Climate Act Cap & Invest – Pragmatic Environmentalist of New York

New York State Cap and Invest Politician Briefing

On January 10, 2023 New York Governor Kathy Hochul delivered her 2022 State of the State Address and provided legislation in her Budget Bill that proposed market-based Cap and Invest program. Since then legislative amendments (Senate Bill 4008-B) to the Hochul Administration bill have been proposed. I developed this briefing for politicians that provides specific comments about the proposed legislation and background information about market-based pollution control programs. This article consolidates information from previous articles on Cap and Invest programs so there is a lot of repetitive information.

I submitted comments on the Climate Act implementation plan including one that specifically addressed the economy-wide strategy that recommended a Cap and Invest approach. I have written over 300 articles about New York’s net-zero transition because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. I also follow and write about the Regional Greenhouse Gas Initiative (RGGI) market-based CO2 pollution control program for electric generating units in the NE United States. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

I want to publicly thank my Senator, John Mannion (D 50^th Senate District), for giving his time to Ken Pokalsky, (VP New York Business Council) and myself for a briefing on this topic. Ken and I both have spent a lot of time recently trying to understand the implications of the proposed Cap and Invest program but it seems like no one is listening. Ken described the general issues facing the state’s business community and his concerns (summarized here) I covered the technical side of the plan. The slides used are available and the following material was submitted as backup. Both the slides and the documentation are boiled down to the key points in the summary that was all we had time to address.

Overview Issues Summary

Market-based pollution control programs are a well-established strategy but past success does not guarantee future results. The most common market approach is to use emissions trading whereby a limit is set on pollution levels and tradable allowances equal to the cap limit are issued to affected sources. The Federal Acid Rain cap and trade program lowered sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions more than expected at far lower costs. The Regional Greenhouse Gas Initiative has generated over $1.7 billion in revenues for New York. There are differences between the goals and results of those programs relative to the New York Cap and Invest proposal that cast doubt on the optimistic projections of its proponents. More importantly, there are components in the proposed legislation that will work against future success.

There are multiple challenges for a New York only Cap and Invest program. Greenhouse gases (GHG) are difficult to reduce because there are limited control options available. There are no viable add-on controls for most GHG emissions so switching fuels has been the primary driver of recent observed emission decreases. The only remaining options are to displace the use of fossil fuels with zero-emissions resources or to run less. That raises the threat of an artificial energy shortage if there are insufficient allowances for sources to run.

This documentation describes the current status of emissions relative to the Climate Act 2030 limit of a 40% reduction in GHG emissions from the 1990 baseline. In order to meet that mandate an unprecedented buildout of wind and solar are necessary to provide the energy needed to displace fossil-fired electric generation. At the same time, electrification is the primary emission reduction strategy for buildings and transportation which is going to increase load. The Scoping Plan recommendations for changes to New York’s Energy Plan did not include a feasibility analysis casting doubts on the viability of this effort.

Of particular concern is that there are features in the legislation that undermine aspects of previous market-based pollution control programs. Climate Act § 75-0109, Promulgation of regulations to achieve statewide greenhouse gas emissions reductions (1) lays out a public stakeholder process to promulgate rules and regulations to ensure compliance with the statewide emissions reduction limits that should be allowed to play out before any new legislation is promulgated. There are numerous technical and logistical issues that must be addressed so that a Cap and Invest market-based program can be successfully implemented. Naïve legislation could thwart an effective program.

Background

Emission market-based pollution control programs have proven to be an efficient approach if implemented correctly. The reasons that such a program is being considered in New York were laid out in the Final Scoping Plan:

The Climate Action Council (Council) has identified the need for a comprehensive policy that supports the achievement of the requirements and goals of the Climate Act, including ensuring that the Climate Act’s emission limits are met . A well-designed policy would support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions. It would provide an additional source of funding, alongside federal programs, and other funding sources, to implement policies identified in this Scoping Plan, particularly policies that require State investment or State funding of incentive programs, including investments to benefit Disadvantaged Communities. Equity should be integrated into the design of any economywide strategy, prioritizing air quality improvement in Disadvantaged Communities and accounting for costs realized by low- and moderate income (LMI) New Yorkers. Pursuant to the Climate Act, a policy would be designed to mitigate emissions leakage. Finally, an economywide strategy would be implemented as a complement to, not as a replacement for, other strategies in the Scoping Plan. A well-designed economywide program will bring about change in the market and promote equity in a way that does not unduly burden New Yorkers or with the global economy.

In general, emission reductions based on market signals rather than explicit directives offers flexibility which should reduce costs and encourages innovation. The most common market approach is to use emissions trading whereby a limit is set on pollution levels and tradable allowances equal to the cap limit are issued to affected sources. In order to comply, the sources must surrender one allowance for each ton of pollution emitted. In order for such a program to succeed there has to be a realistic cap and reduction trajectory, the pollutant has to be have regional or global impacts, and the implementation schedule has to provide time for the market to react.

New York has participated in successful emissions trading programs. It is unfortunate that the important condition that past success does not guarantee future results has been overlooked particularly because there are conditions on the past successes. The Clean Air Act Amendments of 1990 established the Acid Rain Program to reduce acidic deposition. This was a cap-and-trade program for the electric generating sector that issued free allowances based on historical operating characteristics. Initially intended to provide a 50% reduction in sulfur dioxide and nitrogen oxides emissions it was ratcheted down because emissions were reduced lower and at costs significantly lower than expected. There is an important caveat. The original concept was that coal-fired power plants would install control equipment to get the reductions necessary. However, railroad deregulation at the same time lowered coal transportation costs so much that it enabled switching to low sulfur coal from Wyoming across the country. Power plants figured out how to burn that coal and achieved reductions on the order of 90%. The Acid Rain Program incentivized the electric industry to reduce emissions but the ultimate results were influenced by other factors.

New York was an original participating state in the Regional Greenhouse Gas Initiative (RGGI). This is a Cap and Invest program in which the affected sources purchase their allowances in auctions. New York was a primary driver for RGGI and has consistently touted its success by pointing out that carbon dioxide emissions are down by more than 50% since 2000 and that they have raised over $1.5 billion. However, I have shown that this success is conditional. The primary reason New York generating unit RGGI emissions are down is because the fracking revolution reduced the cost of natural gas so much that it displaced coal and residual oil fuels. I have determined that since the beginning of the RGGI program RGGI funded control programs have been responsible only for 5.6% of the observed reductions. I believe that RGGI had very little to do with these fuel switches because fuel costs are the biggest driver for operational costs and the cost adder of the RGGI carbon price was too small to drive the use of natural gas over coal and oil.

There is no question that RGGI has successfully raised revenues but the results of those investments are disappointing. According to the latest NYSERDA RGGI funding status report the projected costs of the current programs are $776.1 million, the net greenhouse gas emission savings are 1,656,198 tons and that works out to emission cost per ton removed of $469. If all the RGGI administrative and operating costs are included another $113 million is added to the total and the emissions cost per ton removed is $537 per ton.

There is a very important pollution control consideration. Sulfur Dioxide (SO2) emissions can be controlled with add-on pollution control equipment or by switching to a lower sulfur fuel. Nitrogen Oxides (NOx) emissions can also be controlled with add-on control equipment or by combustion modifications but fuel switching does not provide much of a reduction. On the other hand, Carbon Dioxide (CO2) add-on carbon capture and sequestration control systems are not viable as an add-on control system. The only ways to reduce CO2 is to switch to a lower emitting fuel or combust less fuel. However, combusting less fuel means that less energy (for electricity, transportation, or heating) is available to meet societal needs.

Hochul Cap and Invest Proposal

I have consolidated in one document the Hochul Administration description of Cap and Invest including links to the Climate Act Scoping Plan Toolkit , references to Cap and Invest in the Scoping Plan Executive Summary, references to it in the State of the State materials, and the relevant Chapter from the Final Scoping Plan.

Hochul has said “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” My main concern is that drawing from the experience of previous programs is not nearly as simple as implied, particularly for people not familiar with the caveats and conditions associated with previous program “success”.

Hochul’s Budget Bill claims that it would be based on “best practices” gleaned from RGGI success. It goes on to note that RGGI auction proceeds were invested in “energy efficiency, renewable energy, and other programs that save consumers money on energy bills and hasten the transition to cleaner energy”; that the proposed Cap and Invest will be specifically designed to “enable public agencies to focus the investment of allowance auction proceeds in communities with particular needs”; that

“A portion of the auction revenue generated will be returned to consumers to mitigate average costs to New Yorkers”; and that the program will be designed with the capacity to join other current or future programs.

In the previous section I noted that there are caveats to RGGI success claims. One of my primary concerns is that RGGI investments did not produce cost-effective GHG emission reductions or very many reductions. I have argued that the State has to change its investment strategies to focus on emission reductions to improve that performance because future reductions are going to depend on effective investments. The low-hanging fruit of potential reductions is disappearing and that has compliance target ramifications.

Unfortunately, many programs that save consumers money on energy bills or focus on investments in disadvantaged communities with particular needs are not very effective producing significant emission reductions. Policy makers should keep this conundrum in mind. There is no resolution to the tradeoff between the need to provide ratepayers, especially those with least ability to pay, with the means to reduce energy use and the need to make emission reductions to reach the targets.

To this point I have not addressed costs. In no small part that is because so little information is available. Hochul mentioned that there would be climate rebate fund of $1 billion and I saw somewhere that represented 30% of the total expected revenues. That yields $3.3 billion for total revenues and an economy wide allowance price of $8.66. If the allowance price equals the current RGGI price of $13 per ton, then the total revenues rises to $5 billion. The New York Value of Carbon in 2022 is $129 per ton and using that would provide $50 billion per year. If the Cap and Invest proceeds are set at the rate necessary to meet projected required emission reductions, a cost estimate using the historical cost per ton reduced from RGGI investments and tons reduced per year can be determined. Depending on the interpretation of how the funding is allocated I estimate the revenues would range between $46 and $10 billion. For this spread of revenues I estimate that this will translate to $0.08 and $1.14 per gallon of gasoline and between $0.47 and $7.04 for Mcf of natural gas.

The final Hochul goal was the capacity to join other current or future programs. There are two reasons that this is unlikely. Firstly, the Climate Act has a unique emission accounting system that is incompatible with other jurisdictions. That would have to change to join other programs. The

Climate Act emission accounting system also mandates consideration of upstream emissions. Trying to extract another jurisdiction from upstream emissions would be difficult if not impossible.

Scoping Plan Evaluation Criteria

The Final Scoping Plan recommendation included evaluation criteria for an economy-wide strategy. Those criteria included certainty of emission reductions, price certainty, prioritizing emission reductions and avoiding hotspots in disadvantaged communities, and mitigating risk of leakage.

Advocates claim that the emissions cap guarantees emission reductions consistent with the Climate Act mandate. This is a naïve presumption apparently based on the fact that all the Acid Rain Program, RGGI, and the other cap and trade programs for NOx have all had emissions compliant with the caps. EPA explains that “The cap is intended to protect public health and the environment and to sustain that protection into the future, regardless of growth in the sector.” For the Acid Rain Program, the cap was originally intended to reduce emissions by 50% but later was tightened down. In the NOx cap and trade programs the caps were set based on a technological evaluation of the control technology available to affected sources. The industry – agency issues with those caps centered on whether the agency estimates for additional control levels were reasonable. Importantly, the SO2 and NOx caps were based on the feasibility of affected source characteristics and were not binding in and of themselves.

On the other hand, the CO2 cap in RGGI and the New York cap-and-invest caps are not based on technical evaluation. I define a binding cap as one chosen arbitrarily without any feasibility evaluation. In 2030 New York GHG emissions must be 40% lower than the 1990 baseline but this is an arbitrary target mandated by the Climate Act. The Scoping Plan for this transition did not include an analysis to see if this target was feasible so I think this will be risky.

The following graph lists NY GHG emissions by sector from 1990 to 2030. The data from 1990 to 2020 is from the New York 2022 GHG emission inventory. Electric sector emissions are available through 2022 and I used those with estimates based on recent averages to project emissions for the other sectors in 2021 and 2022. The emissions shown for 2023-2030 simply represent the straight-line interpolation between the 2022 emissions and the 2030 emission limits consistent with the state’s Climate Act mandate that 2030 emissions must be 40% less than the 1990 baseline emissions.

I estimate that meeting the 2030 emissions limit will require a 4.5% annual decrease from each sector from 2023 to 2030. That is an unprecedented reduction trajectory. Those percentages translate to annual reductions of 2.73 million metric tons of CO2e (MMT) for the electricity sector, 0.97 MMT for agriculture, 5.32 MMT for buildings, 1.59 MMT for industry, 4.89 MMT for transportation, and 1.88 MMT for the waste sector.

Transportation can only reduce emissions if the transition to zero-emissions vehicles accelerates a lot. When I point out that there has been no feasibility analysis, my concern is that the Scoping Plan did not analyze whether the necessary technologies are likely to be available and deployed as needed and there was no consideration of what if questions. At the top of that list is “what if technology rollout is delayed?”

Another Scoping Plan criterion was price certainty. The RGGI design includes s price control mechanism. If the price gets higher than the RGGI ceiling price, additional allowances are added to the auction. If the price gets too low, then subsequent auctions reduce the number of allowances available. Obviously, adding allowances to limit high prices is incompatible with the compliance certainty criterion. Also note that these mechanisms only affect auction prices. There will be a secondary market price that will be largely unaffected by any similar mechanisms in the Cap and Invest program. The important point is that the cost of allowances that consumers pay is the uncontrollable secondary market price.

The Climate Act, Scoping Plan, the Hochul Budget Bill and at least one amendment to the Budget Bill establish a goal of prioritizing emission reductions and avoiding hotspots in disadvantaged communities. Chapter 6. Advancing Climate Justice in the Scoping Plan states:

Prioritizing emissions reduction in Disadvantaged Communities should help to prevent the formation or co-pollutant emissions despite a reduction in emissions statewide. A broad range of factors may contribute to high concentrations of pollutants in a given location that create a hotspot. The result can be unhealthy air quality, particularly for sensitive populations such as expectant mothers, children, the elderly, people of low socio-economic status, and people with pre-existing medical conditions.

The poster child for egregious harm from hotspots is fossil-fired peaking power plants. I believe the genesis of this contention is the arguments in Dirty Energy, Big Money and I have shown that that analysis is flawed because it relies on selective choice of metrics, poor understanding of air quality health impacts, unsubstantiated health impact analysis, and ignorance of air quality trends. In this context, I have seen indications that there are some people who believe that GHG emissions themselves have some kind of air quality impact exacerbated in disadvantaged community hot spots. That is simply wrong – there are no health impacts associated with carbon dioxide emissions at current observed ambient levels. Dirty Energy, Big Money and arguments in the Scoping Plan are based on co-pollutant emissions (NOx and PM_2.5) that allegedly cause impactful hot spots that result in unhealthy air quality. Note that all facilities in New York State have done analyses that prove that their emissions do not directly produce concentrations in the vicinity of power plants that contravene National Ambient Air Quality Standards (NAAQS) mandated to protect human health and welfare. Trying to make the Cap and Invest program, that is appropriate for controlling GHG emissions to mitigate global warming, also address a neighborhood air quality problem already covered by other air quality rules is not in the best interests of a successful Cap and Invest program. I do not know how the allowance tracking system could be modified to address hot spots without creating major unintended consequences.

The final evaluation criterion in the Scoping Plan is mitigating risk of leakage. Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around geographically rather than reducing it. Ideally the carbon price should apply to all sectors across the globe so that leakage cannot occur. Preventing leakage in an area as small as New York is impossible because, for example, car owners on the border will simply cross the border to purchase fuel. Any program conditions to limit emissions in smaller areas of New York will guarantee problems.

Cap and Invest Concerns

Implementation of a Cap and Invest program requires consideration of a myriad of technical and logistical issues best addressed by subject matter experts unencumbered by restrictive legislation. Climate Act § 75-0109, Promulgation of regulations to achieve statewide greenhouse gas emissions reductions lays out a public stakeholder process to promulgate rules and regulations to ensure compliance with the statewide emissions reduction limits that should be allowed to play out before any new legislation is promulgated.

