My Comments on the New York Value of Carbon Guidance Document

The Climate Leadership and Community Protection Act (CLCPA) mandates that the state establish a value of carbon for use in the implementation of the law.  This post describes my comments  on the draft guidance document “Establishing a Value of Carbon, Guidelines for Use by State Agencies” document released on October 29, 2020.  I submitted comments because this law will affect the affordability and reliability of New York’s energy.

I am a retired electric generation utility meteorologist with nearly 40-years of experience analyzing the effects of environmental regulations on electric and gas operations.  I have written a series of posts on the feasibility, implications and consequences of this aspect of the law and another series of posts on carbon pricing initiatives.  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

On July 18, 2019 New York Governor Andrew Cuomo signed CLCPA, which establishes targets for decreasing greenhouse gas emissions, increasing renewable electricity production, and improving energy efficiency.  It was described as the most ambitious and comprehensive climate and clean energy legislation in the country when Cuomo signed the legislation.  I have summarized the schedule, implementation components, and provide links to the legislation itself at CLCPA Summary Implementation Requirements.

The CLCPA requires the New York State Department of Environmental Conservation (DEC), in consultation with the New York State Energy Research and Development Authority (NYSERDA), to establish a value of carbon for use by State agencies. The Draft Value of Carbon Guidance provides values for carbon dioxide, methane, and nitrous oxide for use by State agencies along with recommended guidelines for the use of these and other values by State entities.  Three documents were made available:

In section §75-0113, Value of Carbon the CLCPA states that the “social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions” and that “As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero.”  The law states that DEC “shall consider prior or existing estimates of the social cost of carbon issued or adopted by the federal government, appropriate international bodies, or other appropriate and reputable scientific organizations.”

My comments explain why I think the focus of the guidance is wrong.  The guidance does not recognize that when the CLCPA chose specific targets that the proper way to address social costs is through a cost efficiency approach.  The damages approach recommended in the guidance is an efficiency concept.  DEC emphasized use of their proposed values “that can be used by State entities to aid decision- making and used as a tool for the State to demonstrate the global societal value of actions to reduce greenhouse gas emissions.”  The emphasis was clearly on state agency use and not for meeting the CLCPA targets and less on providing guidelines for state agencies.

Guidance Comments

An overview of the Value of Carbon Guidance was presented Maureen Leddy at the 24 November 2020 Climate Action Council Meeting. I will annotate the Value of Carbon Guidance slides  below with excerpts from the comments I submitted.

The first slide is titled “Value of Carbon Reduction” and notes that the “CLCPA requires DEC, in coordination with NYSERDA, to establish a Value of Carbon as an evaluation tool for agency decision making”.  The lists the following requirements:

        • Describe damages and marginal abatement cost approaches
        • Consider a range of discount rates, including zero
        • Consider the social cost of carbon in other jurisdictions
        • Provide values for non-C02 greenhouse gases

I think the guidance ultimately provides cost effectiveness justification for the CLCPA.  As a result, I believe that the document should explain the concept of the social cost approach targeted for the general public.  Blastland et al. (2020) describe an approach for evidence communication that I suggested would be an appropriate template for the public primer.  The authors suggest that communications should offer “balance, not false balance”.  I argued that this is a major short-coming in the guidance and supporting memo documents because the full range of opinions on social cost methodologies was not included.

My comments addressed technical aspects of the damages and marginal abatement cost approaches.  The biggest problem with their description and the recommendation to use the damages approach is that they ignored the concept that once a cap is set, you should not use the damages approach exemplified by the social cost of carbon. The social cost of carbon is an efficiency concept. Establishing a price incentivizes society to develop the most efficient response to that price but does not guarantee specific emission levels. Once a specific target is established in a cap that violates the efficiency principle inherent in the social cost of carbon.  I pointed out that in its recent review of the federal IWG social cost of carbon, the U.S. Government Accountability Office referred to the marginal abatement cost approach as a type of “target-consistent approach” to valuing emissions, which reflects the fact that this approach establishes a value that depends in part on the relevant emission reduction target.

Also included in the first slide was the target timeline of milestones to meet CLCPA deadline

Milestone Date
Stakeholder conference July 2020
Public comment period ends November 27, 2020
Final released (CLCPA requirement) January 1,2021

I pointed out that the time between the end of the public comment period and the final release date was very short given the importance of the document.  Importantly the implication that the document was required by the CLCPA is based on a mis-reading of the law that states it was supposed to be released “No later than one year after the effective date of this article”.  The law was signed in July 2019 so this should have been released back in July 2020.  Because the date has been missed delaying release long enough for full evaluation and response is appropriate.

