Category: NY Carbon Price Initiative

Last March environmental activists sued the State of New York because the Department of Environmental Conservation (DEC) was not promulgating the regulations for the  New York Cap and Invest (NYCI) Program on schedule.  Last Friday, an Ulster County judge heard arguments from the activists and the DEC.  A report suggests that the judge “will likely rule that New York is breaking its climate law.”

I have followed the Climate Act since it was first proposed, submitted comments on the Climate Act implementation plan, and have written over 550 articles about New York’s net-zero transition.  My background is particularly suited for NYCI evaluation.  I have worked on every market-based program that affected electric generating facilities in New York including the Acid Rain Program, Regional Greenhouse Gas Initiative (RGGI), and several Nitrogen Oxide programs. I follow and write about the RGGI and New York carbon pricing initiatives. The opinions expressed in this article do not reflect the position of any of my previous employers or any other organization I have been associated with, these comments are mine alone.

Overview

The Climate Act established a New York “Net Zero” target (85% reduction in GHG emissions and 15% offset of emissions) by 2050.  The Climate Action Council (CAC) was responsible for preparing the Scoping Plan that outlined how to “achieve the State’s bold clean energy and climate agenda.”  After a year-long review, the Scoping Plan that outlines how to achieve the targets was finalized at the end of 2022.  Since then, the State has been trying to implement the Scoping Plan recommendations through regulations, proceedings, and legislation.  NYCI is but one example of that effort.

Cap-and-Invest

The CAC’s Scoping Plan recommended a market-based economywide cap-and-invest program.  NYCI is supposed to work by setting an annual cap on the amount of greenhouse gas pollution that is permitted to be emitted in New York: “The declining cap ensures annual emissions are reduced, setting the state on a trajectory to meet our greenhouse gas emission reduction requirements of 40% by 2030, and at least 85% from 1990 levels by 2050, as mandated by the Climate Act.”  Affected sources purchase permits to emit a ton (also known as allowances) and then surrender them at the end of the year to comply with the rule.  Colin Kinniburgh’s description at New York Focus describes the activist’s theory of a cap-and-invest program as a program that will kill two birds with one stone.  “It simultaneously puts a limit on the tons of pollution companies can emit — ‘cap’ — while making them pay for each ton, funding projects to help move the state away from polluting energy sources — ‘invest.'” 

As is the case with all aspects of the Climate Act, this approach is not simple and is riddled with complications that make it unlikely that it will work as advocates expect.  I have summarized my concerns on my Carbon Pricing Initiatives page.  Furthermore, the implementation timetable promulgated by politicians mandated a schedule at odds to the scope and challenge of an economy-wide market-based program.  Even if a direct charge on fossil emissions was not a politically charged issue, it is no surprise that DEC implementation is late.

NYCI Lawsuit

Colin Kinniburgh, writing at NY Focus, published a series of articles describing the background of this issue.  After Governor Hochul’s State of the State address in January he explained that Hochul promised to release NYCI regulations but back-tracked on that promise.

In March he summarized the lawsuit:

Four environmental and climate justice groups filed a lawsuit Monday in a state court, claiming that New York is “stonewalling necessary climate action in outright violation” of its legal obligations. By not releasing economy-wide emissions rules, the suit alleges, the state Department of Environmental Conservation, or DEC, is “defying the Legislature’s clear directive” and “prolonging New Yorkers’ exposure to air pollution … especially in disadvantaged communities.”

It’s the first lawsuit to charge the state with failing to enforce the core mandate of its 2019 Climate Leadership and Community Protection Act, or CLCPA: eliminating nearly all of New York’s greenhouse gas emissions by 2050. The law tasks DEC with crafting rules to get there and to reach an interim target of 40 percent emissions cuts by 2030.

The state’s deadline to release those rules was Jan. 1, 2024 — a date the agency blew past. More than a year later, New York has yet to issue even draft rules, and it’s becoming less and less clear that it intends to do so, even though, throughout last year, Governor Kathy Hochul’s administration promised that it was working on them as quickly as possible.

Kinniburgh described the hearing as follows:

Ulster County Supreme Court Justice Julian Schreibman on Friday skewered a lawyer for the state Department of Environmental Conservation (DEC) who argued that the state could not issue required regulations to cut greenhouse gases any time soon.

“It seems to me that the core of your argument is that we’re living in a time of change and uncertainty, and DEC needs to be given some leeway to accommodate that,” Schreibman said.

“That’s correct, your honor,” replied Meredith Lee-Clark, of the New York State Attorney General’s office, who was representing DEC.

“I don’t know that I’ve ever lived in a time that wasn’t one of change and uncertainty, so I don’t know how that is a governable standard,” the judge continued.

Schreibman went on to say that the most relevant cases in the record “almost compel” him to side with the plaintiffs: four climate justice groups who sued the state for violating its climate law by failing to issue regulations needed to meet it.

However, he suggested that he is unlikely to force the state to take action on the kind of timeline the plaintiffs’ lawyer suggested in the hearing — as little as 30 days to issue draft regulations and 100 days to finalize them.

I am no lawyer, but it does not seem that the DEC has much of an argument.  They are not meeting the timetable.  Whether that is a “governable standard” is another issue because there have never been a demonstration that the schedule and ambition of the Climate Act has never been shown to be feasible.  It is not clear if that issue can be addressed in this case.

NYCI Implications

In my most recent post discussing NYCI I addressed the first of the three implanting regulations for NYCI.  The regulation establishes reporting requirements necessary to determine how much affected sources will have to pay for the right to emit carbon dioxide emissions.  I made a general point for the uninitiated, that implementing a rule like others already in place elsewhere seemingly should be simple and straightforward.  The reasoning goes something like this: California has a similar program in place, so all New York needs to do is to convert their rules for use in New York.  It is not that easy.  For starters, California took upwards of ten years with a large staff to develop their rules.  NYCI implementation started in early January 2023 and DEC has many fewer staff.  Furthermore, the Climate Act has unique emissions definitions which makes simple substitution impossible. Finally, there are significant differences between the energy system nomenclature in the states.  In my opinion, DEC did a remarkable job getting something out.  Unfortunately, the proposed rule shows signs of haste and lack of understanding of the nuances of emission reporting.

