any social impacts from anything going on today strikes me as overwhelming hubris. Also note that the IWG claims impacts for the globe.   Richard Tol testified that the SCC 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.” I oppose this because as proposed New York State wants to price carbon to influence alleged impacts around the world that are well beyond the scope of any New York regulation. I also oppose this carbon pricing proposal because when these four changes to the SCC assumptions were combined, the effect was to reduce the SCC by 97%, from $43 to about $1.30. Obviously using a more realistic value for the SCC makes the program worthless.

Reason #5: One of the aspects of this process that I believe is not easily understood is the potential cost to consumer. In the first place, because the NYISO system prices work in terms of dollars per amount of energy (MWhr) all the costs are listed in those units. I have little grasp understanding what those values mean to the state as a whole so I present my costs in total dollars.

On November 7, 2018 NYISO posted a synthesis report entitled Brattle Group, Resources for the Future & Daymark Energy Advisors Analysis Synthesis that summarized the approach methodology, analyses and results for three independent studies of the proposed carbon pricing initiative. I have relied primarily on that report for data referenced in this post.

In Synthesis Report Table 1, Comparison of State-Wide Increase in Wholesale Energy Prices Due to Carbon Charge, the total wholesale energy cost ranges from $17.9 per MWh to $22.2 per MWh. In order to estimate the total increase wholesale energy prices due to the carbon charge I assumed 150,000,000 MWh so the expected cost will range between $2.7 billion and $3.3 billion in 2025. Remember this program will increase those prices every year going forward.

However, the Synthesis Report reports the following changes in consumer costs:

Brattle and RFF both find aggregate customer costs would increase slightly in 2025 due to a carbon charge, increasing $0.7/MWh and $0.8/MWh respectively. Brattle finds customer cost impacts fall over time. Daymark does not report changes in customer costs.

So how do billions eventually magically turn into no impact to the consumer?

The first component of the carbon price is the direct cost. In the carbon pricing plan each ton of CO2 emitted is charged the social cost of carbon. This depends on the total emissions but for this analysis let’s assume that would equal $1.5 billion leaving between $1.2 and $1.8 billion in 2025. I leave it to the reader to estimate how likely it is that the State of New York will actually return all the money collected without sneaking in transaction costs or some other politically driven fee but I assume, contrary to all previous NYS programs, that is the case.

It is important to understand that adding the cost of carbon drives up the overall wholesale electricity. I did my own static calculation using 2015 and 2016 load and marginal emission rate data to estimate the effect of the carbon charge. The carbon charge increases costs not only due to the carbon price itself but also increases generator net revenues. My analysis showed that in 2015 the total cost of the net revenues due to higher wholesale prices is $3.027 billion as compared to $1.321 billion calculated by applying the SCC to actual CO2 emissions. The increase in costs due to the change in market clearing price will not be returned to consumers. The impact of increases to energy costs as it relates to energy producers with costs lower than the clearing price has not been addressed. In particular, what portion of the increased wholesale price goes to the existing renewables, nukes, and all the fossil gens with costs lower than the clearing price? I cannot support this because I think those added costs will never offset consumer prices.

The NYISO synthesis report claims otherwise. One of the driving reasons for the carbon price proposal is that existing renewable subsidies are difficult to administer. The Synthesis report claims significant reductions in the cost of the Renewable Energy Credits and Zero Emission Credit subsidies will offset some of the wholesale electricity increase due to the carbon price. Frankly I think that there is regulatory agency support for this initiative simply because it will reduce their administrative responsibilities.

There are several other alleged consumer benefits. The NYISO analysis claims that the carbon price will induce renewable generation to be built where it is more profitable, that is to say in downstate New York. There is no consideration of increased siting difficulties downstate. However, if you believe in their hopeful assessment then they claim that there will be reduced transmission constraint costs.

Their cost analysis modeling also makes “market adjustments to the static analysis” and assumes that because this program is so successful that further renewable energy subsidies won’t be needed. Sum up all these modeling results and they claim there won’t be a significant consumer impact.

I don’t trust these modeling results. There are too many ways that input assumptions and modeling parameters can be tweaked to impact the final results. I do not support this proposal because no one has satisfactorily explained how all the increased costs of wholesale electricity that I calculated can be so easily offset. They did not do a sensitivity analysis to examine the impacts of a range of assumptions so we don’t know their impacts.