There are numerous technical and logistical issues that must be addressed so that a Cap and Invest market-based program can be successfully implemented. Previous Cap and Trade programs relied on emissions estimates from instruments and EPA has developed a comprehensive and transparent reporting methodology. Instruments cannot be used to estimate emissions from every automobile in the state so emissions estimates based on fuel use must be used. The logistics to develop such a system will take time and must be considered when deadlines are set.

The arbitrary 40% reduction by 2030 target codifies an aggressive reduction schedule by limiting allowance availability in the Cap and Invest proposal. The required emission reductions per year to meet the 2030 mandate are so aggressive that it is unlikely that there will be sufficient allowances available for all sectors to meet that mandate. The result will be an artificial energy shortage that will limit electric production as well as gasoline and natural gas availability. The stakeholder process must develop a plan to address this potential outcome.

The stakeholder process cannot operate in a vacuum. In order for the stakeholder process to function properly the Hochul Administration is going to have to commit to some revenue target and allocation of funds. Although emission reduction priorities in certain areas of the state is a noble concept it is incompatible with the global impacts of GHG emissions. More importantly putting it into practice is extraordinarily difficult.

Senate Bill 4008-B

The legislative amendments (Senate Bill 4008-B) to the Hochul Administration bill should be rejected out of hand because they are not based on how emissions market systems work. They represent nothing more than ideological misunderstanding of these systems. If implemented the Cap and Invest program will fail. The problematic provisions address hot spots, allowance banking, allowance trading, and emission offsets.

I already addressed hot spots above.

The allowance banking proposed amendments to Hochul’s budget bill include a new section to the existing Climate Act law. Proposed § 75-0123. Use of allowances states that:

Allowances must be submitted to the department for the full amount of greenhouse gas emissions emitted during such compliance period. If greenhouse gas emissions exceed allowances submitted for the compliance period, such shortfall shall be penalized pursuant to section 75-0129 of this article.

Any allowances not submitted at the end of the compliance period in which they are issued by the authority shall automatically expire one hundred eighty days after the end such compliance period if not submitted prior to such date.

The provision for expiring allowances would prohibit allowance banking. Allowance banking is a feature of all existing cap and trade programs and is one of the reasons that they have been successful. Banking enables affected sources to handle unexpected changes in operation, compliance monitoring problems, and long-term planning.

The authors of this amendment have not figured out that the primary source of GHG emissions is energy production. One major difference between controlling CO2 and other pollutants is that there are no cost-effective control technologies that can be added to existing sources to reduce emissions. Combine that with the fact that CO2 emissions are directly related to energy production, the result is that after fuel switching the primary way to reduce emissions is to reduce operations. Consequently, CO2 emission reductions require replacement energy production that can displace existing production.

A feature of RGGI that addresses the link between energy use and CO2 emissions is a three-year compliance period with banking. It is included because it was recognized that in a year when it is either really cold or really hot GHG emissions go up as energy use goes up. In a year when it is mild, energy use goes down and emissions go down. To address that variability RGGI has a three-year compliance period and allows sources to bank allowances for this balancing inter-annual variability. The inevitable result of this amendment language would be insufficient allowances in a year with high energy use and that translates to an artificial shortage of energy.

There also is a provision addressing allowance trading. There is no better example of ideological passion over-riding reality than language in the proposed amendments to Hochul’s budget bill that prohibits allowance trading. Proposed § 75-0123. Use of allowances states that:

3. Allowances shall not be tradable, saleable, exchangeable or otherwise transferable.

Words cannot describe how little I think of the authors’ understanding of cap and invest based on this language. Cap and invest programs are a form of cap-and-trade programs. Anyone who thinks that a program that excludes allowance exchanges has no concept whatsoever of how these programs are supposed to work and how they have been successfully working.

There is one aspect of the proposed cap and invest legislation that is conspicuous by its absence – offsets. In RGGI a CO₂ offset allowance represents “a project-based greenhouse gas emission reduction outside of the capped electric power generation sector.” In the California program Offset Credits are issued to “qualifying projects that reduce or sequester greenhouse gases (GHG) pursuant to six Board-approved Compliance Offset Protocols.” Recall that Hochul stated that “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” Furthermore, the Climate Act has a net-zero target. In other words, emissions from certain sectors that can never be expected to reduce their GHG emissions to zero (like aviation) will have those emissions offset by programs that reduce or sequester GHG emissions.

In a rational world, it is obvious that the agriculture and forestry sectors that are the likely sources of most offsets in New York would get incentives to develop offsets compliant with qualification protocols used in other successful programs. After all the Climate Act needs offsets to meet its net-zero targets and offset programs are components of the similar, successful programs New York wants to emulate.

New York’s Climate Act is not rational. Chapter 17 in the Final Scoping Plan explains why offsets are not mentioned:

The inclusion of offset programs in some cap-and-invest programs, such as RGGI, has engendered some criticism, particularly from environmental justice organizations that contend that the availability of offsets reduces the certainty of emission reductions from the regulated sources. In any cap-and-invest program adopted to meet Climate Act requirements, the role of offsets would have to be strictly limited or even prohibited in accordance with the requirements of ECL § 75-0109(4). Under that provision, DEC would have to ensure that any Alternative Compliance Mechanism that is adopted would meet various requirements specified in that provision of the Climate Act. Therefore, offsets would have little, if any, role under a cap-and-invest program designed to comply with the Climate Act.

In short, because there was “some criticism” from environmental justice organizations, the Progressive Democrats in control of the Administration and Legislature are excluding this “important cost-containment element” used in other successful programs. Given that offsets are a necessary component for meeting the net-zero by 2050 target I expect that a different subsidy will be used to incentivize offsets.

Conclusion

I have tried very hard to not get involved with politicians over my career because I don’t think there is much interest in my nuts-and-bolts concerns. Unfortunately for me, the Climate Act is at its heart a political construct. In order to try to get some rationality into the implementation process it is apparent that I have to engage with politicians. In that regard, Senator Mannion is to be commended for listening to the technical side of the Cap and Invest proposal and I appreciate his time very much.

There have been a couple of positive notes. According to Buffalo Business First, New York DEC Commissioner Basil Seggos says the regulations forming the state’s cap-and-invest program likely won’t be ready before a deadline this year. Both Senator Mannion and Ken Pokalsky said they don’t believe the Cap and Invest program language will be included in the final Budget Bill. That suggests that there will be time to develop a plan that addresses all the technical and logistical issues inherent in a New York only Cap and Invest program without legislative naïve interference.

NY Climate Act Cap and Invest Plan Going Off the Rails

One of my pragmatic interests is market-based pollution control programs. As part of New York’s budget process Governor Kathy Hochul announced a plan to use a market-based program to raise funds for Climate Leadership & Community Protection Act (Climate Act) implementation that is included in the Budget Bill. I have looked at the language for proposed amendments to the original Budget Bill proposal and am stunned at the disconnect between reality and the perceptions of the authors of the amendments.

I submitted comments on the Climate Act implementation plan and have written over 290 articles about New York’s net-zero transition because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. I also follow and write about the Regional Greenhouse Gas Initiative (RGGI) market-based CO2 pollution control program for electric generating units in the NE United States. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Climate Act Background

The Climate Act established a New York “Net Zero” target (85% reduction and 15% offset of emissions) by 2050. The Climate Action Council is responsible for preparing the Scoping Plan that outlines how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible and power the electric grid with zero-emissions generating resources by 2040. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to write a Draft Scoping Plan that was released for public comment at the end of 2021 and approved on December 19, 2022.

The Final Scoping Plan included recommendations for a comprehensive economy-wide policy to support implementation. The recommendations included a cap and invest market-based emissions control approach similar to the Regional Greenhouse Gas Initiative (RGGI). The policy is supposed to provide compliance certainty and “support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions.” The “market signal” translates into an additional source of funding to implement policies identified in the Scoping Plan. But that’s not all. A key narrative in New York’s version of the Green New Deal is equity and the cap and invest recommendation includes “prioritizing air quality improvement in Disadvantaged Communities and accounting for costs realized by low- and moderate income (LMI) New Yorkers.”

New York Cap and Invest

Hochul’s state of the state address included a proposal for a cap and invest program. It stated that “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” Subsequently other legislators have jumped on the bandwagon and offered legislation to modify the Hochul proposal. My first article on this plan, initial impression of the New York cap and invest program, gave background information on the Climate Act’s economy-wide strategy and my overarching concerns. I looked at potential revenue targets in a couple of subsequent posts here and here. More recently I compared the emissions reduction trajectory necessary to meet the 40% GHG emission reduction by 2030 mandate relative to observed emissions trends.

My analyses to date indicate that New York’s belief that the proposed cap and invest program can build on “the experience of similar, successful programs across the country and worldwide” is misplaced. The idea that the RGGI market signal was a significant driver for the observed emissions reductions is inaccurate because the primary driver was fuel switching to cheaper natural gas caused by the fracking success in other states. New York has been investing RGGI auction proceeds for years and the cost per ton reduced is no less than $469. At that rate, if the program were to fund all of the reductions necessary, auction revenues of anywhere between $10 billion per year and over $40 billion per year would be needed depending on the assumptions used. Finally, the required emission reductions per year to meet the 2030 mandate are so aggressive that it is unlikely that there will be sufficient allowances available for all sectors to meet that mandate. The result will be an artificial energy shortage that will limit electric production as well as gasoline and natural gas availability.

Incredibly, the legislative amendments (Senate Bill 4008-B) to the Hochul Administration bill proposal described below would make things worse for New Yorkers.

Fatal Flaws for Cap and Invest

In my opinion, the Hochul Administration and other Progressive legislators have been trying too hard to incorporate environmental and climate justice concerns into the net-zero transition plans. In the first place, I don’t think that constituency will ever be satisfied because their insistence on zero-risk policies ultimately requires a shut down of all power sources. There is no benign way to make power or use energy so ignoring the possibility of pragmatic tradeoffs means they will never be placated. Worse, their rationale for the tenets of their beliefs is flawed.

The Climate Act requires the state to invest or direct resources in a manner designed to ensure that disadvantaged communities to receive at least 35 percent, with the goal of 40 percent, of overall benefits of spending on:

Clean energy and energy efficiency programs
Projects or investments in the areas of housing, workforce development, pollution reduction, low-income energy assistance, energy, transportation, and economic development

In order to implement these goals, the Climate Act created the Climate Justice Working Group (CJWG) which is comprised of representatives from Environmental Justice communities statewide, including three members from New York City communities, three members from rural communities, and three members from urban communities in upstate New York, as well as representatives from the State Departments of Environmental Conservation, Health, Labor, and NYSERDA. The 22 members of the Climate Action Council were chosen mostly because of their ideology but most at least had relevant expertise. None of the representatives appointed to the CJWG outside of the agency staff have any energy or climate science background. Nonetheless, all of their comments on the Draft Scoping Plan were explicitly addressed and responses to their concerns are evident in the cap and invest plan.

There are four CJWG concerns that legislators are trying to incorporate into the cap and invest proposed laws or are in the Climate Act itself that make the proposed approach unworkable. Their four concerns are “hot spots”, allowance banking, allowance trading, and the use of offsets. I will address each one below. In each case, CJWG members, climate activists, and environmental justice advocates have seized on an issue based on poor understanding or something else and are demanding their concerns be considered and the legislators are addressing their concerns.

Hot Spots

As mentioned previously a key consideration in the Climate Act is “prioritizing air quality improvement in Disadvantaged Communities”. Chapter 6. Advancing Climate Justice in the Scoping Plan states:

Prioritizing emissions reduction in Disadvantaged Communities should help to prevent the formation or co-pollutant emissions despite a reduction in emissions statewide. A broad range of factors may contribute to high concentrations of pollutants in a given location that create a hotspot. The result can be unhealthy air quality, particularly for sensitive populations such as expectant mothers, children, the elderly, people of low socio-economic status, and people with pre-existing medical conditions.

The poster child for egregious harm from hotspots is fossil-fired peaking power plants. I believe the genesis of this contention is the arguments in Dirty Energy, Big Money and I have shown that that analysis is flawed because it relies on selective choice of metrics, poor understanding of air quality health impacts, unsubstantiated health impact analysis, and ignorance of air quality trends. In this context, I have seen indications that there are people who believe that GHG emissions themselves have some kind of air quality impact exacerbated in disadvantaged community hot spots. That is simply wrong – there are no health impacts associated with carbon dioxide emissions at current observed ambient levels. Dirty Energy, Big Money and arguments in the Scoping Plan are based on co-pollutant emissions (NOx and PM_2.5) that allegedly cause impactful hot spots that result in unhealthy air quality. Note that all facilities in New York State have done analyses that prove that their emissions do not directly produce concentrations in the vicinity of power plants that contravene National Ambient Air Quality Standards (NAAQS) mandated to protect human health and welfare. Trying to make the cap and invest program, that is appropriate for controlling GHG emissions to mitigate global warming, also address a neighborhood air quality problem already covered by other air quality rules is not in the best interests of a successful cap and invest program. I do not know how the allowance tracking system could be modified to address hot spots without creating major unintended consequences.

Allowance Banking

The proposed amendments to Hochul’s budget bill include a new section to the existing Climate Act law. Proposed § 75-0123. Use of allowances states that:

Allowances must be submitted to the department for the full amount of greenhouse gas emissions emitted during such compliance period. If greenhouse gas emissions exceed allowances submitted for the compliance period, such shortfall shall be penalized pursuant to section 75-0129 of this article.

Any allowances not submitted at the end of the compliance period in which they are issued by the authority shall automatically expire one hundred eighty days after the end such compliance period if not submitted prior to such date.

Allowance Trading

There is no better example of ideological passion over-riding reality than language in the proposed amendments to Hochul’s budget bill that prohibits allowance trading. Proposed § 75-0123. Use of allowances states that:

3. Allowances shall not be tradable, saleable, exchangeable or otherwise transferable.

Offsets

New York’s Climate Act is not rational. Chapter 17 in the Final Scoping Plan explains why offsets are not mentioned:

The inclusion of offset programs in some cap-and-invest programs, such as RGGI, has engendered some criticism, particularly from environmental justice organizations that contend that the availability of offsets reduces the certainty of emission reductions from the regulated sources. In any cap-and-invest program adopted to meet Climate Act requirements, the role of offsets would have to be strictly limited or even prohibited in accordance with the requirements of ECL § 75-0109(4). Under that provision, DEC would have to ensure that any Alternative Compliance Mechanism that is adopted would meet various requirements specified in that provision of the Climate Act. Therefore, offsets would have little, if any, role under a cap-and-invest program designed to comply with the Climate Act.

Conclusion

There are four CJWG concerns that legislators are trying to incorporate into the cap and invest proposed laws or are in the Climate Act itself that will make New York’s cap and invest plan fail. All cap and invest programs are intended to reduce emissions that have regional or global impacts. Trying to combine cap and invest global obligations with “hotspot” neighborhood air quality obligations already covered by other air quality rules would be difficult if not impossible to do without unintended consequences. Prohibiting allowance banking eliminates a compliance mechanism widely used in all existing emission market programs. Cap and invest is a variant of cap-and-trade emission market programs so eliminating trading is absurd. Emission offsets are a necessary component of economy-wide net-zero targets. If offsets are prohibited in the cap and invest plan they will be subsidized elsewhere.

A primary component of New York’s Climate Act and cap and invest legislation was to address climate justice. I do not dispute that is a reasonable goal but appeasement of the naïve and misguided demands of the CJWG on cap and invest components will make that program unworkable and cause reliability, affordability, and safety problems. When those problems occur, the communities that will be impacted the most will be the ones this mis-guided appeasement is intended to protect.