 

The second slide, “Draft Value of Carbon Guidance” stated that the proposed guidance:

      • Provides background on different ways to value greenhouse gas emissions reductions
        • Damages approach and marginal abatement cost
      • Recommends the U.S. Interagency Working Group’s (IWG) damages-based value of carbon, also referred to as the social cost of carbon, as appropriate for most agency decision making
      • Considers a range of discount rates, including zero
        • Recommends 1%-3% ($421-$53per ton of C02 in 2020 dollars)
        • Seeking comment on central value of 2% or 2.5% ($125 or $79 per ton of CO2 in 2020 dollars)
      • Discusses how to value non-CO2 greenhouse gases
        • Values are provided for CO2, N02 and CH4, as per IWG
        • Values for other gases will be added as the research evolves
        • CLCPA20-yr GWP does not change these values
      • Details specific considerations for State agencies on how to use a damages-based approach

I think part of the rationale is that the IWG damages-based value of carbon is a more established concept and that more information would have to be developed to use the marginal abatement approach.  The guidance touts the IWG as the best approach but then goes on to ignore the recommendations of the IWG when it comes to the choice of the discount value.  I argued that they did not provide sufficient justification to recommend the changes proposed.

The guidance document recommends that the non-CO2 greenhouse gases be valued individually.  I agree with that approach but I pointed out that there are ramifications to that relative to methane.  Carbon dioxide is long-lived and accumulates over time because it stays in the atmosphere.  Methane is a short-lived (10 to 12 years) pollutant that lasts in the atmosphere less.  Because the CLCPA targets set a hard cap on methane emissions twelve years after the cap limit is reached the impact of methane on warming is done.  It stands to reason that the economic impact on aspects of the economy, such as energy use, health, and agriculture, projected from these climatic changes is also done.  I suggested that the social cost impacts needed to be revised to reflect that reality.

There is a basic problem with the way the guidance document is framed.  While it is valuable that State agencies have guidance on how to use a damages approach, it is even more important to provide support for the CLCPA implementation process.  The use of the damages approach over the marginal abatement cost approach handicaps CLCPA implementation of the most cost-effective strategies.

The second slide also stated that “This guidance is not a regulation and does not set a carbon price nor impose any fees.”  This caveat has been included in every DEC document on the value of carbon but the reality is that the guidance will be used to set a carbon price for the imposition of fees if the New York Independent System Operator Carbon Price proposal is implemented.  I would expect that it would be also used if New York joins the Transportation Climate Initiative.

The third slide, DEC Draft Value of Carbon Guidance, basically repeated all the points made in previous slides.  Two points do need to be addressed:

      • State agencies may utilize the Value of Carbon to aid many forms of decision-making related to permitting, environmental review, rulemakings, funding, procurement, etc.
      • Guidance does not create a price, fee, or compliance obligation.

It is not clear that if the value of carbon is used in decision-making related to permitting how that cannot be considered a compliance obligation.  Maybe it is just intended to “prove” that the actions can be justified because the costs may be less than the social costs calculated using the recommended values.  That may also explain why the IWG recommended values which yield lower social costs are not recommended.

I specifically suggested that the guidance document incorporate the Blastland et al., (2020) simple tip to display information in a table rather than stating them in the text to address the implications of the assumptions used to develop the recommended values of carbon.  I suggested that a table be included that lists the effects of assumptions on the social cost values.  My comments addressed the effects of location of benefits (guidance benefits are primarily global and not New York specific), time horizon (the benefits extend out to 2300), the sensitivity of the climate to greenhouse gases (IWG estimates do not use the most recent modeled estimates of the sensitivity), and the discount rate.  Of those parameters only the differences in discount rates were discussed.  However, the underlying ramifications of the discount rate choice were not explained.