The “30 days to issue draft regulations and 100 days to finalize them” timeline suggested by the plaintiffs’ lawyer is absurd.  It is inconsistent with the New York Administrative Procedure Act timing requirements for starters.  They could argue that it should be subject to an emergency rulemaking, but the implementation regulations are all complex and there is very weak rationale for this as an emergency.   

Unfortunately, there will likely be pressure now on DEC to accelerate a process that already shows signs of poor rulemaking.  Poorly designed regulations will have unintended consequences that will further weaken what I believe is a doomed policy.

Discussion

I have made this point before, but it bears repeating.  I am convinced that no GHG emission reduction cap-and-invest program like NYCI can successfully put a constraining limit on the tons of pollution companies can emit while making them pay to fund projects to help move the state away from polluting energy sources.  Danny Cullenward and David Victor’s book Making Climate Policy Work explains why.    They note 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 indications are that NYCI regulations will be based on political considerations.  The prices for allowances will be based on what the Hochul Administration expects will be politically feasible not what is needed to fund needed reductions.  In any event, the plan for allocating the proceeds does not set a priority on funding emission reduction programs and includes several set asides to politically connected constituencies.  The politically designed reduction targets are inconsistent with the observed deployment of the control strategies.  NYCI will set a cap that will inevitably be too difficult to achieve, triggering an artificial energy shortage.  This will also exacerbate the designed increase in energy costs.  The end result will be increased costs and increased reliability risks.

Conclusion

I don’t think this lawsuit will have much of an impact on NYCI.  You cannot speed up implementation by issuing an order.  Throw in the political reluctance to speed up the process and I see minimal schedule changes.  In the meantime, the impending energy affordability crisis hopefully will trigger reconsideration of the whole transition.

This lawsuit is the first of many.  When the politicians set emission reduction targets without considering feasibility it was inevitable that they could not be achieved.  Political will is a great slogan but a poor driver for energy policy.

Recently I described the status of the New York Cap-and-Invest Program (NYCI).  It was widely accepted that Governor Hochul’s State of the State address would say that NYCI implementation would be a priority and that a schedule for the first auctions would be announced.  However, the only mention of NYCI noted that in the coming months the Department of Environmental Conservation (DEC) and the New York State Energy Research and Development Authority (NYSERDA) will take steps forward on developing the cap-and-invest program by proposing new reporting regulations to gather information on emissions sources.   Nothing was said about implementing an auction.  This post describes reactions to this unexpected development.

I am convinced that implementation of the New York Climate Leadership & Community Protection Act (Climate Act) net-zero mandates will do more harm than good if the future electric system relies only on wind, solar, and energy storage because of reliability and affordability risks.  I have followed the Climate Act since it was first proposed, submitted comments on the Climate Act implementation plan, and have written over 490 articles about New York’s net-zero transition.  The opinions expressed in this article do not reflect the position of any of my previous employers or any other organization I have been associated with, these comments are mine alone.

Overview

The Climate Act established a New York “Net Zero” target (85% reduction in GHG emissions and 15% offset of emissions) by 2050.  It includes an interim 2030 reduction target of a 40% GHG reduction by 2030. The Climate Action Council (CAC) responsible for preparing the Scoping Plan to “achieve the State’s bold clean energy and climate agenda” recommended a market-based economywide cap-and-invest program. 

The program is supposed to work by setting an annual cap on the amount of greenhouse gas pollution that is permitted to be emitted in New York: “The declining cap ensures annual emissions are reduced, setting the state on a trajectory to meet our greenhouse gas emission reduction requirements of 40% by 2030, and at least 85% from 1990 levels by 2050, as mandated by the Climate Act.”  The prevailing perception of NYCI is exemplified by Colin Kinniburgh’s description in his recent article in New York Focus.  He describes the theory of a cap-and-invest program as a program that will kill two birds with one stone.  “It simultaneously puts a limit on the tons of pollution companies can emit — ‘cap’ — while making them pay for each ton, funding projects to help move the state away from polluting energy sources — ‘invest.'” I described questions about NYCI that I believe need to be resolved here.

Kinniburgh also described the last-minute decision to pull any mention of timing about NYCI from the State of the State briefing book.  In the remainder of this post, I will describe the response to the delay by politicians and environmental advocates.

Political Reaction

Kate Lisa described the reaction of New York lawmakers on Spectrum News.  After describing the program, she explained that late last year Hochul’s office “floated a draft plan with varying funding levels to stakeholders, who anticipated a proposal in the upcoming executive budget.”  Lisa believes:

The delay of the program means the system will not be in place to generate revenue for the state’s green energy mandates until at least 2027 and increases the chances lawmakers will have to rollback its ambitious emission reduction mandates set under its climate law.

Her interview with Sen. Kevin Parker, a Democrat from Brooklyn included the following quotes:

“They haven’t talked to anybody. They haven’t had hearings, they don’t know what the community thinks, (and) they haven’t talked to the Legislature with their ideas about it.”  Lisa stated that “The senator said Hochul, and her team failed to tell policymakers about their new hesitancy to impose cap and trade after codifying language in the 2023-24 budget to create a fund to impose the program this year.”   She quoted Parker: “They said: ‘We’ve got it, we’ll come out with rules,’ and now, they said they’re not ready”.

Lisa noted that:

Hochul on Wednesday defended her decision to delay the program’s rollout and said the state needs more pollution data to get the program right. She insisted that her support for New York’s climate mandates have not faltered.