Climate Act Cap and Invest Program Numbers Do Not Add Up

One of my pragmatic interests is market-based pollution control programs. As part of New York’s budget process Governor Kathy Hochul announced a plan to use a market-based program to raise funds for Climate Leadership & Community Protection Act (Climate Act) implementation. It has been touted as a solution for funding and compliance requirements because other market-based programs have been successful. Even though it has drawn widespread support I think the faith in the mechanism is mis-placed because the numbers do not add up.

This article was also published at Watts Up with That. I submitted comments on the Climate Act implementation plan and have written over 290 articles about New York’s net-zero transition because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. I also follow and write about the Regional Greenhouse Gas Initiative (RGGI) market-based CO2 pollution control program for electric generating units in the NE United States. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Climate Act Background

The Climate Act established a New York “Net Zero” target (85% reduction and 15% offset of emissions) by 2050. The Climate Action Council is responsible for preparing the Scoping Plan that outlines how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible and power the electric gride with zero-emissions generating resources by 2040. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to write a Draft Scoping Plan that was released for public comment at the end of 2021 and approved on December 19, 2022.

The Final Scoping Plan noted:

The Climate Action Council (Council) has identified the need for a comprehensive policy that supports the achievement of the requirements and goals of the Climate Act, including ensuring that the Climate Act’s emission limits are met . A well-designed policy would support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions. It would provide an additional source of funding, alongside federal programs, and other funding sources, to implement policies identified in this Scoping Plan, particularly policies that require State investment or State funding of incentive programs, including investments to benefit Disadvantaged Communities. Equity should be integrated into the design of any economywide strategy, prioritizing air quality improvement in Disadvantaged Communities and accounting for costs realized by low- and moderate income (LMI) New Yorkers. Pursuant to the Climate Act, a policy would be designed to mitigate emissions leakage. Finally, an economywide strategy would be implemented as a complement to, not as a replacement for, other strategies in the Scoping Plan. A well-designed economywide program will bring about change in the market and promote equity in a way that does not unduly burden New Yorkers or with the global economy.

Hochul’s address stated that “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” Subsequently other legislators have jumped on the bandwagon and offered legislation to modify the Hochul proposal. My problem is that the perception that these programs have yielded sizable emission reductions while providing funds needed for the transition are misplaced.

Emissions Market Program Background

The concept of emission markets is relatively simple. EPA explains that:

Emissions trading programs have two key components: a limit (or cap) on pollution, and tradable allowances equal to the limit that authorize allowance holders to emit a specific quantity (e.g., one ton) of the pollutant. This limit ensures that the environmental goal is met and the tradable allowances provide flexibility for individual emissions sources to set their own compliance path. Because allowances can be bought and sold in an allowance market, these programs are often referred to as “market-based”.

This is a fine overview but the details are what is important for New York’s plan. I have been following these programs since 1993 because I was responsible for submitting compliance reports from that point until my retirement in 2010. New York State has embraced this approach and I was involved in the stakeholder process associated with multiple rule-makings. Finally I have been tracking the performance of the Regional Greenhouse Gas Initiative (RGGI). All of my findings are based on observations of the inner workings of these programs.

A recent book Making Climate Policy Work comes to many of the same conclusions and raises concerns similar to mine based on economic theory. The description of the book states:

For decades, the world’s governments have struggled to move from talk to action on climate. Many now hope that growing public concern will lead to greater policy ambition, but the most widely promoted strategy to address the climate crisis – the use of market-based programs – hasn’t been working and isn’t ready to scale.

Danny Cullenward and David Victor show how the politics of creating and maintaining market-based policies render them ineffective nearly everywhere they have been applied. Reforms can help around the margins, but markets’ problems are structural and won’t disappear with increasing demand for climate solutions. Facing that reality requires relying more heavily on smart regulation and industrial policy – government-led strategies – to catalyze the transformation that markets promise, but rarely deliver.

The authors recognize the enormity of the challenge to transform industry and energy use on the scale necessary for deep decarbonization. They write that the “requirements for profound industrial change are difficult to initiate, sustain, and run to completion.” Because this is hard, they call for “realism about solutions.” Cullenward and Victor recommend clear thinking and strategy as opposed to “Efforts spent tilting at ephemeral, magical policy solutions waste scarce resources that should instead be invested in things that work.” The goal of their book is to explain how market-oriented climate policies have fallen far short and how they might be modified so that they work. If you are interested in more information about emission markets I recommend this book.

General Market-Based Program Concerns

I submitted comments on the Draft Scoping Plan chapter on a market-based approach for the transition plan based on my observations of similar programs. The EPA Acid Rain Program was a cap-and-trade control program that enabled affected sources to meet their compliance options efficiently. Affected sources could purchase allowances from a facility that had more cost-efficient control options to meet the overall cap. EPA notes that the program “has helped deliver annual SO₂ reductions of over 93% and annual NO_X emissions reductions of over 87%” since the start of the program. The costs have been far lower than expected in no small part because the affected sources figured out how to use fuel switching to coal with lower sulfur content. The success of the Acid Rain program led to similar programs for NOx both nationally, regionally, and limited to just New York State.

Despite the fact that these programs provided significant emission reductions at a lower cost to the affected sources the environmental community felt it was somehow unfair that some facilities made money selling allowances that had been given to them for free. That ignores the fact that those facilities selling the allowances made investments to get lower emissions. The idea that the polluters had to be made to pay led to cap-and-invest programs where the allowances are mostly available through an auction. The Regional Greenhouse Gas Initiative (RGGI) is a good example of that approach.

On the face of it, RGGI appears to provide emission reductions while also raising revenues so that model appeals to legislators. However, my observations of RGGI indicate that the theory of this approach is not matched by reality. Even though the CO2 emissions in the RGGI states have gone down substantially that was mostly because the effected sources switched from coal and residual oil to natural gas with lower CO2 emissions. The investments made with the auction proceeds that were supposed to fund emission reductions were only responsible for ~15% of the observed reductions. The accumulated total of the annual reductions from RGGI investments is 3,658,696 tons through December 31, 2020. The sum of the RGGI investments is $2,991,215,917 over that time frame. The cost per ton reduced $818 exceeds the societal cost of carbon so they are not justified by those societal benefits. Emission reductions in the future are going to have to rely on investments of the RGGI auction proceeds but at those high cost per ton reduced rates the costs may be too high for public acceptance.

One major difference between controlling CO2 and other pollutants is that there are no cost-effective control technologies that can be added to existing sources to reduce emissions. Combine that with the fact that CO2 emissions are directly related to energy production, the result is that after fuel switching the primary way to reduce emissions is to reduce operations. Consequently, CO2 emission reductions require replacement energy production that can displace existing production. If existing generation is not displaced with zero-emissions resources then energy production must be capped.

New York Numbers

The first numbers consideration is the cap itself. EPA explains that “The cap is intended to protect public health and the environment and to sustain that protection into the future, regardless of growth in the sector.” For the Acid Rain Program the cap was originally intended to reduce emissions by 50% but later was tightened down. In the NOx cap and trade programs the caps were set based on a technological evaluation of the control technology available to affected sources. The industry – agency issues with those caps centered on whether the agency estimates for additional control levels were reasonable. Importantly, the SO2 and NOx caps were based on the feasibility of affected source characteristics and were not binding in and of themselves.

On the other hand the CO2 cap in RGGI and the New York cap-and-invest caps are not based on feasibility. I define a binding cap as one chosen arbitrarily without any feasibility evaluation. In 2030 New York GHG emissions must be 40% lower than the 1990 baseline but this is an arbitrary target mandated by the Climate Act. The state’s Scoping Plan for this transition did not include an analysis to see if this target was feasible so I think this will be risky.

The Climate Act has exemptions for certain sectors. All components in the agriculture sector are not required to meet the 40% mandate and energy-intensive and trade exposed industries also get some sort of a pass. Even a cursory examination of the data in the graph suggests that the presumption that a binding cap will necessarily ensure compliance is magical thinking. The historical trend in electricity sector emission reductions appear similar to the trend necessary to meet the 2030 target but the historical trend was caused by fuel switching and there are no more reductions to be had in that regard. In order to reduce electricity sector emissions the energy output will have to be displaced with wind and solar. Waste sector emissions have been more or less constant since 1990. An entirely new technology has to be implemented in the next seven years to get a 4.5% per year reduction in emissions. Transportation can only reduce emissions if the transition to zero-emissions vehicles accelerates a lot. When I point out that there has been no feasibility analysis I am concerned because the Scoping Plan did not analyze whether the necessary technologies are likely to be available and deployed as needed and there was no consideration of what if questions. At the top of that list is “what if the technology rollout is delayed?”

It is beyond the scope of this analysis to consider potential control strategies for every sector. I did investigate one proposed strategy for the building sector transition that was included in Hochul’s proposal. Part VI-B:, Decarbonize New York’s Buildings states:

Building electrification and related upgrades improve interior comfort, reduce exposure to air pollution, and support local jobs. But right now, only about 20,000 New York homes install modern heat pumps for heating and cooling each year. While New York is making progress through programs like NYS Clean Heat, more must be done to cut emissions in our buildings.

To accelerate green buildings in New York, Governor Hochul is setting an unprecedented commitment of a minimum 1 million electrified homes and up to 1 million electrification-ready homes by 2030, and ensuring that more than 800,000 of these homes will be low- to moderate-income households. This target will be anchored by a robust legislative and policy agenda, including: raising the current rate of electrification of approximately 20,000 homes per year more than tenfold by the end of the decade.

I evaluated this component of the plan and the emissions reductions that could be expected for comparison to the annual 5.32 million metric ton of CO2e reduction required to meet the binding cap. Instead of using the confusing and poorly documented Scoping Plan estimates of residential energy use I used the New York State Energy Research & Development Authority Patterns and Trends document. Appendix B, Table B-1 lists the average household consumption by fuel type. I calculated the GHG emissions (CO2, CH4, and N2O) for direct emissions and New York’s required upstream emissions for each fuel type to get an estimate of residential electrification impacts on emissions.

I assumed that the two million homes initiative would convert 250,000 homes per year (two million divided by eight years). I apportioned the type of fuels used by the observed number of residences using each fuel type in the Scoping Plan. In other words, for this analysis, I maximized the potential emission reductions by eliminating the average fuel use in Table B-1 to zero. I found that these conversions would reduce GHG emissions by 1.3 million metric tons of CO2e per year. The Building sector has to reduce emissions 5.32 million metric tons of CO2e per year so the two million home initiative will only reduce emissions 25% of the amount needed when it gets cranked up from 20,000 homes to 250,000 homes per year.

I also took a shot at the costs. I assumed that the two million homes would be converted over to electricity for heating, cooking, hot water, and clothes dryers. I calculated the differential cost between replacement of existing fossil-fired technology with heat pumps and included $6,500 for upgrades to the electric service. Following the Scoping Plan recommendations, I also accounted for improved building shells. I estimate that the average cost to electrify a single residence is $42,777 all in. Multiplying that cost by 250,000 homes per year gives $10.7 billion per year in residential electrification costs for one quarter of the reductions needed. If the building shell is not upgraded the average price increase drops to $24,750 and the total annual cost drops to $6.2 billion per year. Even if you assume that my cost estimate is 25% high and the building shell is not included the costs are $4.6 billion per year.

Another thing to consider is the costs per ton for emission reductions in the buildings sector. In the best case, not including building shells and 25% below my estimates, the cost is $3,500 per ton reduced. That is on the order of 28 times higher than the New York value of carbon which is $126 per ton in 2023.

Discussion

One of the talking points of the Scoping Plan was that emissions from the Buildings Sector was the largest source of emissions in New York. However, the difficulty getting reductions from the sector was not discussed. There are two ramifications of that overlooked challenge.

In the first place the cap and invest binding cap has set an ambitious emissions reduction trajectory of 4.5% reductions per year to ensure compliance with the 2030 Climate Act mandated cap equivalent to a 40% GHG emission reduction from the 1990 baseline. That equates to 5.3 million metric tons per year. I estimate that electrifying 250,000 homes per year that are currently burning fossil fuels will only reduce emissions 1.3 million metric tons per year or one quarter of the amount needed.

Where are the rest of the building sector emission reductions going to come from? The lack of specificity in the Scoping Plan documentation precludes an easy response to that question. There is another aspect of this even if there is some sort of technology available for the remaining reductions required. The current NY rate of electrification is 20,000 homes per year and Hochul’s two million homes per year program will increase that by more than ten times someday. The trained labor and supporting infrastructure necessary is simply not available at this time. Providing training for staff takes time and money and companies have to invest more time and money in the infrastructure to do the work. It is impossible to go from 20,000 to 250,000 homes per year overnight.

The theory of a market-based carbon emissions reduction program is that the higher cost of the fossil fuels with the allowance adder will incentivize innovation to get the most cost efficient solution. Even if someone were to develop a magical solution that dropped the costs to electrify an order of magnitude, there just are not that many emissions from an individual residence available. As a result, the cost per ton reduced will still be well in excess of the New York Value of Carbon, $471 per ton reduced vs. $126 per ton in 2023. If the costs to make these reductions exceed the societal benefit of the reductions then the reductions are not cost-effective.

The second ramification is equally troubling. It is not clear at this time exactly how the program will be rolled out. The state will put allowances up for auction annually equal to the reduction trajectory amounts needed to meet the 2030 emission limits. I am guessing that the providers who supply fossil fuel to the building sectors will be responsible for building sector compliance. They will purchase allowances for each quantity of fuel purchased. If they purchase fuel and have insufficient allowances to cover that energy then they cannot sell the fuel.

I don’t think the advocates for a binding CO2 cap really understand that limiting the number of allowances also places a limit on fuel use. In theory scarcity will drive the prices up incentivizing innovation for lower carbon solutions but the ultimate compliance strategy is to simply not burn fossil fuels. If the emission reduction control strategies are developed slower than the arbitrary compliance trajectory then there will be an inevitable artificial shortage of fuel. If a power plant has insufficient allowances, it cannot run and provide energy when needed. When the fuel providers don’t have enough allowances, then they will have to limit how much fuel aka energy they can provide to homes and other users. Given that the trajectory is so ambitious and the options to make reductions appear to be so limited I don’t see any way this will not result in artificial fuel shortages.

Even if there are sufficient allowances the artificial scarcity will drive up prices. One of the great unknowns of the Hochul proposal is the revenue target. A feature of most cap and invest programs are limits to constrain the auction price. However, the market price has no such limits. The impacts of a binding cap on costs is another unknown with likely bad consequences.

Conclusion

New York policy makers have glommed on to Cap and Invest because they think it is a solution that will easily provide revenues and compliance certainty. Unfortunately, that presumption is based on poor understanding of market-based emissions programs. The reality is that successful programs used emissions reduction strategies that are not available in the quantity or quality necessary for New York. Presuming that past performance would be indicative of future reduction success and establishing an arbitrary emissions target that is incompatible with realistic emission reduction trajectories is not going to end well because the numbers simply do not add up.

Making Climate Policy Work, RGGI, and New York Cap and Invest

One of my pragmatic interests is market-based pollution control programs. In this post I am going to address the take on the Regional Greenhouse Gas Initiative (RGGI) in an influential book Making Climate Policy Work. There are also important lessons to be heeded as New York considers a Cap and Invest program.

I follow and write about the RGGI market-based CO2 pollution control program for electric generating units in the NE United States. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Making Climate Policy Work Overview

The description of the book states:

For decades, the world’s governments have struggled to move from talk to action on climate. Many now hope that growing public concern will lead to greater policy ambition, but the most widely promoted strategy to address the climate crisis – the use of market-based programs – hasn’t been working and isn’t ready to scale.

Danny Cullenward and David Victor show how the politics of creating and maintaining market-based policies render them ineffective nearly everywhere they have been applied. Reforms can help around the margins, but markets’ problems are structural and won’t disappear with increasing demand for climate solutions. Facing that reality requires relying more heavily on smart regulation and industrial policy – government-led strategies – to catalyze the transformation that markets promise, but rarely deliver.