Reason #6: I think that all carbon reduction proposals should clearly state the potential impact of the proposed action on global warming. New York State has never provided an estimate of the effect of any of its clean energy programs or direct emissions control programs on global warming. 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 Brattle analysis estimates that the change in CO2 estimates of reductions in system-wide CO2 emissions due to a New York carbon charge will be 1.5 million metric tons and Resources For the Future estimates 1.2 million metric tons. The impact of these reductions on projected global temperature rise would be at most a reduction, or a “savings,” of approximately 0.000022°C by the year 2050 and 0.000046°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 less than half an inch. 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 44 feet. I oppose this because it clearly will have no effect on global warming.

[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.

On December 7, 2018, the New York Independent System Operator (NYISO) released a draft for discussion purposes only for the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force. This post attempts to summarize this proposal. I have translated the text of the overview of the concept for those outside of the process to date.

New York Carbon Pricing Proposal History

On August 11, 2017, 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. 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.

Over the past year the involvement of the DPS has steadily declined so now it is primarily a NYISO process. Over this time the stakeholder process has considered a straw proposal, draft recommendations, and this latest document “continues to build on these prior documents and represents continued refinements of the market concepts based on additional input received from stakeholders, both during IPPTF meetings and in writing and the analytical information provided to the task force.”

Overview of Carbon Pricing Concept

Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force, Page 4

The NYISO would incorporate the social cost of carbon emissions into the NYISO-administered wholesale energy markets using a carbon price in dollars per ton of carbon dioxide emissions. The NYISO would apply the carbon price by debiting each energy supplier a charge for its carbon emissions at the specified price as part of its settlement. Suppliers would embed these additional carbon charges in their energy offers (referred to as the supplier’s carbon adder or adjustment in $/MWh) and thus incorporate the carbon price into the unit commitment, dispatch, and price formation through the NYISO’s existing processes. In addition to charging internal emitting generators, the NYISO would charge imports and credit exports the LBMP carbon impact to prevent the carbon charges on internal generation from causing emissions leakage and costly distortions.

Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, a carbon charge would raise the energy market clearing prices whenever carbon-emitting resources are on the margin (referred to as the carbon pricing effect on LBMPs, or LBMPc). All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions. A carbon charge would also provide incentives for innovative low carbon technologies that may not yet be developed. Low carbon dioxide emitting New York resources, including efficient carbon-emitting units, renewables, hydropower, and nuclear generators, would benefit from higher net revenues. Load Serving Entities (LSEs) would continue to be charged the LBMP for wholesale energy purchases, which would account for the carbon adder of the marginal units. The NYISO would return the carbon charge residuals (Carbon Residuals), collected from carbon dioxide emitting suppliers and net imports, to LSEs.

Translation of the Overview (Indents are the translations of the Overview text)

The NYISO would incorporate the social cost of carbon emissions into the NYISO-administered wholesale energy markets using a carbon price in dollars per ton of carbon dioxide emissions.

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. The carbon price will be set at the social cost of carbon (SCC) which will be determined by the DPS “pursuant to the appropriate regulatory process”. The choice of the carbon price provides the entire basis for this approach and that issue has not been considered in this process. I have commented on that problem (for example my comments on the April 23, 2018 ). 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 with that SCC value is that it 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.” In addition, the Trump Administration has proposed a different and far lower value for the SCC. For me the bottom line is that most of New York State ratepayers are aware of the ramifications of this value and the possibility that it could add a billion dollars per year to the rates of the state.

The NYISO would apply the carbon price by debiting each energy supplier a charge for its carbon emissions at the specified price as part of its settlement.

The carbon dioxide emissions from every energy supplier will be estimated for the same time period as the settlement prices by the NYISO.

Suppliers would embed these additional carbon charges in their energy offers (referred to as the supplier’s carbon adder or adjustment in $/MWh) and thus incorporate the carbon price into the unit commitment, dispatch, and price formation through the NYISO’s existing processes.

The carbon price will calculated as the SCC value times the tons emitted. It is very likely that the carbon price will set the clearing price for the settlements. New York is an unregulated electric market and the NYISO is the interface between the suppliers and load serving entities who provide the power to consumers. The price NYISO pays the suppliers is the Locational Based Marginal Price (LBMP). Each supplier submits a bid to provide power at a specific price. The NYISO keeps track of how much power is produced and who provides it. Suppliers get paid the highest price bid that provides power to the grid for each hour.