“This simply says we can study here, we’ll get the right information, we’ll get it right,” Hochul told reporters. “But I’m not letting these projects go unfunded. I think that’s an important distinction to make here.”

As I noted in my first article about NYCI in the State of the State address, funding is the key issue.  Lisa quoted Senate Environmental Conservation Committee chair Pete Harckham who said:

What was disappointing was that there was no mention of climate change, the environment, or specifically cap and invest pertaining to climate change.  Let’s hope the approach to climate policy is not changing.  It’s greatly disappointing, but more importantly, it’s a missed opportunity to address climate change and a missed opportunity to address affordability in utility rates.

Lisa noted that “Other top Democrats stand ready to fight back this budget cycle — arguing the policy is critical to bridge the state’s affordability gap that Hochul focused on in her speech.” She noted that Hochul has proposed that the NYCI fee on polluters would “fund rebates for consumers to drive down utility costs.”

Senate Finance Committee chair Liz Krueger expressed her extreme disappointment in a statement that claimed Hochul is “choosing not to save ratepayers billions of dollars every year through NY HEAT or provide low- and middle-income New Yorkers the immediate affordability benefits of cap and invest.”

I am no economist, but politicians are innumerate.  The initiatives to reduce emissions are going to cost money.  The only way that NYCI will address affordability in utility rates is if the money comes from somewhere else.  The more complicated the scheme to fund the initiatives the more likely that the transactional costs will increase overall costs.  NYCI is supposed to fund emission reduction programs, so the proposed rebates decrease the funding available for reductions.  Another problem with rebates is that a fundamental precept for market-based programs is that increasing costs incentivizes people to change behaviors that can reduce emissions.  Rebates ruin that incentive.  Another nonsensical idea pushed by Democratic leadership is the idea that fees on polluters will not get passed on to consumers.

Kate Lisa also recognized that critics worry that the cap-and-invest system would increase gas prices and costs of natural gas and other utilities. “The speed in which they’re moving forward is really unworkable, not feasible and very, very costly,” said Assemblyman Phil Palmesano, the ranking Republican on the Energy Committee. “It’s a radical energy climate agenda that’s really going to be borne by ratepayers and businesses.”

Environmental Advocate Reactions

It is no surprise that environmental advocates are concerned.  The Environmental Defense Fund (EDF) voiced disappointment with the delay in implementing the cap-and-invest program. Kate Courtin, Senior Manager of State Climate Policy & Strategy at EDF, criticized the decision, stating, “By continuing to kick cap-and-invest down the road, Governor Hochul is delaying the benefits that New Yorkers want — cleaner air, lower energy bills and more resilient communities.” The Nature Conservancy in New York released a statement from Jessica Ottney Mahar, policy and strategy director, that included the following:

Unfortunately, in a concerning setback for climate action, Governor Hochul is delaying the implementation of a Cap and Invest Program that would reduce the air pollution that causes global warming. Rather than advancing draft regulations this month, as had been widely discussed, the Governor’s address states that partial program details will be released sometime this year, and then proposes a one-time infrastructure investment of $1 billion. This is insufficient. Policy change is needed to reduce carbon pollution and generate ongoing revenue that can be used to invest in cleaner energy, buildings, transportation and cost reduction programs for New Yorkers. A Cap and Invest program is necessary for the State to meet the goals of the Climate Leadership and Community Protection Act. At a time when our state and our nation face unprecedented impacts from climate change—from flooding to wildfires to droughts—as well as new uncertainty regarding climate policy at the federal level, there is no time to waste. We must address the climate emergency now, and New York must lead the way. The Nature Conservancy urges Governor Hochul to implement a strong Cap and Invest Program this year.

Kinniburgh quoted Patrick McClellan, policy director of the New York League of Conservation Voters, who was dismayed to learn of the change: “There’s really no reason why that rule couldn’t be done this year,” he told New York Focus by text. “If the Governor is unwilling to set a deadline even for that then I think it’s a total capitulation on her part.”

In her Spectrum News segment Kate Lisa referenced lawmakers and environmental advocates who argue the continuing costs of climate change are higher than waiting to address it.” I cannot let that statement go unchallenged.  The idea that the costs of Climate Act inaction are greater than the costs of action is a political sound bite that is is misleading and inaccurate as I documented in my verbal comments and written comments on the Draft Scoping Plan.  I summarized the machinations used to mislead New Yorkers as a shell game in a summary post.

One of the talking points of environmental advocates is the concern that delaying NYCI could impact the strict timeline of the state’s other climate mandates.  Lisa quoted New York League of Conservation Voters President Julie Tighe:

The longer we wait, the harder it will be to meet those targets and generally speaking, the more expensive it will get. Most infrastructure projects don’t get cheaper over time, they get more expensive, so trying to move things along sooner rather than later also provides a longer time frame over which to help get those reductions.

I agree with Tighe that the longer we wait the more expensive infrastructure will get.  However, that is not the position taken in the Scoping Plan.  For example, the Integration Analysis device costs for zero-emissions charging technology and the vehicles themselves is presumed to decrease significantly over time. Home EV chargers and battery electric vehicles both are claimed to go down 18% between 2020 and 2030. Of course, this optimistic scenario is not panning out. 

Conclusion

Democratic legislators and environmental advocates subscribe to the NYCI premise that it would be an effective policy that would provide funding and ensure compliance because of their naïve belief that existing market-based programs worked.  Past results are no guarantee of future success, especially when past results are not triumphs. My evaluation of the Regional Greenhouse Gas Initiative (RGGI) program results show that cap-and-invest programs can raise money but have not shown success in reducing emissions.  That analysis also showed that New York investments in programs are not cost-effective relative to the state’s value of carbon.  Unfortunately, that is not the reason that Hochul is delaying implementation.  It is all about the money.