RGGI Results

One of my first posts at this blog is still in the top ten viewed articles: Academic RGGI Economic Theory of Allowance Management. In that article I argued that economic value theory for an allowance market fails to account for the behavior of the affected sources. In particular, the owners and operators of sources treat the allowances primarily as compliance instruments and not as financial assets. The important difference is that the academic economic theory holds that affected sources are looking years down the road but in reality, there is no such long-term time horizon for affected sources. Compliance entities decide to buy allowances based on their expected operations in the period between auctions or, at most, the entire 3-year compliance period including a small margin for operational variations and regulatory compliance. Contrary to theory there is little attempt to make the allowances a profit center.

I have regularly evaluated RGGI performance on this blog. Last December I evaluated the 2020 RGGI Investment Proceeds report that describes the results of RGGI investments over the entire region. I found that since the beginning of the RGGI program CO2 emissions have been reduced more than 50% but that RGGI funded control programs have been responsible for only 5.6% of the observed reductions. In late December I did a similar analysis of just the New York investment proceed results and found that in New York since the beginning of the RGGI program to 2021 CO2 emissions have been reduced 39% but the reduction was 47% until the State shutdown the Indian Point nuclear station. The RGGI funded control programs have been responsible for only 16% of the observed reductions. The main reason for the reductions in RGGI and New York State has been fuel switching to natural gas unrelated to RGGI.

I also recently evaluated New York’s operating plan that guides the investment of RGGI proceeds. In the next fiscal year, the operating plan has 30 programs but only two programs claim direct CO2 reduction savings. Over the years 2013 to 2021, the total investment for those two programs is $565 million and the claimed savings are 1,684,616 MWh and 861,442 tons of CO₂e with a calculated cost benefit of $656 $/ton. I classified each program relative to six categories of potential RGGI source emission reductions. The first three categories cover programs that directly, indirectly or could potentially decrease RGGI-affected source emissions. Those programs total 45% of the investments. I also included a category for programs that will add load that could potentially increase RGGI source emissions which totals 27% of the investments. Programs that do not affect emissions are funded with 21% of the proceeds and administrative costs total another 7%. In summary, even though the ostensible purpose of RGGI proceeds is to reduce emissions from RGGI-affected sources, less than half of the investments expect to do so.

Even though many RGGI proponents claim the program has been a success, my work shows that depends on how success is defined. If success is defined as significant cost-effect emission reductions from affected sources then that is not the case. If success is defined as a functional market-based system that provides proceeds then it is a success. There is no question the program components work well. The misuse of RGGI funds for affected source emission reductions is not the fault of the system but the politicians who control fund disbursement.

Making Climate Policy Work and RGGI

I wondered if this book talked about RGGI and how they rated its results relative to my analyses. I went through the document searching for and documenting every reference to RGGI to see whether I agreed with their description and evaluation of the program.

The first chapter describes the vision and the reality of carbon reduction market-based policies. Three example policies are described, including RGGI. The RGGI description states:

RGGI’s vision is the most realistic and generally applicable precisely because it is the most pragmatic about what is able to be achieved. The program encompasses states with varied political interests around climate change, ranging from the highly ambitious to the cautiously engaged. It covers only the electricity sector – where the technologies for cutting emissions are most mature – with transparent and predictable program rules. Even in the power sector, however, RGGI is not the only or even main show in decarbonizing its participating states’ electric grids. Other policy programs are having a bigger impact, including state renewable portfolio standards; subsidies that keep nuclear power plants, which are prodigious suppliers of zero-carbon power, from shutting down; and other government-managed regulatory and procurement efforts all aimed at making the RGGI states’ power infrastructure less carbon-intensive. In many respects, the RGGI system represents the high-water mark for what subnational markets can do: RGGI supports the broader goal of deep decarbonization, generates discretionary revenue streams for participating governments, and increases the static economic efficiency of a policy portfolio – all in a single sector. Its benefits are clear and relatively modest. Among purists, RGGI is often mocked because its prices are low (about $5–6 per metric ton of CO2 emissions in 2019) and coverage is limited to just one sector. We see the experience through a completely different lens: RGGI works because its architects knew what they were doing and designed a system that is politically feasible and durable.

I have slightly different takes on some of these points but overall I agree with their characterization.

The next two chapters and Chapter 5 only mention RGGI in passing. Chapter 2: Ambition makes the case that the theory of flexible and economically efficient carbon markets should make them ideal for maximizing the effort to control carbon pollution. This chapter explains why carbon markets have failed to live up to the expectations. The only reference to RGGI discussed the political process that underpins participation. The RGGI framework is flexible enough so that the addition and deletion of participating states when political regimes change does not affect the viability of the overall program. It concludes: “Firms and governments participating in RGGI know that states may come or go, with the consequences managed through an informal political process rather than a legal one.” Chapter 3 on coverage and allocation notes that RGGI is limited to the electric sector. Chapter 5 on offsets notes that even though offsets are allowed they have not been a factor in RGGI. I agree with their characterizations.

Chapter 4: Revenue and Spending delves into the disbursement of funds collected in the market. The total RGGI cumulative auction proceeds at the time of this writing is $5,895,274,757.14 since the first auction in September 2008 so RGGI has successfully generated revenues. With regards to spending the chapter notes that “How societies spend the money raised through these sales is vital to understanding the politics of emissions trading.”

The chapter discussion on RGGI points out that each state controls its revenue spending. There is a graph from the 2017 RGGI proceeds investment report that describes revenue uses in three categories: general funds; revenue recycling (earmarking revenues for spending that benefits citizens); and green spending (energy efficiency, clean energy, and climate mitigation). Given the difficulties I have had trying to interpret the RGGI proceeds reports, it is not surprising that there isn’t more detail.

The authors did pick up on some of the revenue problems in RGGI:

The RGGI program also reveals some of the political dynamics that can emerge when political leaders decide to re-purpose funds. The Governors of New York and New Jersey have both diverted RGGI revenues to the state’s general fund at points in the program’s history, raising concern from environmental NGOs and others who have supported a green spending agenda.

In a section within this chapter titled “Why green spending becomes green pork” the authors explain that there is not much scrutiny how the money is spent. They define pork as an expenditure that is designed to disproportionately benefit a special interest rather than the broader public good. They claim that “the organizations that spend RGGI funds are better designed to provide more discipline and accountability on how those funds are spent” than the other example programs discussed. While that may be true with respect to RGGI as a whole, it is not the case for New York. For example, the authors did not manage to tease out the fact from various unclear reports that New York uses RGGI funds to cover costs that were covered by general funds, i.e., a hidden diversion of revenue to the general fund. I am sure that had the authors looked into New York’s operating plan for RGGI auction proceed expenditures they would have agreed with my conclusion that green pork is a prominent part of New York’s expenditures.

Chapter 6: Market Links discusses the “institutional challenges of managing cross-border market governance”. With regards to RGGI I agree with their characterization:

Critically, what holds this system together is not law and the creation of robust, tradeable property rights, but rather a shared vision of parallel efforts at low levels of ambition. Design decisions are made according to the evolving political views of current and prospective participants. And because RGGI features so many parties – none of which hegemonically dominates the group’s overall agenda – the program must be transparent and predictable. The largely egalitarian cooperation of RGGI states works because it is anchored in stability-oriented market design features that make market behavior more predictable and risk management more tractable.

Chapter 7: Getting the Most Out of Markets explains how to increase program ambition, for example, attracting more jurisdictions or setting more ambitious targets. The RGGI discussion does a good job explaining how the program addressed an oversupply condition:

The northeastern United States’ RGGI program takes a similar approach through a pair of one-time cap adjustments, as well as a dynamic intervention that resembles the Market Stability Reserve. Like the EU ETS, RGGI experienced market oversupply conditions and very low prices in the 2010s. The situation with RGGI was more extreme, however, because this cap-and-trade program only applies to the electricity sector and the United States’ electricity sector began a profound transformation alongside (but not because of) RGGI. Not only did many of its participating states implement aggressive renewable energy and energy efficiency regulations, but also the rise of cheap natural gas from fracking dramatically accelerated the replacement of high-emitting coal-fired electricity with relatively clean natural gas and zero-carbon renewables. Emissions have been falling steadily, despite – not because of – anemic RGGI prices. As emissions fell owing to exogenous forces, the market became oversupplied. In response, RGGI’s two cap adjustments removed almost 140 million allowances – about two years’ worth of total emissions – from the supply of allowance budgets through program year 2020.^[1]

In addition to these one-time adjustments, RGGI also developed a dynamic mechanism to alter the supply of allowances.^[2] This additional market feature is triggered by observed market prices, rather than the EU ETS Market Stability Reserve’s measurement of excess allowance supplies. Like the EU ETS Reserve, RGGI’s approach is two-fold: RGGI features a Cost Containment Reserve that releases 10% of the program-wide allowance budget into the market if prices reach $13 per allowance in 2021; and if prices fall below $6 per allowance in 2021, an Emissions Containment Reserve will absorb 10% of the program’s annual allowance budget and remove these allowances from circulation. When the market remains in between the two triggering prices, allowances supplies are fixed – just as in the EU ETS, where supplies are fixed so long as the total number of surplus allowances stays within a specified range. (Both triggering prices increase at 7% per year to increase ambition over time, but not even the high-end prices are significant when compared to the policy incentives supporting renewable or nuclear energy in participating RGGI states.)^[3]

The final chapter is entitled “Rightsizing markets and industrial policy”. One of the problems identified in the book is that the level of expenditures needed to implement the net-zero transition vastly exceeds the “funds that can be readily appropriated from market mechanisms”. The chapter describes RGGI as the “the cap-and-trade system whose design is most purely oriented around generating and spending revenue”. The authors note that the October 2019 report “The Investment of RGGI Proceeds in 2017” indicates that New York has mobilized just $100 million per year for green spending. My review of the latest plan to invest New York RGGI auction proceeds indicates that the design plan is supposed to “support the pursuit of the State’s greenhouse gas emissions reduction goals”. Of the five goals listed, only one addresses emission reductions. The others are vague cover language to justify the use of RGGI auction proceeds as a slush fund for hiding administrative expenses and costs related to Climate Act implementation at the expense of programs that affect CO₂ emissions from RGGI affected sources.

Making Climate Policy Work and New York Cap and Invest

Governor Hochul recently announced a plan to use a market-based Cap and Invest program to raise funds for the Climate Leadership & Community Protection Act. I submitted comments on the Draft Scoping Plan that made opposed the recommendation for such a program. My initial impression of the Cap and Invest program is that it is more style than substance. If I had read this book before drafting the comments or my initial impression article, I would have highlighted the findings in this book as part of my arguments against this approach.

The program public relations summary claims that “A Cap-and-Invest Program is the most feasible, efficient, and affordable method to attain a more sustainable future.” I have been surprised by the amount of support for the plan. At the February 14, 2023 New York Senate Environmental and Ways and Mean legislative public hearing on the 2023 executive budget the majority of the speakers supported the proposal. I don’t think that any of the comments that support the program realize the many flaws in that proposal that are described in this book.

In my opinion, a fundamental flaw in the Scoping Plan is that it does not include feasibility analyses to determine whether the laundry list of control strategies will be feasible. The Plan does not demonstrate that the proposed strategies will be maintain current standards of reliability and safety or can keep energy costs affordable. This lack of analysis extends to the Cap and Invest proposal. Proponents claim that it is the most feasible option but that is relative to a short list of options and does not necessarily mean that it will work as proposed. The preface of the book notes the importance of feasibility:

In telling the story of how market-based climate policy works in the real world, we adopt the premise that idealized markets would be desirable if they were feasible. We hope this choice allows us to reach readers who identify strongly with the power of market forces, since we hope to change their minds. We want them to understand how political forces constrain what market-based policies can do, especially at the early stages of deep decarbonization, because wishing those forces away isn’t practical and hasn’t worked.

The Cap and Invest fact sheet notes that this program will be similar to RGGI that “has helped reduce greenhouse gases from power plants by more than half and raised nearly $6 billion to support cleaner energy solutions”. As noted previously my analyses show that RGGI was only a minor cause of the observed emission reductions. Chapter 1 this book also argues that RGGI is not the primary cause: “Other policy programs are having a bigger impact, including state renewable portfolio standards; subsidies that keep nuclear power plants, which are prodigious suppliers of zero-carbon power, from shutting down; and other government-managed regulatory and procurement efforts all aimed at making the RGGI states’ power infrastructure less carbon-intensive.” Based on my work I believe fuel switching has been the primary cause of New York observed reductions but there are two aspects to consider. The reductions were because natural gas was a cheaper alternative than coal and oil. However, the subsidies for nuclear power plants kept emissions from rising. That is until the State made the irrational decision to shut down 2,000 MW of nuclear power at Indian Point. Since 2019, when the staged closure began, New York electric utility CO2 emissions have increased 5.8 million tons or 23%.

The Scoping Plan recommendation for an economy-wide strategy to address the financing and emission limitations is based on a naïve understanding of market-based programs. Cullenward and Victor explain the reality:

Market-based policies on a planetary scale, the theory goes, would empower firms and governments with the flexibility to focus investment on the least expensive options for controlling emissions. Flexibility would reduce costs, allowing more environmental protection with fewer resources; in turn, frugality would make it easier to mobilize business and voter support for ever-deeper climate pollution reductions.

They go on to explain that this vision has completely failed:

Many pollution markets exist, but nearly all are smokescreens that create the impression that market forces are cutting emissions when, in fact, other policies are doing most of the real work of decarbonization. Almost everywhere that market systems are in place they operate at prices that are so low as to have little impact on key decisions such as whether to invest in or deploy new technologies.

The Cap and Invest solution is being marketed as both a compliance and financing tool. The belief is that the cap will establish compliance limits and the auction will provide the funding to make the reductions. There are issues with these tools.

The use of the cap as a binding compliance mechanism is unprecedented. Consider, for example, the EPA Cross State Air Pollution Rule (CSAPR). This cap-and-trade program is in place to limit nitrogen oxide (NOx) emissions in the eastern United States for ozone compliance. There have been multiple iterations of this rule that have progressively reduced the cap. The distinction between CSAPR and a binding cap is that EPA evaluated emissions, existing control technology, and potential improvements or additions for all the sources in the CSAPR-affected states. The cap was determined using this control technology evaluation to set a feasible limit. A binding cap is one chosen arbitrarily without any such feasibility evaluation. In 2030 New York GHG emissions must be 40% lower than the 1990 baseline but this is an arbitrary target mandated by the Climate Act.

There is another aspect of any GHG emissions reduction program. There are no cost-effective add-on control technologies available for existing sources. The only options available for an affected source are to change the fuel to something with lower GHG emissions, make the system more efficient, to reduce operations, or shut down. As noted previously, New York reduced its electric system emissions significantly because of fuel switching but that strategy is tapped out for any future significant reductions. In order to get more reductions from the electric generating system, zero-emissions resources must be deployed to displace the fossil resources. This is particularly difficult because the loss of Indian Point’s zero emissions generation has increased recent emissions. The control strategies are similar for all other sectors.

Cullenward and Victor make the point that it is easier to make reductions with existing technology:

In a few places, carbon prices from market-based policies have been powerful enough to induce some changes in emission patterns – such as when firms decide whether to produce electricity from high-emission coal plants or lower-emission rivals. Those impacts, however, have nearly always involved commercially mature technologies competing in stable environments and under other highly restrictive conditions.

In order to meet the 2030 GHG emissions target technology that has not been proven commercially viable at the necessary scale is needed. This challenge is a problem with the Climate Act deep de-carbonization targets that the Scoping Plan recommendations ignore:

On another front, what markets do best – creating transparent, marginal price signals that encourage firms and households to optimize their choices – is misaligned with the industrial challenges facing deep decarbonization today. In most sectors the world is not far along with deep decarbonization: key technologies, demonstration projects, and the emergence of new firms to back low-carbon technologies are fledgling at best (see Figure 1.2).9 Industrial firms and consumers aren’t waiting for a faint, marginal signal from markets to nudge their behavior. Instead, they need active programs to mobilize and apply resources to new technologies that, with time and effort, will launch the global process of deep decarbonization and displace incumbent industries. Well-designed market signals, at best, are good at encouraging optimization when technologies are commercially mature and strategic choices are clear – such as when the UK electricity market had a signal to select mature renewable energy technologies and gas instead of coal. The hardest challenges of deep decarbonization involve redirecting investment toward technologies and businesses that are the opposite: beset with risk and danger for first movers. Creating those new industries requires a policy strategy – industrial policy, in effect – that is focused on the problem at hand, rather than inducing marginal changes in behavior with known technologies and production methods.