Finally, I recommended that the evaluation of carbon pricing policies in Canada by McKitrick (2016) be considered.  He explains that “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”.  Clearly this is entirely relevant to New York.  Importantly he notes:

“However, a beneficial outcome is not guaranteed: certain rules must be observed in order for carbon pricing to have its intended effect of achieving the optimal balance between emission reduction and economic growth. First and foremost, carbon pricing only works in the absence of any other emission regulations. If pricing is layered on top of an emission-regulating regime already in place (such as emission caps or feed-in-tariff programs), it will not only fail to produce the desired effects in terms of emission rationing, it will have distortionary effects that cause disproportionate damage in the economy. Carbon taxes are meant to replace all other climate-related regulation, while the revenue from the taxes should not be funnelled into substitute goods, like renewable power (pricing lets the market decide which of those substitutes are worth funding) but returned directly to taxpayers.”

Conclusion

Because it appears that a primary goal of this process is to memorialize a value of carbon to justify agency actions, the public deserves to know how the real costs are balanced against the theorized cost benefits.  When CLCPA strategies are announced and cost savings are claimed the public deserves to know that the savings are based on global not New York benefits, savings out to 2300, and do not represent the latest climate sensitivity science.  If the total costs are close to the purported benefits this may be acceptable but I have no doubt that the total costs per ton will far exceed even these conjured values.

Furthermore, there are fundamental technical considerations overlooked or ignored by the guidance. New York State CLCPA implementation is trying to choose between many expensive policy options while at the same time attempting to understand which one (or what mix) will be the least expensive and have the fewest negative impacts on the existing system. If good picks are made then state ratepayers will spend the least amount of a lot of money, but if they are wrong, we will be left with lots of negative outcomes and even higher costs for a long time.  Picking the correct value of carbon metric and values is critical to doing this right.  A comprehensive response to comments justifying the choices made is an integral part of doing this right.

My comments on the FERC Carbon Pricing Policy

Earlier I described the Federal Energy Regulatory Commission (FERC) technical conference regarding Carbon Pricing in Organized Wholesale Electricity Markets held on September 30, 2020.  On October 15, 2020 FERC proposed a policy statement to “clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. I also described the proposed policy statement that seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules.”

The post on the policy statement mentioned that I intended to personally comment on the concerns I raised in my personal blog post on the FERC technical conference.   I submitted comments as a private citizen.  The technical conference convinced FERC commissioners that carbon-pricing was an “efficient” market-based tool but nobody asked and no one proved that they work.  In my opinion the first rule of efficient policy is that it works.  I believe that those who support carbon pricing on theoretical economic grounds are overlooking or are unaware of practical issues I have raised.  Cynic that I am, I think the primary value to FERC and the RTO/ISO operators is that the carbon price makes their lives easier.  That it will have significant impacts on consumers and not do anything for the climate is somebody else’s problem.

In order to determine whether any carbon pricing proposal will affect the justness and reasonableness of rates I argued that the Commission must consider whether the proposal will reduce carbon dioxide emissions at a cost below some standard of reasonableness.  There is a cost where the abatement costs exceed any estimates of the cost impacts of CO2 on the climate.  Despite its flaws the Social Cost of Carbon (SCC), the present-day value of projected future net damages from emitting a ton of CO2 today, is a widely used metric to establish a reasonable value.  Because my primary concern is New York’s Climate Leadership and Community Protection Act (CLCPA) I proposed using New York’s proposal to use the Interagency Working Group 2016 estimates that translate into a 2020 value of carbon dioxide of $53-421 per ton, with a central value of $79-125 per ton”.

The FERC notice of the proposed policy statement on Carbon Pricing in Organized Wholesale Electric Markets states that “We agree that proposals to incorporate a state-determined carbon price in RTO/ISO markets could, if properly designed and implemented, significantly improve the efficiency of those markets”.  I argued that there are practical reasons why it is impossible to properly design and implement a carbon pricing scheme that will affect efficiency of those markets in the best interests of the public.

Carbon pricing is a climate policy approach that charges sources for the tons of carbon dioxide that they emit.  A Resources for the Future (RFF) summary lists several attributes that they claim makes carbon pricing more attractive than other potential policies to reduce carbon dioxide emissions:

      • Carbon pricing allows emitters to choose the most efficient method to reduce emissions.
      • An economy-wide carbon price applies a uniform price on CO₂ emissions regardless of the source.
      • A carbon price encourages individuals and businesses to reduce their carbon emissions more than conventional regulations.
      • A carbon price creates a new revenue stream that can be used in a number of ways.

I compared those attributes to the real-world of carbon pricing.