It is not just NYCI.  The optimistic projections of environmental advocates and the Progressive Democrats who whole-heartedly support the Climate Act are at odds with reality.  When all the transition costs are tallied, massive increases will be found whatever word games and numerical tricks are employed to claim otherwise.  I believe it would be prudent to re-assess the Scoping Plan cost estimates to determine if New York can afford to implement the Climate Act in general and NYCI in particular.

On November 28, 2023, the Citizens Budget Commission released Keys to a Cap-and-Invest Design That’s Earth- and Economy-Focused (“Keys Report”) that examines the potential benefits and problems associated with the New York Cap-and-Invest Plan (NYCI).  If you want a summary of this program I recommend reading the report.

NYCI is a primary tool for the Climate Leadership & Community Protection Act (Climate Act or CLCPA) net zero transition mandate.  This report does an excellent job describing the basics of cap-and-invest programs, issues that need to be considered during NYCI implementation, and makes recommendations that I believe should be incorporated.  My comments on this report support their work and provide context that shows that their concerns are warranted. 

I have followed the Climate Act since it was first proposed, submitted comments on the Climate Act implementation plan, and have written over 380 articles about New York’s net-zero transition including a number on various New York cap-and-invest proposals.  In addition, I have been associated with every cap and trade control program affecting the electric generating sector in New York including the Regional Greenhouse Gas Initiative (RGGI) which is frequently touted as a successful prototype for NYCI.  I have written about the details of the RGGI program because very few seem to want to provide any criticisms of the program.  I think that background enables me to provide some added value to the CBC report.  The opinions expressed in this post do not reflect the position of any of my previous employers or any other organization I have been associated with, these comments are mine alone.

Overview

The Climate Act established a New York “Net Zero” target (85% reduction and 15% offset of emissions) by 2050.  It includes an interim 2030 reduction target of a 40% reduction by 2030 and a requirement that all electricity generated be “zero-emissions” by 2040. The Climate Action Council (CAC) 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 using zero-emissions electricity. The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantifies the impact of the electrification strategies.  That material was used to develop the Draft Scoping Plan.  After a year-long review, the Scoping Plan recommendations were finalized at the end of 2022.  In 2023 the Scoping Plan recommendations are supposed to be implemented through regulation, PSC orders, and legislation.  NYCI is one of these components.

The Keys Report describes the status of NYCI:

New York is currently developing the rules and regulations for NYCI. Very few details are known; almost all programmatic details of NYCI will be determined by forthcoming regulations developed by the Department of Environmental Conservation (DEC), as directed by the CLCPA. The Final Scoping Plan (FSP) provides some insight into potential design parameters. The FSP envisioned a program that would cover all major sectoral emissions sources that can feasibly be regulated and an emissions cap designed to be consistent with CLCPA emissions limits. Furthermore, the New York State Fiscal Year 2024 Enacted Budget established three distinct accounts within a newly created special revenue fund into which any proceeds raised by NYCI would be transferred.

The Keys Report addresses key aspects of NYVI and “provides guidance on how to design and evaluate the effectiveness of NYCI by:

• Providing context and background on the development of cap-and-invest programs;
• Explaining major risks to cap-and-invest programs;
• Identifying the goals that should be used to guide NYCI design choices;
• Describing the design choices that need to be made; and
• Recommending specific design choices and features.”

This article supplants that guidance with additional context. Note that I emphasize the issues associated with the electric sector but similar issues will occur in all sectors. I highlight their main points and provide my insights below.

The Basics of Cap-and-Invest

The overview in the Keys Report does a good job describing the fundamental aspects of market based emission reduction programs.  It notes:

The theory behind cap-and-invest is relatively simple: the State sets a cap on allowable emissions, distributes allowances—the permits that allow firms to generate a specified amount of emissions—to large-scale emitters via auction, and uses the proceeds of the auction (and penalties for non-compliance) to invest in programs to reduce emissions. Companies that can reduce their marginal emissions at a lower cost than purchasing allowances will be incentivized to do so, while emitters that cannot reduce their emissions as easily will opt to purchase allowances to cover all of their emissions.

There are three things that should be kept in mind about the theory relative to NYCI. The Keys Report states: “Companies that can reduce their marginal emissions at a lower cost than purchasing allowances will be incentivized to do so.”  In the Environmental Protection Agency trading programs for sulfur dioxide (SO2) and nitrogen oxides (NOx), the allowances are allocated for free but that does not mean that affected companies don’t have to pay anything.  A company can invest in pollution control equipment to reduce their emissions and if they believe that allowances might not be available or could be more expensive than investing in control equipment, then their compliance strategy would be to install control equipment.  If a company does not have a cost-effective control option, then they can decide to purchase allowances as their compliance strategy.  There are some caveats.  This only works if the companies that can install control equipment can create reductions beyond their compliance requirements so that they can sell to those who don’t have that option.  If the compliance obligation or emissions cap is too tight, then too few sources can over-comply and there will not be enough allowances available.  There also are technological considerations to cap limits that must be considered.

The second nuance is that in the proposed cap-and-invest program the allowances must be purchased.  There is no direct incentive to over-control and sell allowances to fund the installation of additional control equipment. You can argue that installing controls to exceed the limits will affect the market price of allowances that will incentivize over-control but that is an indirect effect.  In my opinion, that makes the business case more difficult to justify added expenses for over-control.  The requirement to purchase allowances in cap-and-invest programs adds a complication to the economics of compliance strategies.

The final and most important issue that must be kept in mind is that CO2 compliance strategies are different than SO2 and NOx.  There are no cost-effective add-on control systems for CO2 so affected sources have fewer options to comply.  It boils down to operate less or retire.  In the electric sector, that is only appropriate if an alternative source of electricity is available.  The Scoping Plan proposes to use the revenues from the cap-and-invest program to fund the infrastructure to produce “zero-emissions” generation or reduce the electric load so not as much generation is needed.  If the investments in wind and solar resources are insufficient to deploy the necessary resources, then it is impossible to shut down or reduce operations at electric facilities by limiting allowances.  If existing fossil-fired units cannot run because they don’t have allowances then there will be an artificial energy shortage and a real blackout.