The authors address three issues related to the fact that the existing systems have failed to live up to expectations. The first issue is related to the technology issues noted above:

We explain why idealized, “first-best” designs for pollution markets envision systems that produce high carbon prices as a powerful incentive for change. In the real world, the outcome has been the opposite: prices are low and often volatile, which undercuts the incentive to invest in ambitious new technologies and to make changes in production methods beyond those that are straightforward with few risks. First-best visions for pollution markets also imagine that markets should cover many sectors simultaneously, allow extensive interconnection with markets overseas, raise large amounts of revenue, and spend those revenues efficiently to offset distortions in the economy. On every front the real world has produced outcomes that are the opposite from theory: markets are fragmented, links are few, sectoral coverage mostly is narrow, and revenues raised are small.

Details for the proposed Cap and Invest program are sketchy but my impression from what I have heard is that it will also be the opposite of this theory.

As an alternative, the author describe how to make market-based programs more effective. Their second issue is necessary market reforms:

Some reforms are needed to make market signals more reliable – an outcome that requires shifting away from cap-and-trade systems, where market structures create volatile prices, and toward systems where prices are managed within narrow bands. In effect, cap-and-trade systems can be made more effective when they are designed to behave more like taxes; it is no accident that the few jurisdictions with the highest prices and the greatest level of effort use taxes, not cap-and-trade. More stable prices will make it easier for firms to invest in anticipation of market signals and to build political coalitions that are supportive of that investment. Systems that are designed like taxes also perform better in the real world where market policies are implemented alongside other regulatory programs. In that setting, cap-and-trade schemes merely trade the residual and get little work done in cutting emissions – they are Potemkin markets. Tax approaches, by contrast, create a clear incentive for change (the specified tax level), which persists even as other policy instruments have big impacts on behavior as well.

This approach is basically RGGI without a binding cap. Unfortunately, Climate Act proponents are convinced that the transition schedule is possible despite the lack of any evidence supporting evidence and that the climate crisis necessitates the aggressive schedule of the Climate Act. Even though New York GHG emissions are less than one half of one percent of global emissions and global emissions have been increasing by more than one half of one percent per year this rationale for the Climate Act schedule is a major obstacle against this common sense approach.

In addition to the compliance mechanism the proposed Cap and Invest program is intended to provide revenues for the transition. I have no doubts that the program will generate revenues and suspect that the Hochul Administration will decide the revenue targets based on just how much they think they can get away with rather than basing them on the results of their RGGI auction proceeds. Cullenward and Victor address this aspect:

Our playbook for market reform offers some insights into why so many of the visions for market-oriented climate policy won’t happen under real-world political conditions. For example, many advocates for market-based policies imagine that the adoption of market schemes will occur alongside massive policy reforms that roll back regulation. We explain why, politically and administratively, those regulatory and industrial policies are not easily rolled back. Moreover, we explain why pushing for that outcome would be a bad idea – since those other regulatory policies, in fact, are doing most of the serious work in cutting emissions.

One of the most important contributions of markets is among the least appreciated today: well-designed market schemes can raise revenue. A politically savvy strategy for market reforms requires paying closer attention to how program revenues are spent – and specifically to allocating funds to activities that will build experience with new technologies and thus also catalyze new interest groups that are supportive of accelerating deep decarbonization.

Because of the enormity of the challenge another issue is discussed. In particular, what else is needed:

The key is to channel resources into the sectors that are critical for deep decarbonization. Rather than link all sectors together into a common market system, each must be treated independently because each has its own political economy and state of technology. In sectors where technologies are immature, industrial policy should focus on research, development, and demonstration (RD&D) in a diverse array of options – an approach that yields knowledge and also builds political coalitions around new low-carbon industries.

The New York Climate Act covers all sectors. It may be possible to breakout the sectors based on such a recommendation. However, the looming problem is that a binding cap will limit emissions even if the zero-emissions resources are not available to displace the existing emissions. Carbon dioxide emissions are directly tied to fossil-fuel combustion and energy production. If for any number of reasons, the zero-emissions are not deployed fast enough in all the sectors there won’t be enough credits available to cover the emissions necessary to provide the energy needs. In the worst case, an electric generating unit needed to keep the lights on will refuse to operate because they have insufficient allowances.

The obvious solution to this concern is a feasibility analysis of the schedule for technological innovations necessary to maintain affordability and reliability. The authors suggest “Doing better requires recognizing the structural limits to what is achievable with market-based approaches – limits that are rooted in how the politics and technological opportunities are organized in each sector.”

Conclusion

The Hochul Administration proposes a Cap and Invest program that will provide revenues and establish a compliance mechanism. I agree with the authors that the results of RGGI and other programs suggest that the Cap and Invest proposal will generate revenues. However, we also agree that the amount of money needed for decarbonization is likely more than any such market can bear. The problem confronting the Administration is that in order to make the emission reductions needed they have to invest between $15.5 and $46.4 billion per year. I don’t think that range is politically palatable.

The use of Cap and Invest as a compliance mechanism is more of a problem. The Hochul Administration has not acknowledged or figured out that the emission reduction ambition of their Climate Act targets is inconsistent with technology reality. Because GHG emissions are equivalent to energy use, limiting GHG emissions before there are technological solutions that provide zero-emissions energy means that compliance will only be possible by restricting energy use. Unless a miracle occurs in 2030 when there are insufficient allowances someone has to choose who gets to operate.

This is a good book and I recommend it to anyone interested in energy and climate policy and emissions trading programs.

[1] The Regional Greenhouse Gas Initiative, “Elements of RGGI,” https://www.rggi.org/program-overview-and-design/elements; see also The Regional Greenhouse Gas Initiative, “RGGI Program Review: Summary of Proposed Changes to RGGI Regional CO2 Allowance Budget” (Nov. 21, 2013); The Regional Greenhouse Gas Initiative, “Second Control Period Interim Adjustment for Banked Allowances Announcement” (March 17, 2014).

[2] The Regional Greenhouse Gas Initiative (2014), supra note 11.

[3] New York and Illinois (the latter of which is not in RGGI) created the first zero-emission credit (ZEC) subsidy programs for nuclear energy in the United States. See Nuclear Energy Institute, “Zero-Emission Credits” (Apr. 2018). These policies were challenged in court and ultimately upheld in two parallel cases. Coalition for Competitive Electricity v. Zibelman, 906 F.3d 41 (2nd Cir. 2018) (New York); Electric Power Supply Association v. Star, 904 F.3d 518 (7th Cir. 2018) (Illinois). Following these favorable outcomes, New Jersey (once again part of RGGI) adopted a similar program. Robert Walton, “New Jersey moves ahead on nuke subsidies, approving ZEC application process,” Utility Dive (Nov. 21, 2018). For an overview of state renewable energy policies, see Galen L. Barbose, “US Renewables Portfolio Standards: 2019 Annual Status Update,” Lawrence Berkeley National Laboratory (2019), https://emp.lbl.gov/projects/renewables-portfolio.

New York Annual Climate Act Cap and Invest Revenue Targets

One of the biggest questions related to Governor Hochul announced plan to use a market-based program to raise funds for the Climate Leadership & Community Protection Act (Climate Act) is the revenue target. I incorporate the latest 2020 GHG emissions inventory data and some other bits of information to follow up on a couple of earlier posts that addressed this issue.

I submitted personal comments on the Climate Act implementation plan and have written over 280 articles about New York’s net-zero transition because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. I also follow and write about the Regional Greenhouse Gas Initiative (RGGI) market-based CO2 pollution control program for electric generating units in the NE United States. Before I retired I had extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Background

The first related article I posted gave my initial impression of the New York cap and invest program. That post gives background information on the Climate Act’s economy-wide strategy and my overarching concerns. I explained that I had evaluated New York’s RGGI auction proceeds funding status report and found that the projected costs of the current programs are $776.1 million, the net greenhouse gas emission savings are 1,656,198 tons and that works out to emission cost per ton removed of $469. If all the RGGI administrative and operating costs are included another $113 million is added to the total and the emissions cost per ton removed is $537 per ton. I also evaluated existing emissions and the reduction trajectory necessary to meet the 2030 Climate Act emissions target. Those numbers will be updated in this post. The post also lists some practical considerations that should be a concern for this initiative.

The second related article determined different annual revenue targets. I determined the emissions reduction trajectory needed to meet the 2040 GHG emissions target, calculated the control cost per ton removed based on the RGGI auction proceed investments, and found that a total of $7.9 billion per year is needed. That is the low-end cost of the projections. At the upper end three projections exceed $45 billion a year. I will update those projections below.

New York GHG Emissions

In order to understand the challenge it is necessary to know where we stand for our GHG emissions. The following table (the link is to the full table because I cannot figure out how to make tables in the text get bigger when a reader clicks on it) lists the New York State GHG emissions (MMT CO2e AR5 20 yr) by sector from the DEC emissions inventory . It also includes the annual change in emissions since 1997.

I evaluated current emissions relative to the 2030 Climate Act target of a 40% reduction by 2030. The following table lists the trajectory of observed, projected, and interpolated emissions consistent with the 2030 requirement to reach 245.87 million metric tons of CO₂e. New York State has released the official GHG emissions for New York State for 2018, 2019, and 2020 and they are highlighted in gold. I estimated emissions for 2021 and 2022 using the observed electric generating unit emissions and historical averages for other sectors. Note that emissions increase due to the shutdown of the Indian Point nuclear generating facility. The 2030 levels are fixed and are highlighted in rose. There are six columns that list the emissions trajectory necessary to get from the observed emissions (gold) to the target. The annual reduction in the trajectory is the difference between the observed emissions and the 2030 target divided by the number of years. For example, the estimated GHG emissions in 2021 were 381 million metric tons. If the emissions are reduced by 15 million tons per year, then in 2030 the emissions will meet the target of 245.87 million metric tons. Two projections are listed for 2022 that give bounds to the reductions necessary. One uses the estimated emissions and the other assumes that total state GHG emissions stay constant between 2020 and 2022.

Ostensibly the goal of the cap and invest program is to generate the revenues necessary to make the required reductions. The following table uses the range of 2022 emission estimates (384.92 and 345 million metric tons of CO₂e) and the range of cost per ton reduced ($533.79 and $487.75) to place bounds on the required reduction costs. If the assumption is made that all the reduction costs will be financed by auction proceed investments, then the annual revenue needed for the high bound is $9.278 billion and the low bound is $6.044 billion. That assumes that all the money collected is invested. However, Hochul announced that there would be a Climate Action Rebate of 30%. In order to maintain the revenue needed to meet the emission targets that means that the total collected has to increase from $9.278 billion to $12.254 billion increasing the cost per ton reduced to $763. In addition, she announced another 3% for small businesses and, this being New York, I assume that the administrative costs will be the same as the 7% as in RGGI. Incorporating those costs raises the total needed to between $15.463 million and $10.073 billion. That assumes that all the environmental justice targeted money can be invested in reductions that benefit environmental justice communities. If the interpretation of the 40% for environmental justice communities is in addition to the investments needed to meet the reduction targets, then the annual totals increase between $46.390 billion and $30.219 billion.

There are a couple of other potential annual revenue target methodologies. The clearing price at the last RGGI auction was $12.99 and assuming that 385 million allowances were auctioned off the revenues would be $5 billion. The highest auction clearing price would increase revenues to $5.35 billion. Keep in mind that that the allowances auctioned will decrease over time so this is the upper bound. In addition, there are mandates for set asides so that is not a true reflection of the number of allowances that would be auctioned. The annual reductions could also be set to the NYS Value of Carbon which is set at $129 in 2025 and $172 in 2050. The estimates for those revenues range between $1.6 and $3.0 billion.

Discussion

The sectors affected by the Climate Act Cap and Invest Program are most interested in the revenue target for the auction. Regulatory staff claim that they are interested in the emission reductions and not the revenues which would argue for setting the cap at a defensible value that could provide the reductions necessary. There are many issues with this simple approach. It is assumed that there are no other sources of funding to make the reductions. It also assumes that the cost per ton reduced is constant but control programs will increase as control efficiencies necessarily get tighter. There are also issues with how the EJ set-aside is invested and how much money is used for administration.

Conclusion

There is no clear and obvious revenue target. As with all GHG market-based control programs the real concern is that the costs necessary to make reductions are so high that they exceed the Value of Carbon and the likely limits of the public’s willingness to pay.

There is another concern. The Scoping Plan requires an ambitious emission reduction trajectory. Because there are no cost-effective control options for GHG emissions, the reductions will have to come from indirect displacement of fossil-fired energy use or simply reducing fossil-fuel use. The ultimate compliance control strategy is stop operating when there are no allowances available to be had. Energy demand is inelastic so there will be interesting times ahead as this plays out.

Climate Act Scoping Plan Toolkit

The Climate Leadership & Community Protection Act (Climate Act) website was extensively revised at the start of 2023. It includes a link for the Scoping Plan Toolkit which is described as “resource to help community and partner organizations” with specific “resources to facilitate conversations about New York’s climate work.” As I was working on an article about the cap and invest program I noticed that there were two fact sheet pdf files for cap and invest: Cap-and-Invest One Pager [PDF] and Cap-and-Invest vs. Cap-and-Trade vs. Carbon Tax [PDF]. This is a short post about the new format of the website and the cap and invest “toolkits”.

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.

Climate Act Website

The Climate Act website was revised at the start of 2023. Now it is a public relations site to sell the Climate Act. It has been revised so that it is more accessible to smart phones with large text fonts and splashy graphics. The main internal links cover “Our Impact”, “Get Involved”, News & Events”, “Resources” and “Partner Toolkit”. I list the links within each of these categories below:

“Our Impacts”

“Get Involved”

“News & Events”

“Resources”

“Partner Toolkit” Fact Sheets

There is blog post fodder in every one of these links. For example, the lead for the Addressing Energy Affordability Concerns link says “As energy prices rise, we must power our future focused on clean and renewable resources.” Not included in the platitudes and talking points within the link is a reference to the experience of any jurisdiction that has pushed the use of wind and solar resources over fossil fuel that has actually lowered consumer bills. It is all flash and style for pushing the narrative without substance.

Cap and Invest Toolkit Fact Sheets

This post is going to introduce issues associated with the cap and invest toolkits. There are two fact sheets for the cap and invest program: Cap-and-Invest One Pager [PDF] and Cap-and-Invest vs. Cap-and-Trade vs. Carbon Tax [PDF]. When I first started looking at these resources. I found that they both linked to the cap and invest program one pager. I alerted a contact I have known for years because there is no contact on the web pages. The next morning the link to the Cap-and-Invest vs. Cap-and-Trade vs. Carbon Tax was changed so someone else caught the problem. I also question the label of the one pager document. The author’s interpretation is that a one pager means two sides of one page. I think the generally accepted implication is to condense the summary to a single page.

I am going to do a more detailed post on the cap and invest plan toolkits but for now I just want to make one point. Both fact sheets extoll the virtues and success of the Regional Greenhouse Gas Initiative (RGGI) cap and invest program. New York utilities have been covered by that program since 2009 and New York agencies never lose the opportunity to claim that it has been a success. I have been involved in the RGGI program process since its inception and have written many articles about the details of the RGGI program.