RFF states that “carbon pricing allows emitters to choose the most efficient method to reduce emissions”.  In the context of power plants under FERC jurisdiction this is mostly irrelevant.  In the first place, there are no cost-effective add-on controls for CO2 reductions, so fossil-fired electrical generators only have limited options.  For an individual power plant operator, the only effective approach is to switch to a lower emitting fuel.  Power plants can also be replaced in whole or part by alternative generation, but the business model of most de-regulated generating companies precludes the option to develop replacement generation. I have shown that in RGGI the market participants don’t behave as expected by economic market theory so the markets don’t necessarily behave as the economists think they should.  As a result, all the modeling and laboratory testing economic results “proving” market efficiency should be viewed cynically.  I believe that even though carbon pricing advocates have convinced themselves that somehow carbon pricing is different than a tax, the reality is that because of the limited options for compliance any carbon price is treated just like a tax by electric generating operators.  Because energy taxes are inherently regressive, the carbon price result is not in the best interest of low-income ratepayers.

There is another aspect to carbon emissions reductions that is relevant to FERC.  In order to replace firm, dispatchable fossil-fired capacity the total costs to make in-kind replacement with renewable wind and solar have to be included.  No one at the technical conference addressed how a carbon price signal for generators would lead to the development of the transmission and ancillary grid support services necessary to support intermittent and diffuse wind and solar generation.  An electric system carbon price requires any generator that emits CO2 to include a carbon price in their bid which serves to provide the non-emitting generators with more revenue.  However, solar and wind generators are not paying the full cost to get the power from the generator to consumers when and where it is needed.  Because solar and wind are intermittent, as renewables become a larger share of electric production energy storage or energy now provided by traditional generating sources will be needed but there is no carbon price revenue stream for energy storage.  Because solar and wind are diffuse, transmission resources are needed but solar and wind do not directly provide grid services like traditional electric generating stations.  Energy storage systems could provide that support but they are not subsidized by the increased cost to emitting generators.  When the carbon pricing proposal simply increases the cost of the energy generated, I think that approach will lead to cost shifting where the total costs of fossil fuel alternatives have to be directly or indirectly subsidized by the public.

RFF and the economists at the FERC Technical Conference all agree that an economy-wide carbon price that applies a uniform price on CO₂ emissions, regardless of the source, is the ideal solution.  On the other hand, speakers at the conference admitted that this ideal implementation was unlikely.  Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around the globe rather than actually reducing it. Economic leakage is a problem where the increased costs inside the control area leads to business leaving for non-affected areas.  There also is an economic leakage effect in electric systems where a carbon policy in one jurisdiction may affect the dispatch order and increase costs to consumers in another jurisdiction.  As a result, work arounds are necessary to address leakage which complicates the implementation and may lead to unintended consequences.

RFF’s third attribute stated that ‘A carbon price encourages individuals and businesses to reduce their carbon emissions more than conventional regulations”.   There are several problems with this ideal.  In a situation where there is a specific target like New York’s CLCPA 2040 target for zero emissions from the electric sector, it is necessary to consider the total costs and then the necessary carbon price. In order for a carbon price to effectuate this change the carbon price has to equal the cost of the conversion divided by the total tons emitted over the implementation period.  I conservatively estimated the cost for New York to meet the state’s goal of a zero-emissions electric sector by 2040 as $620 per ton.  The cost for converting the country by 2035 as has been proposed would be much higher because the number of years in the implementation period is shorter and the reduction costs themselves would be higher because New York’s starting point for emissions is relatively lower.  Recall that the highest social cost of carbon value that New York is considering is no more than $421 per ton.

The second problem is that individuals and businesses also have limited opportunities to reduce carbon emissions.  One commentator points out 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. Therefore, the real intention is to make fossil fuels so expensive that renewables can eventually become competitive, along with carbon capture and sequestration, hydrogen heating etc.”

In order for a carbon price to be more effective than conventional regulation the funds received will have to 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 range of SCC values representing the value of reducing CO2 today to prevent damages in the future.

Theory says that the carbon price alone can incentivize lower emitting energy production and that the market choices will be more efficient than government-mandated choices. Ultimately the market signal question is whether the SCC value is sufficient to incentivize the market to invest in zero GHG emitting generation resources.  There is no sign that RGGI motivated the market to act and it is not clear that the carbon pricing schemes proposed under the purview of FERC will provide enough incentive either.