Emissions Leakage and Related Adverse Economic Impacts Can Threaten Effectiveness of Cap-and-Invest Programs

The Keys Report explains the problem of leakage:

Cap-and-invest programs impose new direct or indirect costs on businesses and individuals. In response, those businesses or individuals may seek to avoid costs by looking beyond the borders of the cap-and-invest program. This is called leakage; economic activity continues elsewhere but avoids emissions reduction policies. When leakage occurs, it appears that emissions reductions have taken place, but they have simply been exported outside the borders of the program.

In my opinion, this is an insurmountable flaw to NYCI.  Because of the limited opportunity to reduce GHG emissions, New York companies will simply treat the allowance requirement as a tax and raise their prices to account for the increased cost of doing business.  If the cost of the allowances is sufficient to fund the emissions reductions, then everything I have observed indicates that the costs will be so high that economic activity will be forced to leave in order to stay competitive with jurisdictions that don’t have this tax.

As noted in my introduction I have spent a lot of time analyzing RGGI.  I do not agree with all the discussion of RGGI leakage:

Leakage can affect all emissions trading schemes to some degree, but it is a pronounced threat to the effectiveness of RGGI due to its confinement to the electricity generation sector. Given the interconnected nature of electricity grids, power generated in non-member states can replace generation in member states when their relative costs change. It is difficult to measure leakage, but clearly some occurs. For example, one analysis estimated that between 43 percent and 86 percent of emissions reductions benefits within the RGGI region were offset by increased emissions in neighboring states.

I disagree with the cited analysis that claims emission reductions benefits were largely offset by leakage.  If that were true, then there should be a substantive increase in generation imports displacing RGGI sources.  In late November RGGI released CO2 Emissions from Electricity Generation and Imports in the Regional Greenhouse Gas Initiative: 2020 Monitoring Report.  According to this report: “Annual average net imports into the nine-state RGGI region from 2018 to 2020 increased by 19.4 million MWh, or 34.7 percent, compared to the average for 2006 to 2008.”  However, import levels have not changed over the last seven reporting periods.  The report also notes that: “Changes in these data over time may point to potential CO2 emissions leakage as a result of states implementing the CO2 Budget Trading Program, or a lack thereof, but may also be the result of wholesale electricity market and fuel market dynamics unrelated to the implementation of the CO2 Budget Trading Program, or a combination of these factors.” 

Furthermore, my analysis of RGGI emissions over time directly contradicts the referenced paper and shows that the primary reason for RGGI emission reductions has been fuel switching from coal and residual oil to natural gas.  Most of the load reductions at the coal and oil plants was offset by increases from in-state natural gas production.  Consequently, I believe that while leakage may be occurring its effect on emissions is small relative to wholesale electricity market and fuel market dynamics unrelated to RGGI.

Program Goals to Guide the Design of a Successful Cap-and-Invest Program The Keys Report states that:

NYCI’s primary objective is to reduce greenhouse gas emissions by increasing costs to emit GHGs and spending the proceeds to facilitate further emissions reductions. These higher costs are spread across the economy, and the program must be designed well to prevent possible unintended adverse effects.

I agree that the program must be designed well to prevent adverse effects but think the problem is even more difficult than described because of the differences between a CO2 allowance trading program and other pollutant programs described previously.  NYCI is a blunt pollution control approach.

The report describes five critical goals should be considered when assessing the design choices and proposed NYCI program.

• Maximize GHG emissions reduction: Cap-and-Invest is likely to be the primary regulatory vehicle for accelerating GHG emissions reduction in New York. The success of the program will largely hinge on how effectively it incentivizes the mitigation of emissions that can feasibly be reduced. However, there are practical limits to what can be achieved, especially in the near-term, due to technological constraints and the availability of low-emissions energy.

This is an excellent summation of the problem.  Unfortunately, the practical limitations may be insurmountable on the mandated schedule.

• Minimize the financial cost to businesses and households: Regulators should consider how much the program will cost businesses and households, to avoid putting New York’s economic competitiveness and affordability at risk. Pushing to achieve overly aggressive environmental goals would result in substantial and unproductive direct financial costs. Emissions reductions should be brought on by the lowest-cost decarbonization, energy efficiency, and conservation strategies, rather than being the result of declines in economic activity or population.

I completely agree with this recommendation.  In order to implement the recommendation, the Hochul Administration should set affordability standards now and incorporate a feature to modify the auction if the standard is exceeded.

• Prevent emissions leakage: NYCI’s environmental benefits and cost-effectiveness could be undermined if emissions leakage is not adequately limited. If the emissions reduction targets are set too aggressively, economic activity, jobs, and emissions could be pushed out of the state to neighboring regions with less stringent regulation.

I do not think that emissions leakage can be prevented in any cap-and-dividend program in a small jurisdiction if the allowance prices are high enough to reduce emissions.

• Minimize adverse economic impacts: Beyond the direct financial costs, wider economic disruptions such as reduced employment or instability in emission-intensive industries must also be considered. The program should aim to prevent these adverse effects to ensure that the energy transition does not come at the cost of economic vitality.

I agree.  The problem is that the prevention program should lay out a plan to prevent the adverse effects which is easier said than done.

• Maximize benefits to disadvantaged communities: Low-income households spend a greater share of their income on energy, making them more vulnerable to the costs imposed by a cap-and-invest program. At the same time, disadvantaged communities are likely to feel more of the effects of emissions. NYCI should (and is required to) minimize the burden imposed on the communities that are most sensitive to increased costs of necessities, like home heating and transportation, and maximize economic and environmental benefits within those communities.