In early December I evaluated the 2020 RGGI Investment Proceeds report that describes the results of RGGI investments over the entire region. I found that since the beginning of the RGGI program CO2 emissions have been reduced more than 50% but that RGGI funded control programs have been responsible for only 5.6% of the observed reductions. The main reason for the reductions has been fuel switching to natural gas. When the sum of the RGGI investments is divided by the sum of the annual emission reductions the CO2 emission reduction efficiency is $818 per ton of CO2 reduced.

In late December I did a similar analysis of just the New York investment proceed results. I found that in New York since the beginning of the RGGI program CO2 emissions have been reduced 39% in 2021 but the reduction was 47% until the State shutdown the Indian Point nuclear station. The RGGI funded control programs have been responsible for only 16% of the observed reductions. The main reason for the reductions has been fuel switching to natural gas. When the sum of the RGGI investments is divided by the sum of the annual emission reductions the CO2 emission reduction efficiency is $565 per ton of CO2 reduced.

I conclude that RGGI is not an effective CO2 emission reduction program and that because the emission reduction efficiency of the RGGI investments is far greater than any social cost of carbon metric yet proposed that the investments are not cost-effective. RGGI success is the eye of the beholder.

New York Annual Climate Act Investment Requirements

I recently described my initial impression of the New York cap and invest program and noted that it was not clear what the target revenue cap would be. This post looks at some alternative revenue projections.

I submitted comments on the Climate Act implementation plan and have written over 270 articles about New York’s net-zero transition because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that the net-zero transition will do more harm than good. I also follow and write about the Regional Greenhouse Gas Initiative (RGGI) market-based CO2 pollution control program for electric generating units in the NE United States. I have extensive experience with air pollution control theory, implementation, and evaluation having worked on every cap-and-trade program affecting electric generating facilities in New York including the Acid Rain Program, RGGI, and several Nitrogen Oxide programs. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Climate Act Background

The Climate Act established a “Net Zero” target (85% reduction and 15% offset of emissions) by 2050. The Climate Action Council is responsible for the Scoping Plan that outlines how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible and power the electric gride with zero-emissions generating resources by 2040. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to write a Draft Scoping Plan that was revised in 2022 and the Final Scoping Plan was approved on December 19, 2022. Unfortunately, the revisions only addressed the language of the draft plan and not the substance of the numbers used from the Integration Analysis.

Investment Projection

My initial impression of the New York cap and invest program post calculated a revenue projection for the proposed cap and invest program. From 2025 to 2030 I estimate that emissions will have to go down 14.76 million tons per year to meet the 2030 GHG emissions target. New York’s investments in the Regional Greenhouse Gas Initiative yield an expected cost per ton reduced of $537 for a total of $7.9 billion. Governor Hochul proposed “legislation to create a universal Climate Action Rebate that, subject to a stakeholder and rulemaking process, is expected to drive more than $1 billion in annual cap-and-invest proceeds to New Yorkers”. If the $1 billion is added then the total revenues would be $9 billion per year.

Scoping Plan Cost Projection

The primary documentation for the numbers presented in the Scoping Plan is the Tech Supplement Annex 2. Key Drivers Outputs spreadsheet. The Scoping Plan has been described as a “true masterpiece in how to hide what is important under an avalanche of words designed to make people never want to read it.” The spreadsheet is worse. Not only is the information provided buried in a massive spreadsheet but the authors of the Integration Analysis presented misleading, inaccurate, and biased data to support the narrative that the costs of inaction are more than the costs of action. I have extracted the relevant tabs from the massive reference spreadsheet into my analysis spreadsheet to address the first concern.

The data in the Integration Analysis that is used in the Scoping Plan is misleading. On one hand as many numbers are possible are only provided relative to a Reference Case instead of a status quo or business-as-usual case that represents the full costs of the control strategies necessary to meet the net-zero by 2050 Climate Act goal. I maintain that the true cost of New York’s net-zero transition by 2050 should include all costs associated with all programs designed to reduce GHG emissions. The authors of the Integration Analysis and Scoping Plan excluded decarbonization costs that I believe should be included and provided insufficient documentation to enable anyone to determine what is in or out of the Reference Case. For example, consider the supporting data for Figure 48 (Fig 48 tab in my spreadsheet).

Note the transportation investments in the Reference Case total $1.056 trillion but that the cost for the Low-Carbon Fuels scenario is only $3.4 billion more. That means most of the costs associated with capital and operating expenses for light-duty vehicles, medium- and heavy-duty vehicles, and buses as well as charging infrastructure costs are buried in the Reference Case because these costs are a lot more than $3.4 billion.

The cost data in the Integration Analysis that is used in the Scoping Plan is inaccurate. For example, in the calculations for the new wind, solar, and energy storage resources needed to replace existing fossil-fired resources it is assumed that none of the existing or newly developed resources reach their effective life expectancy. Wind, solar, and energy storage resources all have expected lifetime less than 25 years and it is more than 25 years to 2050 so this inaccurately underestimates the cost of electric generation.

The data in the Integration Analysis that is used in the Scoping Plan is biased. Wind and solar resources are intermittent so the assumption of the amount of energy produced affects the projected capacity of resources needed. Without exception the future amount of energy from wind and solar resources is biased high relative to the New York Independent System Operator projections. As a result, the costs projected are unreasonably low. Based on my evaluation the Integration Analysis biased every choice to make the zero-emissions replacement resources cheaper.

I emphasize that the annual revenue numbers that I believe should be clearly listed in the Integration Analysis and Scoping Plan are not provided so I can only make an estimate. Given all the limitations described above, the revenue values in the final row in the Figure 48 table shown above should be used cautiously. The annual expenditure values listed are the difference between the mitigation scenarios and the Reference Case divided by the number of investment years (27) from 2024 to 2050. The values range between $10 and $11 billion.

Other Cost Projections

I have heard other numbers tossed around so I did a bit of research to find other values.

In testimony regarding the environmental provisions of Governor Cuomo’s Executive Budget Proposal for SFY 2020-2021, Peter Iwanowicz, Executive Director, Environmental Advocates of NY, January 27, 2020 stated:

The costs of inaction are enormous. Based on the widely accepted social cost of carbon pollution of $50 per ton, New York has $10.2 billion dollars in costs per year attributed to the pollution we emit that is fueling climate change. This is a staggering blow to our health, our environment, our communities, and our economy.

Back calculating this projection assumes 204 million tons which is about the total CO2 emissions for 2017. The problem is that social cost of carbon parameter can only be applied once because it represents all the impacts from the time of the reduction to 2300. Counting them more than once is the same as claiming that because I lost ten pounds five years ago that I lost 50 pounds.

New York Lawyers for the Public Interest Nov. 8 Elections show that New Yorkers Overwhelming Support Climate Funding:

The Bond Act is a good start—but it’s not enough. It’s been three years since New York passed our landmark climate law, the Climate Leadership and Community Protection Act (CLCPA), and we’re far from achieving the law’s mandate of largely decarbonizing the state economy by 2040. The state’s own analysis shows that we’ll need to invest roughly $15 billion a year by 2030, and $45 billion a year by 2050.

The Integration Analysis does include annual projections for net direct costs of between $10.4 and $12.2 billion for 2030 and between $41.0 and $41.3 billion in 2050.

New York Renews: Climate Coalition launches campaign for state action

Among NY Renews’ key goals for the upcoming legislative session is the creation of a $10 billion Climate and Community Protection Fund, modeled after the state’s Environmental Protection Fund. It’s an amount in line with the Climate Action Council’s estimates of what meeting the goals in the climate plan will cost: $10 to 15 billion a year, whether the costs are paid by the state, the federal government, industry, ordinary New Yorkers, or a mix of all of the above.

There are enough options for guessing what the Council estimates as costs that these numbers are consistent.

I found a couple of independent estimates of the total costs to meet the net-zero target by 2050: An article by Ken Gregory critiques a report by Thomas Tanton “Cost of Electrification: A State-by-State Analysis and Results”. In Tanton’s analysis the estimated total installed cost (overnight) is approximately for New York is $1.465 trillion or $54.3 billion per year. Gregory’s total national capital cost of electrification is $433 trillion and New York’s proportional share based on Tanton is $22.2 trillion. Overbuilding solar and wind by 21% reduces New York overall costs to $18.2 trillion. Allowing fossil fuels with carbon capture and storage to provide 50% of the electricity demand reduces New York’s estimated costs to $1.2 trillion or $44.4 billion per year.

Conclusion

The New York Senate held a public hearing to examine legislative and budgetary actions necessary to implement the Climate Act Scoping Plan on January 19, 2023. One of the primary concerns of the legislative and budgetary actions has to be how much money is required. I modified the draft of this post to submit as a comment. The main point I wanted to make is that it is very important that the Legislature understand that the numbers presented in the Scoping Plan are inappropriate for any future legislative actions. Those actions must be based on the total costs of implementation and not just the costs relative to a Reference Case. Beyond that I offered no substantive recommendation for revenues needed because of the inadequate documentation in the Scoping Plan.

I determined the emissions reduction trajectory needed to meet the 2040 GHG emissions target, calculated the control cost per ton removed based on the RGGI auction proceed investments, and found that a total of $7.9 billion per year is needed. That is the low-end cost of the projections. At the upper end three projections exceed $45 billion a year. All these estimates will impose extraordinary cost burdens on New Yorkers. No one in the Hochul Administration has owned up to these costs. When will this news become public knowledge?

Finally, all the cost per ton reduced estimates in these projections exceed the New York State Value of Carbon guidance. The Frequently Asked Questions guidance states:

The term value of carbon is any representation of monetary cost applied to a unit of greenhouse gas emissions, expressed in terms of the net cost of societal damages (i.e., the “social cost of carbon”), marginal greenhouse gas abatement cost, or using another approach. DEC recommends that State agencies use a damages-based value of carbon for cost-benefit analysis, for describing societal benefits, and evaluating other types of decisions, such as state procurement, contracts, grants, or permitting.

This means that all these projected costs exceed the cost-benefit analysis for describing societal benefits. New York’s greenhouse emissions are less than one half of one percent of global emissions and global emissions have been increasing by more than one half of one percent per year. The facts that the expected investments exceed the societal benefits values and that all New York emission reductions will be replaced by emissions from elsewhere in a year does not mean that we should not do something, but it does mean we should take the time to do it right.

Initial Impression of New York Cap and Invest Program

On January 10, 2023 New York Governor Kathy Hochul delivered her 2022 State of the State Address. This post describes my initial impressions of the announced plan to use a market-based program to raise funds for the Climate Leadership & Community Protection Act (Climate Act) implementation. I believe that this will be a future textbook example of how perverting the previously successful concept of a market-based pollution control program to fit the ideological purposes of a political agenda inevitably leads to failure.

Climate Act Background

The Climate Act established a “Net Zero” target (85% reduction and 15% offset of emissions) by 2050. The Climate Action Council is responsible for the Scoping Plan that outlines how to “achieve the State’s bold clean energy and climate agenda.” In brief, that plan is to electrify everything possible and power the electric gride with zero-emissions generating resources by 2040. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies. That material was used to write a Draft Scoping Plan that was released for public comment at the end of 2021 and approved on December 19, 2022.

The Final Scoping Plan noted:

The Climate Action Council (Council) has identified the need for a comprehensive policy that supports the achievement of the requirements and goals of the Climate Act, including ensuring that the Climate Act’s emission limits are met . A well-designed policy would support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions. It would provide an additional source of funding, alongside federal programs, and other funding sources, to implement policies identified in this Scoping Plan, particularly policies that require State investment or State funding of incentive programs, including investments to benefit Disadvantaged Communities. Equity should be integrated into the design of any economywide strategy, prioritizing air quality improvement in Disadvantaged Communities and accounting for costs realized by low- and moderate income (LMI) New Yorkers. Pursuant to the Climate Act, a policy would be designed to mitigate emissions leakage. Finally, an economywide strategy would be implemented as a complement to, not as a replacement for, other strategies in the Scoping Plan. A well-designed economywide program will bring about change in the market and promote equity in a way that does not unduly burden New Yorkers or with the global economy.

It is no surprise that the Scoping Plan recommends a market-based program. New York was a primary driver for RGGI and has consistently touted its success. However, the reality is that RGGI is not as successful as they claim. I will explain why the experiences of RGGI should be warning signs for this program. If you are interested in a good overview of Hochul’s cap and invest program I recommend James Hanley’s article: Cap and Invest or Cap and Divest.

Comments on the Draft Scoping Plan Economy-Wide Strategy

I submitted comments on the Draft Scoping Plan chapter on a market-based approach to provide an additional source of funding for policies that “require State investment or State funding of incentive programs, including investments to benefit Disadvantaged Communities”. I will summarize some of my overarching concerns in this section.

My comments described general issues for a carbon pricing market-based approach. One major difference between controlling CO2 and other pollutants is that there are no cost-effective control technologies that can be added to existing sources to reduce emissions. Combine that with the fact that CO2 emissions are directly related to energy production, the result is that the primary way to reduce emissions is to reduce operations. Consequently, CO2 emission reductions require replacement energy production that can displace existing production. This necessarily increases costs to consumers and is why I believe carbon pricing will always be a regressive tax.

There are other practical reasons that carbon pricing will not work as theorized. Leakage is an insurmountable problem. Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around geographically rather than reducing it. Ideally the carbon price should apply to all sectors across the globe so that leakage cannot occur. Preventing leakage in an area as small as New York is impossible because, for example, car owners on the border will simply cross the border to purchase fuel. A fundamental problem with all carbon pricing schemes is that funds decrease over time as carbon emissions decrease unless the carbon price is adjusted significantly upwards over time. The Regulatory Analysis Project (RAP) recently completed a relevant study: Economic Benefits and Energy Savings through Low-Cost Carbon Management for Vermont that concludes “carbon pricing alone will be a weak tool to deal with the realities of consumer behavior, our historic buildings infrastructure, rural settlement patterns, and the many barriers that working families and businesses face in choosing to invest in energy efficiency or other low-carbon options”. Based on investment results for RGGI proceeds, the programs funded are not cost-effectively reducing emissions. The Climate Act mandate for funding in Disadvantaged Communities will exacerbate that issue because cost-effectiveness will not be a primary consideration.

In addition to my practical concerns “A Practical Guide to the Economics of Carbon Pricing by Ross McKitrick defines how carbon pricing is supposed to work in theory. His guide is at odds with the Final Scoping Plan for every point. He explains that “First and foremost, carbon pricing only works in the absence of any other emission regulations”, but the cap and invest program proposed by Hochul is in addition to the emission regulations of the Climate Act itself. The Guide goes to note “another important rule for creating a proper carbon-pricing system is to be as careful as possible in estimating the social cost of carbon”. He argues that “whatever the social cost of carbon is determined to be, the carbon price must be discounted below it by the marginal cost of public funds (MCPF) — that is, the economic cost of the government raising an additional dollar of tax, on top of what is already being raised”. The Scoping Plan does not even recognize the importance of this aspect of carbon pricing. He concludes: “There may be many reasons to recommend carbon pricing as climate policy, but if it is implemented without diligently abiding by the principles that make it work, it will not work as planned, and the harm to the Canadian economy could well outweigh the benefits created by reducing our country’s already negligible level of global CO2 emissions.” Substitute New York for Canada and I believe this describes this Hochul’s cap and invest program.

Results of the Existing Cap and Invest Program

New York fossil-fired electric generating stations are already in a cap and invest program. I previously mentioned that I have evaluated the RGGI program. This section describes the results of that work especially as they relate to the proposed program.

The costs per ton reduced exceed any estimates of the societal value of carbon reductions. Since 2009 when the RGGI program started, I found that the cost per ton removed of the investment proceeds from RGGI auctions is $818 per ton for the entire RGGI region. According to the latest NYSERDA RGGI funding status report the projected costs of the current programs are $776.1 million, the net greenhouse gas emission savings are 1,656,198 tons and that works out to emission cost per ton removed of $469. If all the RGGI administrative and operating costs are included another $113 million is added to the total and the emissions cost per ton removed is $537 per ton. It is not clear to me how much of this funding meets the criteria for disadvantaged community investments.