In addition to charging internal emitting generators, the NYISO would charge imports and credit exports the LBMP carbon impact to prevent the carbon charges on internal generation from causing emissions leakage and costly distortions.

This sentence suggest that this is simple but in reality this is much more complicated and could doom the entire plan. Not only does the NYISO have to estimate the carbon dioxide emissions from the sources in its control area where it has enough information to determine what was running and at what level now they have to make an estimate of the carbon emissions from imports where they do not have that information. This is outside my area of expertise but the experts who have commented on this do not seem impressed that the plan proposed will work. I am also uncomfortable because I suspect this complexity will lend itself to unintended gaming.

Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, a carbon charge would raise the energy market clearing prices whenever carbon-emitting resources are on the margin (referred to as the carbon pricing effect on LBMPs, or LBMPc).

It is not unreasonable to assume that the increase in cost due to the carbon price will put CO2-emitting resources on the margin all the time because of the cost of fuel and CO2. I have estimated that if carbon pricing was in effect in 2015 the total cost to be $3.027 billion and in 2016 $2.985 billion which are both more than double the direct tax of Social Cost of Carbon (SCC) times the annual CO2 emissions ($1.321 billion in 2015 and $1.248 billion in 2016).

The NYISO analyses claim that there will not be any significant cost increase to the consumer. They assume that the actual carbon price costs will be completely returned to the consumers despite New York’s poor record in the past. Other cost increases are supposed to be balanced by decreases in other costs: lower subsidies to renewables from other state programs, lower subsidies to nuclear power from a state program, and an assumed shift of renewables to high load areas (Downstate NY) because of the price signal. The assumed shift of renewables is controversial because it ignores all the siting constraints that have so far reduced renewable development downstate.

All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions.

One of the great ironies of this program is the fact that because different fossil-fired sources have different rates and the highest emitting rate sets the marginal price then all the fossil-fired sources with lower rates will get a windfall equal to the difference in the CO2 rates times the SCC. The NYISO has never quantified how the carbon prices monies will be allocated across source categories.

A carbon charge would also provide incentives for innovative low carbon technologies that may not yet be developed.

In theory this sounds possible but in practice this pricing signal will likely be so weak that development of new low carbon technologies due to this program is unlikely. There are so many incentives already in place the suggestion that this will drive development is implausible.

Low carbon dioxide emitting New York resources, including efficient carbon-emitting units, renewables, hydropower, and nuclear generators, would benefit from higher net revenues.

While this is true, as noted above the NYISO has never quantified how much of the higher net revenues would go to which of these categories. It is likely that it will significantly add to the revenues of carbon-emitting units.

Load Serving Entities (LSEs) would continue to be charged the LBMP for wholesale energy purchases, which would account for the carbon adder of the marginal units.

This is just noting that the existing revenue system will remain in place.

The NYISO would return the carbon charge residuals (Carbon Residuals), collected from carbon dioxide emitting suppliers and net imports, to LSEs.

All the cost estimates assume that all the carbon price money will be returned to the consumer. I think that it is unlikely that at least some of the money won’t be diverted to cover the cost of returning this money. In addition, New York does not have a good record investing proceeds from the Regional Greenhouse Gas Initiative (RGGI) as originally intended. New York lawmakers have twice diverted RGGI proceeds directly into the general fund. Moreover, as shown by the Environmental Advocates of New York, the Cuomo Administration has used RGGI funds to replace other funding sources for existing programs rather than funding the original intent which was for additional programs.

Conclusion

The ultimate question that must be resolved is whether carbon pricing can work in the wholesale electric market sector in New York State. I agree that the theory of a carbon price on the whole economy and all energy sectors lets the market decide how best to reduce carbon is attractive. However, in this application it would only apply to one energy sector in one region of the economy. I am not optimistic that this will work as advertised.

I attempted to translate the text for those outside the process. I also mentioned some of the issues with this policy in this post. The comments I submitted late last summer provide more details for my concerns. There are many implementation concerns that NYISO has glossed over that I believe are significant problems. Ultimately, I fear that this policy will be implemented with much hoopla and self-congratulations by the advocates of the program and the consumers of New York will be saddled with another program that increases costs without any tangible benefits to society.