There will be a balancing act relative to disadvantaged community funding.  In the first place NYCI necessarily will increase energy costs that will affect those least able to afford those increases the most.  Therefore, there is a moral imperative to reduce those affordability impacts as much as possible.  The tradeoff is that funding for low- and middle-income citizens is not a particularly effective way to reduce emissions.  Consequently, there might not be enough funding available to make the reductions necessary to meet the Climate Act mandated schedule.  If the allowance auctions follow the schedule and not the actual emission reduction trajectory, then there might not be enough allowances available which could lead to an artificial energy shortage that will cause blackouts.  Blackouts disproportionately impact the disadvantaged communities so the balancing act must consider this interaction.

Design Parameters

The Keys Report program identified seven program design parameters that will be critical to NYCI’s success.  I agree that these parameters are important.  However, there are aspects of these parameters that run contrary to the climate activist constituency that appear to be driving the Climate Act implementation bus.  It will be fascinating to see how the Hochul Administration resolves the differences between activist demands and the reality of a functioning cap-and-invest program.

Sectoral and Geographic Scope

NYCI will be designed to cover a range of economic sectors, and its rules will determine whether it can be expanded geographically. The geographic and sectoral scope of a cap-and-invest program significantly affects both its emissions reduction potential and imposed costs. An emissions-trading system with broad coverage will be able to tap into a wider array of emissions reduction opportunities that can be achieved at a lower cost, because the tools available to reduce emissions vary across economic sectors or across regions. Including more jurisdictions can also help to reduce the risk of emissions leakage, which arises when regulatory conditions differ among regions. Including more sectors is preferable, as it spreads the cost of emissions reduction, minimizing the financial burden on any single sector.

The reality is that there are advantages to a New York program that is included with programs in other jurisdictions.  In addition to the reasons mentioned, if New York could join the California program, then it would not be necessary to develop a reporting system, an auction system, or a compliance tracking system.   The time, effort, and expense for those three components is significant.

GHG Emissions Accounting and Linkage

New York’s CLCPA employs a unique method for GHG emissions accounting, utilizing a Global Warming Potential (GWP) over a 20-year horizon (GWP-20) and including emissions from electricity imported from other states, exported waste management services, and from biogenic sources. The GWP-20 accounting method emphasizes the short-term impacts of greenhouse gases and is particularly sensitive to gases like methane that have a higher warming potential but shorter atmospheric lifespan.

This is a significant reality slap for NYCI.  New York’s unique GHG emission reporting requirements are incompatible with other jurisdictions so we cannot take advantage of increasing the geographical scope.  I believe that it would be impossible to incorporate New York’s reporting approach into any other cap-and-invest program.  As proof note that last spring the Department of Environmental Conservation floated the idea of changing the GWP approach and the usual suspects melted down.  If this idea is suggested again, the outcry will be the same. 

Emissions Cap Setting

The level of the initial emissions cap and its trajectory over time will play a large role in shaping the price of allowances and the cost of compliance with NYCI. To incentivize investment in emissions reduction, the cap must decline over time. A steeper decline increases the rate of emissions reduction, but also likely leads to a higher price of emissions allowances in auctions and in trade, increasing the financial cost imposed on businesses complying with the program.

This is another reality tradeoff has already been addressed.  Clean energy resources need to be deployed to displace existing sources of GHG emissions.  There are a whole host of reasons that those resources may not be deployed on the schedule necessary to meet the Climate Act legal mandates.  If the emission cap reduction trajectory blindly follows the legal mandate with no provision to account for deployment delays, then there will be insufficient allowances necessary to meet energy demand.  The resulting shortfall would result in consequences more severe than the alleged problems the Climate Act is supposed to mitigate.

Allowance Allocation Method

NYCI regulations must determine how the program will allocate allowances. While that is almost certain to include an auction, it could also include various methods of free allocation. Early cap-and-invest programs, including the European Union ETS, primarily allocated allowances for free to regulated businesses. Over time this has changed; most existing emissions trading systems now utilize auctions to allocate most emissions allowances, while distributing a portion for free to alleviate leakage risk or consumer costs. The benefits of allocation by auction from the perspective of governments is obvious: cap-and-invest can generate substantial revenue. Since it began operating in 2013, California’s system has generated more than $38 billion.

I think this description addresses the issues associated with allowance allocations correctly. 

Price Stability Mechanisms

NYCI’s design can also affect the volatility of allowance prices in the market. Cap-and-invest gives the government some certainty over the level of emissions within the scope of the program, but the price of allowances will be variable. Allowance price volatility is a concern because it adds risk to the decision to invest in technologies that could reduce emissions—especially investments that have high upfront fixed costs. Extreme allowance prices on the high end raise the costs imposed on businesses and households. While businesses may be primarily concerned with high allowance prices, sudden price swings may discourage them from making investments if they expect the cost of compliance in the long-run to change. An excessively low allowance price indicates that the supply of allowances (the emissions cap) may closely mirror, or exceed, market demand for allowances, meaning there’s a weak incentive to invest in emissions reduction. Mechanisms to rein in excessive auction volatility and price extremes can mitigate these risks.

Price stability is important and this description accurately points out why.  However, controversy is inevitable for this mechanism. It appears that NYCI is being modeled after the California cap-and-trade program with many of the same features mentioned for potential inclusion.  California incorporates automatic allowance adjustments to address cost volatility that may be incompatible with the Climate Act and are certainly at odds with an allowance distribution that meets the Climate Act schedule.  The article CA Carbon Cap it not really a cap explains:

You see, the so-called emissions “cap” in the program automatically adjusts so that it is actually very unlikely to set a hard limit on emissions. If the state’s greenhouse gas (GHG) emissions are lower than the emissions cap, the program puts a floor on the price of the tradable emissions allowances, essentially shrinking the cap to soak up extra allowances at the floor price. And if emissions are high, it automatically expands the cap by selling all allowances demanded at a pre-determined ceiling price.