I evaluated current emissions relative to the 2030 Climate Act target of a 40% reduction by 2030. The following table lists the trajectory of observed, projected, and interpolated emissions consistent with the 2030 requirements. New York State has released the official GHG emissions for New York State for 2018 and 2019 and they are highlighted in gold. I estimated emissions for 2020 and 2021 based on observed RGGI emission levels. Note that they increase due to the shutdown of the Indian Point nuclear generating facility. The 2030 levels are fixed and are highlighted in rose. There are four columns that list the emissions trajectory necessary to get from the observed emissions to the target. The annual reduction in the trajectory is the difference between the observed emissions and the 2030 target divided by the number of years. For example, the estimated GHG emissions in 2021 were 378.69 million metric tons. If the emissions are reduced by 14.76 million tons per year, then in 2030 the emissions will meet the target of 245.87 million metric tons.

The emissions reduction trajectory of 14.76 million tons per year is going to be a challenge. The following table (the link is to the full table because I cannot figure out how to make tables in the text get bigger when a reader clicks on it) lists the New York State GHG emissions (MMT CO2e AR5 20 yr) by sector from the DEC emissions inventory . There have been years when the annual reductions have exceeded that trajectory but there have also been years when it went up by that much. RGGI has a three-year compliance period intended to smooth out the inter-annual variation. Whether the compliance period for the Climate Act program will do something similar is one of those details that remains to be worked out.

I think the fundamental cap-and-invest program issues that New York energy users and suppliers will have to deal with this year is the disconnect between the theory of cap and trade with what is proposed, the practical considerations necessary to make it work, and the preconceived notions of the environmental community.

There are two fundamental issues. The theory of market incentives is that raising the cost of carbon will let the market innovate to produce the least cost approach to provide carbon reductions. That takes time and that makes the schedule problematic. It may not be possible for the innovation necessary to replace a system that took decades to build to coincide with the 27-year arbitrary schedule of the Climate Act net-zero by 2050 target. The other fundamental theoretical issue looms huge. The state is going to “invest” the proceeds. Government investments pick winners and losers and governments don’t have a good record in that regard.

The second overall concern is the practical considerations necessary to make any market-based program work. At the top of that list is emissions monitoring. In the RGGI cap-and-invest program there were minor monitoring implementation issues because all the affected sources were already providing the data necessary to run the program. Hochul’s cap-and-auction program affects distributors of heating and transportation fuels and large-scale emitters of greenhouse gasses outside the electric utility industry that are not in similar programs so they have to create a new reporting system. The program is going to have to determine how to define compliance and establish penalties for failure to comply. Every sector has the issue of weather-related variations in energy use. The RGGI program addressed that with a three-year compliance period.

The biggest practical concern is the revenue target. The New York State value of carbon guidance cost ranges between $121 per ton in 2020 and $137 per ton in 2030. That could be used as the auction allowance price target. Presumably the auction will use the same features as in RGGI that establish boundary limits to keep the price near the target. The potential revenues using the emissions trajectory and the New York value of carbon yields a little over $40 billion in 2024 and $34 billion in 2030. According to the Citizen’s Budget Commission New York State’s personal income tax revenues were $47.1 billion in state fiscal year 2015-2016. I cannot imagine that the DEC and NYSERDA will use regulations to propose a cap-and-invest revenue scheme that is on the order of the leading source of tax revenue. One alternative possibility is to calculate the money needed to get the 14.76 million tons per year reductions required by multiplying it by the observed $537 per ton reduction cost from RGGI investments. That total of $7.9 billion divided by the 2025 emissions, 320 million tons, yields a target allowance cost of $24.76. That is a more reasonable value that may enable the Hochul Administration to avoid legislation for the program.

There are other practical considerations that mostly add funding and effort. All affected entities must provide consistent emissions data and the State has to develop a new system to track that information. There is a significant logistical effort for entities to participate in the auctions that must include another tracking system. It is necessary to setup a market monitoring presence so someone is making sure that there isn’t market manipulation going on.

The last practical considerations are more of a problem. New York’s Climate Act mandates that upstream emissions must be considered. How is a fuel distributor supposed to keep track of where and how his fuel is coming from? Hochul’s speech claims that New York wants to get other states involved but New York’s unique emissions requirements would require other states to adopt them too.

The final concern is the response of environmental advocates to market-based programs. As far as I can see, they oppose these programs because evil industry is not punished enough. In order to push their notion that zero-risk pollution control approaches are the only consideration and there are no tradeoffs, they have a list of market program talking points. Emission trading programs create hot spots because some locations don’t decrease their emissions as much as others. There is a persistent suspicion that somehow industry cheats on the emissions monitoring. Finally, they think that industry is getting windfall profits from these programs. As a result, more and more limitations are added to the program making is less and less efficient.

Hochul’s announcement specifically included environmental justice complications. Offsets are not allowed because sources would not make reductions near some disadvantaged community. Recall that CO2 emission reductions require replacement energy production that can displace existing production. If New York State investments do not provide sufficient displacement results then there will be a scarcity of allowances and the price of allowances will go up. In the RGGI program there was a feature that released extra allowances if the price exceeded an acceptability threshold. I suspect that the environmental advocates will oppose adding allowances to the system because it threatens the response to the “existential crisis.” The problem is that if allowances are not available then the only compliance option left is to not operate which could threaten reliability. I have seen no sign the environmental advocates recognize this threat.

Another issue is the requirement to invest at least 35 percent with a goal of 40 percent, so they directly benefit disadvantaged communities. I fear that this means that program funding is going to be more based on consistency with this mandate and not cost-effectiveness. There are 15 programs listed in the latest NYSERDA RGGI funding status report that have cost and GHG emission savings estimates. As noted above, the sum of the costs divided by the tons reduced is $537 per ton, but the cost per ton reduced for the 15 programs ranges from $61 to $2,515 with a standard deviation of $681. If programs are chosen in the upper end of the costs per ton reduced to favor politically connected constituencies then it will be more difficult to meet the aggressive schedule and ambitious annual reduction targets of the 40% reduction in GHG emissions by 2030 mandate.

The final environmental justice issue is that Governor Hochul will “propose legislation to create a universal Climate Action Rebate that, subject to a stakeholder and rulemaking process, is expected to drive more than $1 billion in annual cap-and-invest proceeds to New Yorkers”. I previously estimated that the cost of the investments to meet the necessary reduction trajectory would be $7.9 billion. Presumably we must increase that cost by more than $1 billion to cover the cost of the Climate Action Rebate so I choose the cost to be $9 divided by the 2025 emissions, 320 million tons, which yields a target allowance cost of $28.13. I guess that is still a reasonable value that may enable the Hochul Administration to avoid legislation for the program.

Conclusion

The Final Scoping Plan states that “A well-designed policy would support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions”. I conclude that the conditions noted in the Hochul speech preclude such a “well-designed” policy.

The Scoping Plan states that “Equity should be integrated into the design of any economywide strategy, prioritizing air quality improvement in Disadvantaged Communities and accounting for costs realized by low- and moderate income (LMI) New Yorkers”. It is not clear how they propose to prioritize air quality improvements in any particular location in a statewide emissions market. You can say it but that does not mean you can do it. The costs for LMI New Yorkers are addressed with a Climate Action Rebate that simply passes costs along to everybody else.

The Scoping Plan notes that “Pursuant to the Climate Act, a policy would be designed to mitigate emissions leakage.” Again, it is easy to say that it will mitigate leakage but how can it possibly be tracked, much less be prevented. James Hanley addresses this issue well in his critique.

The plan goes on to say that “an economywide strategy would be implemented as a complement to, not as a replacement for, other strategies in the Scoping Plan” and that “A well-designed economywide program will bring about change in the market and promote equity in a way that does not unduly burden New Yorkers or with the global economy.” The theory is fine but the theory is raise the price of carbon, return all the proceeds to the consumers, and let the market evolve over time to the least-cost emission reduction solutions. That is not what is proposed.

Hochul’s address stated that “New York’s Cap-and-Invest Program will draw from the experience of similar, successful programs across the country and worldwide that have yielded sizable emissions reductions while catalyzing the clean energy economy.” Hochul’s cap-and-invest proposal will proscribe a certain cost for permits to operate, control all the revenues, and determine how they are spent. In my opinion that is exactly like a tax and nothing like similar market-based programs. The proposed cap-and-invest program is a carbon tax with complicating factors that make it more likely to fail to provide the claimed benefits. I conclude that it will not end well.

Climate Action Council Economywide Strategies Subgroup

New York’s Climate Leadership and Community Protection Act (Climate Act) mandates that a scoping plan be developed to guide the next Energy Plan. In order to address particular draft scoping plan issues three subgroups have been setup to address particular issues. This article describes my initial impression of the economywide strategies subgroup. I am not sure why they did not simply refer to these strategies as carbon pricing mechanisms because that is what they are talking about.

Everyone wants to do right by the environment to the extent that they can afford to and not be unduly burdened by the effects of environmental policies. I submitted comments on the Plan and have written extensively on implementation of New York’s response to that risk because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that it will adversely affect reliability, impact affordability, risk safety, affect lifestyles, and will have worse impacts on the environment than the purported effects of climate change in New York. New York’s Greenhouse Gas (GHG) emissions are less than one half one percent of global emissions and since 1990 global GHG emissions have increased by more than one half a percent per year. Moreover, the reductions cannot measurably affect global warming when implemented. 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.

Climate Act Background

The Climate Act establishes a “Net Zero” target (85% reduction and 15% offset of emissions) by 2050. The Climate Action Council is responsible for preparing the Scoping Plan that will “achieve the State’s bold clean energy and climate agenda”. They were assisted by Advisory Panels who developed and presented strategies to the meet the goals to the Council. Those strategies were used to develop the integration analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants that tried to quantify the impact of the strategies. That material was used to write a Draft Scoping Plan that was released for public comment at the end of 2021. The public comment period on the Draft ended on July 1.

In order to address particular Draft Scoping Plan issues three Climate Action Council subgroups have been setup to address the following issues:

Economywide strategies
Alternative Fuels
Gas System Transition

Each subgroup is supposed to develop a better understanding of their topic, focus on implementation issues, and then provide information to the full Council so that it can be incorporated into the Final Scoping Plan.

Public Comments

The Climate Action Council states that it will revise the Draft Scoping Plan based on comments and other expert input in 2022 with the goal to finalize the Scoping Plan by the end of the year. According to remarks made at the July 11, 2022 Climate Action Council meeting about 35,000 comments were submitted. If the Council were to truly consider public comments, then the comment review process would have been on-going. The State claims that they did not do that so it will be some time before the Council will start getting information from those submitted comments. It is unimaginable that the Council members will be able to review all the comments so it is very likely that they will rely on summaries written by agency staff.

It appears that each subgroup is taking a different approach to considering public comments relative to their topic. The alternative fuels workplan hopes to discuss public comments at their fifth meeting on July 27 and hope to finalize their framework at their eighth meeting in early September. The economywide strategies workplan holds off discussion of public comments until the sixth meeting on August 22. That is one meeting before the final scheduled meeting. The gas system transition workplan does not even mention public comment consideration. In my opinion, the alternative fuels workgroup is at least trying to consider public input. The economywide strategies workgroup is only paying lip service to public input despite the fact that the Draft Scoping Plan posed specific questions about the proposed strategies in the Plan. The alternative fuels workgroup does not apparently even want to consider public input.

Expert Input

The Climate Action Council has stated that it will revise the Draft Scoping Plan based on other expert input in 2022. I think there is a problem with their perception of expert input. The Climate Act itself is based on the opinionated expertise of the authors. Their expertise was over-confident, proscriptive, biased, and naïve. They over confidently presumed that a net-zero transition was simply a matter of political will. The law includes proscriptive mandates for specific amounts of different renewable energy technology. There is a bias against the only scalable, dispatchable, zero-emissions generating resource – nuclear power. The law naïvely assumes that untested technology will be available to meet their arbitrary schedule.

If it was apparent that the Council intended to incorporate unbiased outside expertise then I would not be worried. It is not surprising this is not the case given that some members were actively involved in the development of the language of the law so they apparently think that they don’t need any input from experts that may disagree with their pre-conceived notions. My biggest concerns are reliability and affordability. There is no workgroup addressing reliability and some vocal members have flatly stated that reliability in an electric grid that relies on renewables is not an issue. The deference of the Council leadership to these ideologues who haven’t the background, education or experience to have a worthwhile opinion on that subject is disappointing and the apparent lack of urgency to engage with the experts who do have that expertise is frightening.

I am only going to discuss the economywide strategies subgroup. In my comments on economywide strategies I made the point that that the relevant chapter was written to address specific issues raised by the Climate Action Council. The Draft Scoping Plan only considers three economy-wide approaches and not the possibility that not doing anything like this might be the better choice. As a result, the chapter gets bogged down into details about specific issues raised by council members rather than looking at whether the theory of a price on carbon has worked well in practice.

Economywide Strategies

According to the June 27, 2022 meeting presentation: “This subgroup will provide further evaluation and guidance regarding the three economy-wide approaches identified in the Draft Scoping Plan.”

At their second meeting, the results of a New York State Energy Research & Development Authority and Resources for the Future analysis were presented. Members of the Workgroup should keep in mind that the NYSERDA-RFF Carbon Pricing Project: Lessons Learned from the Literature Review and Policy Design Experience presentation is not a critical review of carbon pricing approaches. Instead, it describes the theory without regard to issues and summarizes three ways to implement a carbon pricing scheme. There are warning signs that should be highlighted and there are some misconceptions included in the presentation.

The first slide in the New York Policy Context section poses the question why jurisdictions pursue carbon pricing. It claims that “Pricing provides an efficient market signal to reduce emissions” and goes on to argue that:

Does not require policy makers to pick technologies and creates incentives for private actors to make clean investments and reduce fossil fuel use
Provides cost-effective implementation by investing in low-cost emissions reductions
Internalizes the environmental cost of emissions in economic decisions
Carbon pricing involves price stability that yields a behavioral response that is three times greater than market-driven price variations of the same magnitude (Andersson 2019).

The presentation claims that jurisdictions pursue carbon pricing because it “does not require policy makers to pick technologies and creates incentives for private actors to make clean investments and reduce fossil fuel use”. However, the later Carbon Fee versus Emissions Cap slide states “Recent emissions cap programs have opted for a cap-and-invest model which directs carbon revenues toward program-related investments to accelerate emissions reductions”. Directing carbon revenues explicitly picks technologies contradicting this “benefit”. In my Draft Scoping Plan comments, I quoted Paul Homewood who made the point that “The only logical reason for a carbon tax is to reduce emissions. Such a tax might help to reduce energy consumption, but only at punitive levels, because energy demand is so inelastic.” Keep in mind that there aren’t any cost-effective retrofit technologies to reduce greenhouse gas emissions so the only way to reduce fossil fuel use is to convert energy consumption to a less emitting resource or reduce use.

The presentation claims that jurisdictions pursue carbon pricing because it “Provides cost-effective implementation by investing in low-cost emissions reductions”. One of the underlying presumptions in any carbon price program is that the funds received will be spent effectively. I have evaluated the results of the investments made by regulatory agencies to date in RGGI measured as the cost per ton reduced. The RGGI states have been investing investments of RGGI proceeds since 2008 but their investments to date are only directly responsible for less than 5% of the total observed reductions. Furthermore, from the start of the program in 2009 through 2017, RGGI has invested $2,527,635,414 and reduced annual CO2 emissions 2,818,775 tons. The resulting cost efficiency, $897 per ton reduced, far exceeds the Social Cost of Carbon (SCC) that represents the value of reducing CO2 today to prevent climate change damages in the future.

Finally, the presentation claims that jurisdictions pursue carbon pricing because it “Internalizes the environmental cost of emissions in economic decisions”. The Draft Scoping Plan avoided societal costs from GHG emissions are the largest benefits claimed. In my comments on the Plan benefits I included a description of the SCC and the caveats associated with the alleged benefits. The methodology calculates the benefits out to 2300 so they will accrue to the next 11 generations. Jurisdictions that cannot afford investment in resilient agriculture, sea-level rise mitigation, and disease prevention have larger impacts so the benefits will accrue to them rather than New York. The bottom line is that the costs are real but the internalized environmental benefits are mostly imaginary and will not accrue to New York in any event.