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 previously posted comments on this initiative and this post summarizes the latest comment I submitted at the end of the stakeholder process.

Introduction

I participated in the year-long stakeholder process for this initiative because I wanted at least one voice included from the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers for New York State energy policy. I was the only active independent citizen involved with this process. I submitted my comments 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 question I addressed in my comments is whether the proposed program to price CO2 in the wholesale electric market is an appropriate response for New York State policy. Since the August 10, 2017 release of Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals (hereinafter the “Brattle Report”) there has been an active stakeholder process to examine that proposal for using carbon pricing within wholesale markets to further New York’s energy goals. The documentation for this policy is available at the New York Independent System Operator (NYISO) web site. My comments are in there but are also available at the NYS Department of Public Service (DPS) website.

This whole process exemplifies my problem with many of the climate change policy initiatives. The majority of NYS ratepayers are unaware of the ramifications of this proceeding or have any idea of the potential cost of a price on carbon emissions in NYS wholesale electricity markets. On the other hand, every advocacy group that likes the concept and every special interest who could benefit from this is not only aware of it but actively participating. Consequently, within this little echo chamber everything sounds great. Moreover, the momentum within NYS agencies is for leading the way on climate policy initiatives and a carbon price is near the top of the list of “must have” climate initiatives. Finally, the majority of the stakeholders and the parties who will vote in the next phase of the NYISO implementation process do not represent the interests of ratepayers so I fear that this flawed proposal will eventually be implemented.

To cut to the simplest summary, the carbon pricing initiative proposes to add the Social Cost of Carbon (SCC) to CO2 emissions from electric generators that provide power to the wholesale electric market in NYS. I have reviewed documents and provided comments for over a year. Based on my review and analysis I conclude that the original criteria for success defined last year are not met. The small CO2 reduction benefits estimated do not support implementation given the potential for significant costs to consumers, considerable implementation issues and likelihood of unintended consequences.

My comments used the criteria listed in the Brattle Report preamble. The NYISO and DPS agreed in the preamble to the Brattle Report that in order to be successful, “Any carbon pricing proposal must contribute to achieving New York State’s public policies, while providing the greatest benefit at the least cost to consumers while also providing appropriate price signals to incentivize investment and maintain grid reliability.”

New York’s energy policies are driven by Reforming the Energy Vision (REV) which is Governor Cuomo’s plan to “rebuild, strengthen and modernize New York’s energy system” in order to” build a clean, more resilient, and affordable energy system”. The 2030 goals for REV are:

• 40% reduction in greenhouse gas emissions from 1990 levels;
• 50% of electricity must come from renewable sources; and
• 600 trillion Btu increase in statewide energy efficiency.

The REV 2050 emission goal is an 80% reduction in greenhouse gas emissions from 1990 levels.

Summary

My criteria for evaluating the success of the carbon pricing initiative are:

• Will its CO2 emission reductions effectively help meet the REV 40% reduction goal;
• Does the program incentivize renewable energy?; and
• Does the program provide the greatest benefit at the least cost to the consumer?

The ultimate goal of this program is to reduce CO2 emissions. In order to meet the REV 40% reduction goal I estimate that the electric sector must reduce its emissions by 676,599 tons per year. The emission reductions projected by Brattle (0.3 million tons) and RFF (0.2 million tons) as a result of this policy fall well short of that level and are well within normal annual variation. New York State cannot replace existing programs with this initiative and hope to meet the REV 2030 goal.

This carbon pricing initiative proposes to set a price on carbon for one sector in one state whereas the ideal approach is to cover all sectors globally. That major shortcoming reduces the effectiveness of this policy to increase renewable energy development. I believe that there are existing programs in place that will be more effective incentivizing renewable energy.

In order to provide the greatest benefit to the consumer the cost of carbon reductions must be less than the social cost of carbon. This program fails to meet that criterion. With regards to cost, the modeling analyses claim minor costs to the consumer but there are significant uncertainties that I think all would tend to increase the final cost. This program is only more effective than RGGI investments if the offsetting benefits modeling results come true. I don’t have as much faith in the prospective cost effectiveness rates as the observed RGGI rates. Therefore, I think the risks of substantial consumer impacts make this a less attractive option than existing programs that can target economically-disadvantaged ratepayers who stand to lose the most with this regressive carbon tax proposal.