Also see The Limits of Carbon Trading Limits that argues that the cap is elastic for good reasons:

California’s CO2 market has the most sophisticated, and arguably most successful, system of emissions price-collars of any cap-and-trade market. The price-collars are designed to regulate the CO2 price so that it doesn’t reach economically – or politically – unacceptable extremes by making the cap elastic. If the price is too low, the system automatically withholds additional CO2 allowances to tighten supply. If the price is too high, it supplies more of them. This means, as Severin Borenstein and I have laid out in the past, that California’s CO2 “cap” is more accurately thought of as a progressive carbon tax, where the price of CO2 goes up at higher levels of statewide CO2 emissions.

I think these features may be incompatible with the Climate Act law if the Climate Action Council interpretation is followed.

Emitter Compliance Flexibility

Providing emitters with various ways to achieve compliance can improve the overall cost-effectiveness of NYCI without compromising its objective of emissions reduction. Allowance trading, carbon offsets and allowance banking can help to lower compliance costs and enhance the efficiency of the program. These flexibility mechanisms allow the artificial market created by the cap-and-invest program to emulate real market behavior. This can help to ensure that sudden changes in the market don’t lead to extreme price volatility, making the program more predictable and manageable for participating businesses. This adaptability has been key to the success of existing emissions trading systems.

This is another inevitable reality confrontation.  These are absolutely necessary components of any cap-and-invest program but they are opposed by New York’s climate activist constituency.  It is unclear how the Hochul Administration can continue to cater to those folks when they demand to remove the tools that make market trading programs work. 

One of the demands by this constituency is to forbid the use of offsets as noted in the Keys Report description.  I think this is flawed.  The Climate Act is net-zero which is defined as an 85% reduction in GHG emissions with the remaining 15% of emissions counterbalanced by offsetting emissions.  I guess they want to limit offsets to particular sectors, but the following description explains all the benefits that prohibiting offsets will prevent:

Carbon offsets can also be a valuable flexibility tool in a cap-and-invest program. Offsets allow regulated entities to meet a portion of their compliance obligation by investing in or purchasing emission-reduction credits from projects outside of the capped sectors. These might include forestry projects or agricultural practices that sequester carbon, or methane capture from landfills. If the agriculture and waste sectors are not required to comply with NYCI, creating a secondary market for offsets could incentivize these sectors to improve their efficiency. Offsets can provide an affordable alternative for compliance, but they have been the subject of frequent scrutiny due to concerns that the emission benefits they generate would have occurred regardless of investment in the credited activity.40 Research on offsets does indicate establishing equivalency of offset projects to more direct emissions reduction is a challenge. Despite their imperfection, offsets can provide a real value, especially in the near term when strategies to reduce emissions are more limited. The CLCPA addresses these concerns by requiring that DEC verify that any emissions offsets used to comply with environmental regulation are, “real, additional, verifiable, enforceable, and permanent.”

Tradeoffs from Limiting Flexibility

The possibility of including a trading mechanism in NYCI, rather than setting facility-specific caps in the program, has drawn scrutiny. This is largely out of concerns that polluters in or near Disadvantaged Communities (DAC) would be able to continue polluting, and instead simply buy allowances and maintain their current emissions levels. Historically, these communities have often been disproportionately exposed to air and water pollution, giving reasonable rise to this concern.

Another reality is that allowance market programs are trading programs.  The idea that there should be limits on trading is inimical to the very concept of a trading program.  This is a GHG emissions trading program that is appropriate to use for pollutants that influence global warming. The location within New York State for the GHG emissions does not matter.  In order to curry favor with more political constituencies, the Climate Act includes provisions to address disadvantaged communities.  This includes the idea from members of the Climate Action Council who had no trading program experience to somehow include site-specific limits on trading.  I personally see no practical way to implement such a scheme.  As noted below there are other regulations in place that ensure that all regions in the state meet air and water quality standards that protect health and welfare so the idea that GHG emissions trading should also address local effects is counter-productive and unnecessary.

Revenue Management and Use

Ensuring the transparent, accountable, and efficient use of the revenue generated is critical to the success and legitimacy of a cap-and-invest system. If auction prices are similar to those in the state-level cap-and-invest systems in California and Washington, NYCI could generate billions of dollars annually.

I have no doubt that NYCI will generate billions of dollars.  Unfortunately, New York’s record of RGGI investment proceeds has been dismal. According to the New York State Regional Greenhouse Gas

Initiative-Funded Programs report, since the inception of the program, total investments from New York’s RGGI auction proceeds programs is $825 million and the claimed savings are 1,731,823 tons of CO₂e with a calculated cost per ton reduced of $476/ton.  At that rate, investments to provide the reductions necessary will be unaffordable.

Monitoring, Evaluation, and Modification

All existing GHG emissions trading systems began operating in the last two decades, and significant changes have been made to all of their structures since being implemented. While evidence supports many of the design parameters discussed in previous sections, it is limited by the short time these policies have been in operation and the unique environmental and economic characteristics within each region. It is crucial that robust monitoring and evaluation mechanisms be incorporated with cap-and-invest to assess the program’s performance over time and inform any adjustments to the program as necessary.

I agree with these comments.

Recommendations

The Keys Report includes recommended cap-and-invest design features.  The following paragraph sums up the issues I believe must be addressed.

While the Cap-and-Invest program proposed by the State could reduce emissions more cost-effectively than other regulatory approaches, its success will depend greatly on its design. Efforts to make the program more stringent by limiting trading of allowances, or imposing source-specific emissions limits, while well intentioned, would ultimately increase the costs imposed on New Yorkers and may exacerbate emissions leakage and economic competitiveness risks.