Misconceptions

There are misconceptions in two claims that carbon pricing has been successful that need to be addressed for a full understanding of economywide strategies.

The first claim states that “Murray and Maniloff (2015) find that RGGI has driven about half of the region’s emission reductions in the power sector since the program’s inception”. I disagree with conclusion. The Murray and Maniloff analysis relied on econometric modeling that assumes that compliance with the program is made more efficient by an allowance acquisition program that resembles commodities markets. In reality, based on my experience in the utility allowance trading business and discussions with my peers, the vast majority of companies treat allowance acquisition as simply a tax. Allowances are purchased in the auctions or on the secondary market based on short-term compliance needs. The over-riding concern is compliance and there is no efficiency gain due to the market.

In my opinion the Murray and Maniloff analysis assumed that companies would do things to reduce their CO2 emissions rather than just buying allowances as a tax. However, the only thing that affected sources could do is to improve combustion efficiency to use less fuel. Fuel costs are the over-riding driver for operating costs so plants have already looked into this and probably made the efficiency changes that they could afford so there were few opportunities left to become more efficient. In addition, EPA’s New Source Review program can penalize old facilities that make efficiency improvements because they are concerned that they those improvements could extend the life of a higher emitting facility. Based on my experience and discussions with colleagues in the industry affected generating units did not do anything to explicitly control emissions for RGGI compliance. More importantly when this analysis observed facilities shutting down, they claimed that was due to RGGI. In fact, all the facilities that I am familiar with would have shut down even if RGGI were not in effect. For all these reasons I do not accept this reference as credible evidence for RGGI success.

There are two ways to determine why the emission reductions occurred using data and observations. The first way to determine why emissions dropped over this period is to evaluate the emissions data. I queried the database at EPA Clean Air Markets Division data and maps and downloaded emissions, load and heat rate data for the nine RGGI states for the years 2000-2018. In order to determine what fuel was used I had to use these data instead of the data in the RGGI system because the EPA data includes fuel type information. This means that there are differences in the annual totals because the EPA data set has more units in it. Prior to the start of RGGI I had to ask for data from “all programs” and for consistency kept that constraint even after the start of RGGI.

The RGGI Nine-State EPA Clean Air Markets Division Annual Emissions Data by Primary Fuel Type table lists load and CO2 mass data from 2006 to 2018. In order to establish a baseline, I used the average of the three years prior to the start of the program. The CO2 mass and load from coal-fired units went down over 80% from the baseline to 2018. The RGGI states have a relatively high concentration of residual oil-fired units and load and CO2 mass went down nearly as much. Diesel and other oil-fired units went down over 50%. On the other hand, natural gas firing loads went up 35% and CO2 mass went up 43%. Because natural gas firing has much lower CO2 per MWhr emission rates the total CO2 mass went down 41% from my baseline to 2018. Because fuel prices are the primary driver of unit operations and because the RGGI allowance price was relatively small in comparison to the fuel price differential of natural gas relative to coal and oil I conclude that the primary driver of RGGI region CO2 emission reductions was fuel switching not RGGI.

The second way to determine the effect of RGGI is to use RGGI’s own information. The Investment of RGGI Proceeds in 2017 report tracks the investment of the RGGI proceeds and the benefits of these investments throughout the region. I recently calculated that the total annual reductions since the start of the program were: 4,014,410 MWh of electricity use avoided, 9,824,199 MMBtu of fossil fuel use avoided, and 2,818,775 short tons of CO2 emissions avoided. The total reduction in load from the baseline until 2018 is 51,098,013 MWh so the direct investments of RGGI auction proceeds were responsible for 7.9% of the observed reduction in load. The total reduction in CO2 from the baseline until 2018 is 52,202,198 tons so the direct investments of RGGI auction proceeds were responsible for only 5.4% of the observed emissions reduction.

The second claims that “Carbon pricing involves price stability that yields a behavioral response that is three times greater than market-driven price variations of the same magnitude (Andersson 2019)”. The abstract states “This quasi-experimental study is the first to find a significant causal effect of carbon taxes on emissions, empirically analyzing the implementation of a carbon tax and a value-added tax on transport fuel in Sweden”. This analysis modeled emission reductions with and without the carbon tax and then had to “disentangle” the carbon tax and the extension of a value-added tax to include gasoline and diesel. Based on my findings for RGGI this kind of modeling is prone to prove the pre-conceived notions of the researcher. He claims that this is the first quasi-experimental study to find a significant causal effect of a carbon tax on emissions. However, he admits and the NYSERDA-RFF presentation neglects to point out that:

This result is in contrast to earlier empirical studies that find no effect from the Swedish carbon tax on domestic transport CO2 emissions (Bohlin 1998, Lin and Li 2011), and the estimated reduction is 40 percent larger than an earlier simulation study finds (Ministry of the Environment and Energy 2009). In fact, my finding differs from all earlier empirical studies of carbon taxes, which find that the taxes have had very small to no effect on CO2 emissions in the countries that implemented them (Bohlin 1998, Bruvoll and Larsen 2004, and Lin and Li 2011).

Discussion

I believe that the answer to the Scoping Plan has always been in the back of the book. There never has been any intention to incorporate comments to revise the Draft Scoping Plan that did not comport with the Hochul Administration’s idea of what their political base wants. The first Climate Action Council meeting of the year was not held until the beginning of March thus wasting two months. There was no plan to process submitted comments on an on-going basis because there was no perceived need to address inconvenient comments. The “plan” to address comments promises to address them all but I predict that many substantive criticisms will essentially be ignored. The comment will be acknowledged but not addressed.

They are going through the motions with respect to the subgroups too. The three subgroups ostensibly will provide the rest of the Council their considered opinions of the issues and, I presume, recommendations on how to proceed. I am a student of market-based air pollution control programs so I am most familiar with the economywide strategies topic. Everybody who volunteered to be on this subgroup has a vested interest in adding carbon pricing to the recommendations for the Final Scoping Plan. They got a briefing from NYSERDA and RFF who both are biased towards the approach. I showed that their briefing presentation was prejudiced. There are unmentioned issues with carbon pricing and at least one of the examples described selectively chose results that supported their pre-conceived conclusions and ignored contrary evidence.

The economywide strategies subgroup workplan does not plan to consider public comments until their sixth meeting despite the fact that there was a specific request for comments on the economywide strategies chapter. The Draft Scoping Plan chapter on the topic was written to cater to Council member comments and suggestions and I showed above that the presentation did not suggest that there might be issues associated with a carbon pricing scheme. As a result, I believe that the final recommendation will reflect the agendas of Council members rather than the best interests of New York. However, I think that their recommendations may not be in the back of the book.

Conclusion

Based on my experience and observations of trading programs the only way for a carbon pricing scheme to actually reduce emissions is to set the price at punitive levels. Consider that in the most recent legislative session the Climate and Community Investment Act intended to provide funding for the Climate Act never made it out of committee. At this time there is $2.3 billion in utility debt statewide and one in six households is more than two months behind on utility bills. When gasoline prices went up this year the Governor suspended motor fuel and diesel motor fuel taxes because:

“Fuel prices have surged in recent months, hurting working families and small businesses the most, and it is crucial that we provide New Yorkers relief,” Governor Hochul said. “By suspending certain fuel taxes for the next seven months, New York is providing some $609 million in direct relief to New Yorkers — a critical lifeline for those who need it most. At a time when families are struggling because of economic headwinds and inflation, we will continue to take bold action to reduce the economic burden on New Yorkers and get money back in their pockets.”

I cannot imagine a scenario in which the proponents of carbon pricing can ever sneak a scheme through that would have a high enough cost to actually reduce carbon emissions without immediate political pushback. The answer in the back of the book for economywide strategies is most likely pay lip service to it but don’t do anything that will give political ammunition to the opposition.

Finally, note that I did submit a letter to subgroup members based largely on this material. I do not expect any response but if I do hear something I will update this post.

Draft Scoping Plan Carbon Pricing Strategies Comment

The Climate Leadership and Community Protection Act (Climate Act) has a legal mandate for New York State greenhouse gas emissions to meet the ambitious net-zero goal by 2050. This article describes the comments I submitted to the Climate Action Council on Chapter 17: Economy-Wide Strategies. I am not sure why they did not refer to these as policies that effectively price GHG emissions because that is what they are talking about.

Everyone wants to do right by the environment to the extent that they can afford to and not be unduly burdened by the effects of environmental policies. I have written extensively on implementation of New York’s response to that risk because I believe the ambitions for a zero-emissions economy embodied in the Climate Act outstrip available renewable technology such that it will adversely affect reliability, impact affordability, risk safety, affect lifestyles, and will have worse impacts on the environment than the purported effects of climate change in New York. New York’s Greenhouse Gas (GHG) emissions are less than one half one percent of global emissions and since 1990 global GHG emissions have increased by more than one half a percent per year. Moreover, the reductions cannot measurably affect global warming when implemented. This page documents all the comments that I submitted as part of the Climate Leadership and Community Protection Act implementation process. 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.

Climate Act Background

The Climate Act establishes a “Net Zero” target (85% reduction and 15% offset of emissions) by 2050. The Climate Action Council is responsible for preparing the Scoping Plan that will “achieve the State’s bold clean energy and climate agenda”. They were assisted by Advisory Panels who developed and presented strategies to the meet the goals to the Council. Those strategies were used to develop the integration analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants that quantified the impact of the strategies. That material was used to write Draft Scoping Plan that was released for public comment at the end of 2021. The Climate Action Council will revise the Draft Scoping Plan based on comments and other expert input in 2022 with the goal to finalize the Scoping Plan by the end of the year.

I prepared this comment because my extensive experience with the Regional Greenhouse Gas Initiative has shown that there is a major disconnect between the theory of a carbon pricing program and reality. This disconnect is also evident in the NYISO carbon pricing initiative and the Draft Scoping Plan carbon pricing initiatives.

Summary

Based on the format of Section 17, it was written to address specific issues raised by the Climate Action Council. As a result, it gets bogged down into details about specific issues raised by council members rather than looking at the big picture. In theory, a price on carbon is a great idea. The Council has not considered the theory relative to their perceptions.

My overview comments explain why I believe carbon pricing will always be a regressive tax based on a post I did on carbon pricing. I also think that there are a number of practical reasons that carbon pricing will not work as theorized. Because a global program is impractical, leakage is always going to be a problem. All carbon pricing proposals need to address the problem that as carbon emissions go down revenues go down relative to the fact that reductions get more difficult and expensive as control efficiency increases. The Council members who support carbon pricing seem to be blissfully unaware of the realities of the energy market that are at odds to their theories. Based on observed results I think that indirect market signals are going to lead to less cost-effective reductions in the time frame necessary for the aggressive reduction rules. To date, carbon pricing for the electric sector only considers generation costs which leads to cost shifting the additional costs to supply electricity when and where it is needed to be covered outside the carbon pricing framework. Supporters under-estimate the very real problems of implementation logistics. My concerns about carbon pricing are supported by the recently completed a relevant study done by Regulatory Analysis Project (RAP): Economic Benefits and Energy Savings through Low-Cost Carbon Management for Vermont.

In addition to my practical concerns “A Practical Guide to the Economics of Carbon Pricing by Ross McKitrick defines how carbon pricing is supposed to work in theory. He explains that “First and foremost, carbon pricing only works in the absence of any other emission regulations.” The Guide goes to note “another important rule for creating a proper carbon-pricing system is to be as careful as possible in estimating the social cost of carbon”. He argues that “whatever the social cost of carbon is determined to be, the carbon price must be discounted below it by the marginal cost of public funds (MCPF) — that is, the economic cost of the government raising an additional dollar of tax, on top of what is already being raised”. The Draft Scoping Plan does not even recognize the importance of this aspect of carbon pricing. Finally, he notes that: “it needs to be remembered that carbon pricing works because it is a market-based policy: it works with market forces, not against them. He concludes: “There may be many reasons to recommend carbon pricing as climate policy, but if it is implemented without diligently abiding by the principles that make it work, it will not work as planned, and the harm to the Canadian economy could well outweigh the benefits created by reducing our country’s already negligible level of global CO2 emissions.”

Affordable Revenues

I think the Climate Action Council has to define affordable. In the absence of any numbers in the Draft Scoping Plan related to potential revenues I calculated my own estimates. The total New York State GHG emissions in 2019 are 379.43 million metric tons of CO₂ equivalent. If the carbon price was set at the 2022 New York State Value of Carbon Guidance value of $129, then the economy wide cost would be $48.9 billion. I submit that is not affordable for any New Yorkers and could not possibly be designed to avoid regressive impacts.

Clearly, setting a carbon price for all New York emissions is unaffordable so the Climate Action Council should consider setting a price on different sectors. Table ES.2: 2019 New York State GHG Emissions is from the 2021 Statewide GHG Emissions Report and lists the emissions by sector.

I used this GHG emissions information and the 2022 value of carbon of $129 to look at several emission scenarios in the next table. Using the IA-Tech Supplement Annex 2 Emissions Key Drivers spreadsheet 2022 Gross State Product and population each scenario estimates the cost per month for each NYS resident and the cost as a fraction of the GSP. If all the emissions were included in the carbon pricing scheme the cost per resident would be $262.50 and the costs are 3.36% of the GSP. The Candidate scenario only includes the Energy and Industrial Processes and Product Use sectors reduces the costs slightly. The Combustion scenario only includes in-state combustion emissions and drops the total revenues by more than half. Finally, I excluded everything except the electric power sector. Those costs are still pretty high: $12.05 per person per month and 0.15% of the GSP.

The estimates of current (2019) emissions coupled with the New York value of carbon yield very high revenues. On October 26, 2021, the AP-NORC Center and the Energy Policy Institute at the University of Chicago (EPIC) released the results of a survey that claimed that a majority of Americans regard climate change as a problem of “high importance”. It also included survey questions asking whether respondents would support, oppose, or neither support or oppose a law that imposed “a fee on carbon to combat climate change”. The survey question asked “If the law passed, it would increase the average amount your household pays each month for energy, including electricity, heating gas, and gasoline or diesel for your car by a total of X dollars per month” where respondents were randomly assigned a $1, $10, $20, $40, $75, or $100 cost increase. For a $1 per month increase, 45% would support, 30% would oppose, and 25% would neither support or oppose. For a $100 per month increase, 20% would support, 62% would oppose, and 18% would neither support or oppose. Only 45% support $1 per month per household and $1 per month per person only provides revenues of $237 million. All of the projections in Table 2 estimate costs far higher than that level so I do not think the public perception of affordable will be met by any carbon pricing scheme that uses the New York value of carbon.

Another way to look at affordable costs is to set the costs per month per person and the costs relative to the GSP and see what revenues would be generated. The following table provides that information. All of the projected costs exceed the AP-NORC Center and EPIC survey category where 45% support $1 per month per household.

The Draft Scoping Plan provides no details to recommend what is affordable. Rather than getting bogged down in implementation issues, the Climate Action Council and the Climate Justice Working Group should address what is affordable. That recommendation is going to drive the specifications for all three of these carbon pricing approaches.

Conclusion

The theory of carbon pricing is embraced by leading economists. However, advocates for such a scheme in New York do not understand that the plans proposed are not like the theory. My comments showed that there are implementation issues and that the Draft Scoping Plan proposed pricing schemes do not match the theory. Ross McKitrick sums it up: “There may be many reasons to recommend carbon pricing as climate policy, but if it is implemented without diligently abiding by the principles that make it work, it will not work as planned, and the harm to the Canadian economy could well outweigh the benefits created by reducing our country’s already negligible level of global CO2 emissions.” Substitute New York for Canada and it describes the likely effect of the carbon pricing plans proposed.