The potential for implementation issues and unintended consequences should also be considered. Examples of implementation issues include: border treatments, determining the RGGI price used, calculating emissions for the program, and addressing double payments. Unintended consequences include negative impact on beneficial electrification, the potential to game the system, and decreased economic viability of new fossil-fired generation that is likely needed to maintain system reliability.

In conclusion, I believe that the results of the stakeholder process indicate that this is a risky approach that will have high costs and could have unintended consequences that might hurt consumers and businesses in New York. As a result I cannot recommend implementing the policy as proposed.

Consistency with REV 40% Goal

Although one would think that there would be some place where there is a roadmap for how the state plans to meet the 2030 REV 40% goal I have been unable to find it so I made my own estimate. The NYSERDA report New York State Greenhouse Gas Inventory: 1990-2015 provides the data needed to quantify the REV goals.

Table S-2. New York State GHG Emissions, 1990–2015 (MMtCO2e) in that document lists values for 1990 through 2015 based on historical data. Table 1 New York State CO2 Fuel Combustion Emissions lists the 1990, 2015 and 2030 fuel combustion CO2 emissions (1000 tons) converted from those values in Table S-2. For the purposes of this estimate I assume that the REV 40% goal applies only to CO2 from fuel combustion. I am not sure what to do about emissions from electricity imports so I included those values too.

The baseline for REV is the 1990 total CO2 emissions or 222.2 million tons. If those emissions are reduced 40% the REV target is 133.3 million tons. The 2015 data show the status of CO2 emissions and it shows that the reductions from 1990 to 2015 are only 12.2%. On the other hand, the electric generation sector has gone down over 53% so they have already met their share of the 40% goal. If we assume that in order for the state to meet the 40% target all sectors have to come down equally from the 2015 level to meet the 2030 goal, then another 10,148,981 ton reduction in CO2 is necessary from the electric sector. If that reduction is apportioned equally across the 15 years between 2015 and 2030 then the annual average reduction needs to be at least 676,599 tons per year.

There are three independent estimates of future CO2 reductions expected from the proposed policy to price CO2 in the wholesale electric market:

• The Brattle Group provided their latest estimate on 10/12/2018;
• The Daymark Energy Advisors provided their latest estimate for NY UIU on 10/29/2018; and
• Resources for the Future (RFF) provided their latest estimate on 9/24/2018.

There were subsequent updates but I did not incorporate them into Table 2 2025 CO2 Emissions Reductions.

The ultimate goal of this program is to reduce CO2 emissions. Frankly, the emission reductions projected by Brattle and RFF as a result of this policy are well within normal annual variation so if they are correct this policy is ineffective. On the 11/9/18 IPPTF conference call Daymark said that they predicted “no material change in CO2”. None of these projections satisfy the annual average reduction of 676,599 tons per year necessary if all sectors reduce emissions equally to meet the REV 2030 goal. As a result, New York State cannot replace existing programs with this and hope to meet the REV 2030 goal.

Incentives for renewable energy

The theory for carbon dioxide taxation is that when the cost of fossil-fueled energy reflects the social cost of carbon then the market will produce alternatives. Unfortunately there is a large gap between this theory and the proposal to set a price on carbon in the New York wholesale electric market. The first problem is estimating the external cost of CO2 to establish the rate. The NYISO process ignores that problem by simply relying on the state value. I have shown previously (here, here, and here) that the fundamental problem is that the Integrated Working Group SCC value that has been proposed does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. Secondly, while the theory might work for an entire economy covering all sectors and all regions, this proposal covers only the wholesale electric sector and just the New York region. The most likely outcome is that emissions will simply relocate.

The New York public policy has a 2030 target for CO2 reductions.  This approach relies on an indirect incentive for renewable energy. There is a lag between the necessary carbon price market signal for the private investments and the availability of the new infrastructure. The question is whether other programs might provide more timely and effective investment signals. For example, the National Grid System Data Portal includes a “collection of maps to help customers, contractors and developers identify potential project sites. Each map provides the location and specific information for selected electric distribution lines and associated substations within the National Grid NY electric service area.”   The Joint Utilities of New York are working together to provide the same sort of information for all service territories. I don’t believe the vague signal provided by the carbon price proposal could ever provide more timely and effective investments than the site-specific signals provided by the Joint Utilities. As a result, there are existing programs that are more effective meeting the REV goals.