It is important to also recognize NYCI would not exist in a vacuum. NYCI is a central component of New York’s efforts to reduce emissions, but alone, is unlikely to ensure CLCPA goals are met. If additional regulations are pursued that include facility-specific limits or energy standards, the interaction with cap-and-invest could render it less cost-effective. Traditional regulatory standards could require some firms to reduce their emissions beyond what they otherwise would have under only cap-and-invest. This would reduce demand in the allowance market, pushing down prices and undermining the incentive for businesses only covered by cap-and-invest to reduce their emissions. Facility-specific regulations may still be appropriate if there are local health impacts or other negative externalities not adequately covered by the emissions market.

I want to make one point about the final sentence.  The Climate Action Council health impact arguments ignore the fact that there already are regulations in place to address local impacts.  Every facility in New York has had to prove that its emissions do not cause exceedances of the National Ambient Air Quality Standards.  This condition is ignored in these arguments.  The Department of Environmental Conservation is developing regulations and guidance to deal with these concerns and this has to be considered as NYCI is implemented.

The CBC recommends the State follow these approaches when designing the Cap-and-Invest program:

1. Allow and pursue linkage with other emissions trading programs. While a national cap-and-invest program that covers all economy-wide emissions is optimal, broadening the scope of Cap-and-Invest beyond the boundaries of New York, by linking with other programs, would enhance the program’s cost-effectiveness by providing a larger pool of emissions reduction opportunities. The State should ensure that NYCI regulations are designed to be consistent with emissions trading systems in other states to enable future linkage.

I agree with this recommendation.

• Keep sectoral coverage as broad as possible. NYCI should cover emissions from as many sectors as is feasible. Exceptions should only be made if inclusion is exceedingly difficult or expensive to administer. Excluding certain sectors could shift the entire burden of reducing economy-wide emissions onto sectors with a compliance obligation. Sectors that face a greater emissions leakage risk could instead be given a share of allowances for free to alleviate this risk, but they should still have an obligation to comply with the program.

I agree with this recommendation.

• Maintain flexibility in compliance through trading, banking, and verifiable offsets. An efficient Cap-and-Invest program should provide businesses with multiple options for compliance to accommodate the differences in their conditions. Trading should not be restricted; limiting this critical component of cap-and-invest would add uncertainty to the market, and potentially drive up the price of allowances without increasing the environmental benefits of the program. Permitting banking of allowances can encourage early emission reductions and help companies smooth out their compliance costs over time. Allowing the use of verifiable offsets to meet a portion of firms’ compliance obligation can reduce the cost of compliance and incentivize emissions reduction in non-regulated sectors.

I agree with this recommendation,  If these are not accepted, this is no longer a market trading program and none of the observed benefits of previous successful programs should be expected.

• Allocate revenue on budget, but free from capture. Revenues generated through NYCI should be included and appropriated within the State’s regular budget process, as other taxes and fees are within the financial plan, to promote transparency and accountability and ensure that funds are not spent wastefully. Furthermore, this revenue should be allocated to costs related to administering and evaluating the program, and investments that further the goals of the program, such as energy efficiency programs, development of low-carbon energy infrastructure, and incentives for the adoption of clean technologies. These investments can accelerate the transition towards a low-carbon economy, reduce the burden of compliance costs, and deliver additional environmental and economic benefits. The revenue generated by NYCI should be free from capture and diversion to short-sighted spending endeavors and unrelated political priorities.

I also agree with this recommendation.  I did not mention that New York has diverted the RGGI allowance proceeds in the past.  In addition, to the overt diversion to the general fund, the Agencies continue to use RGGI revenue as a slush fund to cover costs more appropriately covered by other programs.  Importantly this means less money for the stated purpose of the program.

• Regularly monitor, publicly report, and evaluate program data and modify the program based on evidence. Effective monitoring and evaluation are key to the success of the Cap-and-Invest program. Regularly reporting on the program outcomes, including emissions reduction progress, the functioning of the allowance auction and secondary market, and the use of auction revenues, can ensure transparency, accountability, and inform adjustments to improve NYCI. Data collected from auctions and programs receiving revenue should be publicized to allow for adequate public scrutiny.

I agree with this recommendation.

• Align the program with other regulations implemented in accordance with the CLCPA. Any additional climate policies that may be pursued to meet CLCPA goals should be considered holistically when designing Cap-and-Invest to minimize overlapping regulatory costs and improve overall policy effectiveness. This approach can help ensure that the program complements rather than conflicts with, or inappropriately compounds the costs of, other measures.

I think this recommendation makes sense.

• Finalize clear and comprehensive rules and give adequate time for businesses to prepare. Predictability and certainty are necessary for businesses to plan their compliance and emissions reduction investments. Finalizing clear and comprehensive rules in a timely manner can reduce uncertainty and facilitate a smooth transition for the carbon market. The State should finalize regulations well in advance of the first compliance period.

This is a common sense recommendation but I fear the desire to get something up and running as soon as possible will mean that implementation will be rushed.

Conclusion

The Keys Report is an excellent summation of NYCI and I recommend reading the original document.  I know how much work went into this report because have tried to describe the issues covered in this report myself. I find it encouraging that a non-partisan organization with no preconceived notions on the benefits and risks of the cap-and-invest programs is in close agreement with my concerns.  My comments on this report support their work and provide context that shows that their concerns are warranted.  If anything, their concerns are understated. However, because there are significant differences between their recommendations and the Hochul Administration narrative I am not optimistic that their recommendations will be considered and implemented.

Personally, I think NYCI is not going to work as its supporters think. I agree with Danny Cullenward and David Victor’s book Making Climate Policy Work  that the politics of creating and maintaining market-based policies for GHG emissions “render them ineffective nearly everywhere they have been applied”.  I have no reason to believe that NYCI will be any different even if all the recommendations suggested by the Keys Report are implemented.  Because I think that political considerations will preclude those recommendations, I think that NYCI will cause a dramatic increase in New York energy costs, fritter the revenues away on politically convenient projects, and fail to support renewable energy resource development sufficient to meet the mandated goals of the Climate Act.  I expect no good outcomes.