Cost Benefit Comparison

In order to determine whether the carbon pricing proposal provides the greatest benefit at the least cost to the consumer we have to consider costs. The Synthesis Report reported costs in two ways: changes in consumer costs and changes in system production costs. All three analyses claim that there won’t be significant cost increases.

For the changes in consumer costs the Synthesis Report notes:

Brattle and RFF both find aggregate customer costs would increase slightly in 2025 due to a carbon charge, increasing $0.7/MWh and $0.8/MWh respectively. Brattle finds customer cost impacts fall over time. Daymark does not report changes in customer costs.

For changes in the system production costs the Synthesis Report notes:

The Brattle study finds negligible changes in annual system production costs (+/- $10 million) due to a carbon charge. The RFF estimate is within this range and finds that the policy would increase production costs by $7.2 million in the Eastern Interconnect in 2025. Daymark similarly finds system production costs change by +/- $30 million through 2025, increasing to $148 million by 2035.

The ultimate measure of success for any carbon dioxide emission reduction program is whether or not the cost per ton of CO2 reduced exceeds the Social Cost of Carbon. According to the NYISO power trends 2018 document the 2017 annual energy usage in New York was 156,370 GWh. In order to estimate the total increase wholesale energy prices due to the carbon charge I assume 150,000,000 MWh and so the expected cost to the consumer will range between $105 million and $120 million. The Brattle Group predicts a 0.3 million ton reduction at a cost of $105 million for a $350 per ton of CO2 reduced rate. RFF predicts a 0.2 million ton reduction at a cost of $120 million for a $600 per ton of CO2 reduced rate. The cost of a ton of CO2 reduced by this program approaches an order of magnitude higher value than the SCC proposed for this program.

In order to evaluate effectiveness of the carbon pricing initiative we should compare it to other similar regulatory programs. The RGGI Report: 2016 RGGI Investments Generate Environmental and Economic Benefits, provides information that can be used for a comparison. According to the Executive Summary in this report:

Proceeds from the Regional Greenhouse Gas Initiative (RGGI) have powered a major investment in the energy future of the New England and Mid-Atlantic states. This report reviews the benefits of programs funded in 2016 by $436.4 million in RGGI investments, which have reduced harmful carbon dioxide (CO2) pollution while spurring local economic growth and job creation.

For this analysis I have included data from both 2015 and 2016. Although the RGGI report includes lifetime benefits I only provide the annual benefits because the REV target is an annual target. This report says there were $436.4 million in RGGI investments funded programs in 2016 as compared to $410.2 million in 2015. In both Proceeds reports (2015 and 2016), Table 1 Benefits of RGGI Investments list the annual reported benefits for energy savings, electrical use and CO2 emissions reductions. In Table 3 Comparison of 2015 and 2016 RGGI Proceeds Funding and Benefits I list that data and calculate the CO2 emissions reductions cost per ton.

Compared to RGGI investments the carbon pricing initiative appears to be more efficient. If we could confidently rely on the carbon pricing initiative model estimates of cost then there might be evidence supporting this approach because of the relative effectiveness despite the minor CO2 reduction benefits projected.

In Synthesis Report Table 1, Comparison of State-Wide Increase in Wholesale Energy Prices Due to Carbon Charge, the total wholesale energy cost ranges from $17.9 per MWh to $22.2 per MWh. In order to estimate the total increase wholesale energy prices due to the carbon charge I assumed 150,000,000 MWh so the expected cost of the will range between $2.7 billion and $3.3 billion in 2025. Table 4 in the Synthesis Report lists the collected carbon revenue.

Table 4 2025 Total Energy Prices Due to the Carbon Charge lists the total energy price increase, the collected carbon revenue, the energy price difference which is a windfall for the generators, the projected change to the customer and the residual after the change to the customer is subtracted out. The energy price difference is due to the high LBMP prices. This is the crux of my concern. The generator windfall is $1-2 Billion or about $15/MWH on average! So we end up with a fleet where the average subsidy from carbon price is $15/MWH, existing RECs get $20/MWH, existing Nukes get $17-$25/MWH, and who knows what the subsidies will be for new RECs.

The plan is that the collected carbon revenue will be returned to the consumers. The modeling results claim that the final customer costs (change to customer) will only be between $105 and $120 million. That leaves between $988 million and $1.68 billion in energy prices that the analyses model away because there are “offsetting factors that provide customer benefits”.   The CO2 reduction costs (between $350 and $600 per ton) calculated previously are only that low when you assume that there will in fact be offsetting factors that reduce those costs. On the other hand the upper bound, assuming no effective offsets to reduce costs, has CO2 reduction costs of between $3,600 and $9000 per ton. That order of magnitude difference concerns me.

Unfortunately there are issues with all three analyses that make me skeptical that the offsetting factors will indeed provide the customer benefits necessary to lower consumer prices to an acceptable level. They all rely on dynamic production cost models to evaluate the effects on dispatch, emissions, and LBMPs. In my opinion this kind of model is not well-suited to handle a major change to the electric system like adding a price on CO2. All three analyses ran a “business as usual” scenario and then one or more scenarios where the carbon price was added with various assumptions. My experience is that these models necessarily rely on averaged input that invariably do not reflect the range of input values. That is a problem because there are normal situations that are missed. For example, in the late 1980’s and early 1990’s when natural gas was usually a little more expensive than residual oil and both were not that much higher than coal, production cost model operating projections for the large oil-fired units in the state always under-estimated how much they would run simply because there were variations in price and those variations on occasion made oil economic. I have no doubt that similar unforeseen situations will occur so I think these modeling results have to be viewed with caution.

Even if you have more faith than I on the ability of these models to predict the future outcome for such a drastic change in the system, there are significant differences in the assumptions between the three modeling analyses. For example, even the price of RGGI allowances differs significantly. In 2030, NYISO and Brattle assume that a RGGI price of $24 per ton whereas Daymark assumes $12. That assumption makes a big difference in the amount of money that is supposed to be returned to the customer. Consequently, my confidence in the results is lowered. Furthermore, it is not only the assumptions but also the post-processing analysis that can lead to erroneous conclusions.

This program is only more effective than RGGI investments if the offsetting benefits modeling results come true. I don’t have as much faith in the prospective cost effectiveness rates as the observed RGGI rates. I think the risks of substantial consumer impacts make this a less attractive option than existing programs that can target economically-disadvantaged ratepayers who stand to lose the most with this regressive carbon tax proposal. In addition, existing programs can provide support for the electric system exactly where needed. Moreover, all the cost estimates assume that all the carbon price money will be returned to the consumer. New York does not have a good record investing proceeds from RGGI as originally intended. New York lawmakers have twice diverted RGGI proceeds directly into the general fund. Moreover, as shown by the Environmental Advocates of New York, the Cuomo Administration has used RGGI funds to replace other funding sources for existing programs rather than funding the original intent which was for additional programs.

Another major issue with all three models is how to handle the border. As noted previously, while the theory for pricing carbon might work for an entire economy covering all sectors and all regions, this proposal covers only the wholesale electric sector and just the New York region. The most likely outcome is that emissions will simply re-locate and the proposal has to address this issue. While this issue is beyond my area of expertise it is clear from the discussions that amongst the people who do understand this issue there is wide disagreement.   Moreover, my modeling experience has been that it is extraordinarily difficult to anticipate all the nuances of actual implementation and correctly incorporate them into any model for the future. As a result I have no confidence that the models will correctly handle what actually happens and because this has so much of an increased impact on cost I believe that however it turns out will be more expensive than the models predict.

In order to provide the greatest benefit to the consumer the cost of carbon reductions must be less than the social cost of carbon. This program fails to meet that criterion for even the State of New York SCC values proposed which I believe the significantly over-value the impact of today’s CO2 emissions on future society. With regards to cost, the modeling analyses claim minor costs to the consumer but there are significant uncertainties that I think all would tend to increase the final cost. As a result, even though this program appears to be more cost effective than RGGI investments, I think the modeled values are speculative whereas the RGGI values are based on reality. Also, the risks of substantial consumer impacts make this a less attractive option than existing programs that can target economically-disadvantaged ratepayers and provide support for the electric system exactly where needed.