The final RFF attribute stated that “A carbon price creates a new revenue stream that can be used in a number of ways.”  This attribute is more of a concern on the value of the approach than a direct impact on the electric generation sector.  The revenue stream from a carbon pricing stream could be very large.  In the classical theory of carbon pricing those revenues are re-distributed to offset other taxes so that the consumers come out whole.  In practice all or part of the revenues have usually been diverted away from direct consumer rebates to fund carbon reduction programs. If carbon reduction programs are dependent upon a continuing revenue stream there is a fundamental problem.  As CO2 is reduced revenues decrease and eventually either the carbon price has to increase to a very high level or the revenues used to fund mitigation programs will be insufficient to make further reductions.

Conclusion

In order to convince me that carbon pricing has a hope of working in the US electricity market I would need to see an estimate of the cost to convert the nation’s electric system to zero emissions and combine that with recent emissions to develop a cost per ton for the transition.   I believe that the cost for converting the country by 2035 would be much higher than any estimate of the social cost of carbon.

If the estimated emissions reduction cost per ton is higher than the social cost of carbon, then the costs to mitigate climate change effects are greater than the alleged impacts.  A rational alternative response would be to invest in research and development to produce cheaper zero emissions electric generating resources and finance adaptation measures until such time that cost-effective zero-emission resources are available.  I asked if FERC does not hold the States to this just and reasonable standard then who will?

I concluded that RTO/ISO market rules that incorporate a state-determined carbon price in RTO/ISO markets cannot be just and reasonable for the rate payers whatever the value to the RTO/ISO market operators.  I note that among the advocates for carbon pricing at the Technical Conference were RTO/ISO operators who apparently believe that carbon pricing will make their regulatory responsibilities easier.  However, a carbon price will have significant impacts on consumers and not cost effectively reduce CO2 emissions.

FERC Carbon Pricing Policy Statement

On October 5 Anthony posted my article on the Federal Energy Regulatory Commission (FERC) technical conference regarding Carbon Pricing in Organized Wholesale Electricity Markets held on September 30, 2020.  On October 15, 2020 FERC proposed a policy statement to “clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. The proposed policy statement also seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules.” This post alerts WUWT readers to the opportunity to provide comments on that policy statement.

Policy Statement Comments

According to the FERC press release:

The proposed policy statement follows the September 30, 2020, technical conference at which participants identified a diverse range of potential benefits from proposals to integrate state-determined carbon pricing into the regional markets. Those benefits include the development of technology-neutral, transparent price signals within the markets and providing market certainty to support investment.

States are taking the lead in efforts to address climate change by adopting policies to reduce their GHG emissions. Currently, 11 states impose some version of carbon pricing, and other entities, including the regional markets, are examining this approach. Participants at the technical conference said carbon pricing is an example of an efficient market-based tool to incorporate state public policies into regional markets without diminishing state authority.

Today’s proposal finds that regional market rules incorporating a state-determined carbon price can fall within the Commission’s jurisdiction over wholesale rates. However, determining whether the rules proposed in any particular Federal Power Act (FPA) section 205 filing do fall under FERC jurisdiction will be based on the specific facts and circumstances. The Commission is seeking comment on the appropriate information to consider when reviewing such a filing, including:

        • How do the relevant market design considerations change depending on the manner in which the state or states determine the carbon price? How will that price be updated?
        • How does the FPA section 205 proposal ensure price transparency and enhance price formation?
        • How will the carbon price or prices be reflected in locational marginal pricing?
        • How will the incorporation of the state-determined carbon price into the regional market affect dispatch? Will the state-determined carbon price affect how the regional market co-optimizes energy and ancillary services?
        • Does the proposal result in economic or environmental “leakage,” in which production may shift to more costly generators in other states, without regard to their carbon emissions? How does the proposal address any such leakage?

The Commission invites comments on this Proposed Policy Statement by November 16, 2020 and reply comments by December 1, 2020. Comments must refer to Docket No. AD20-14-000, and must include the commenter’s name, the organization they represent, if applicable, and their address in their comments.

 

Comments, identified by docket number [AD20-14-000], may be filed electronically at http://www.ferc.gov in acceptable native applications and print-to-PDF, but not in scanned or picture format. For those unable to file electronically, comments may be filed by mail or hand-delivery to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street, NE, Washington, DC 20426.

 

Policy Statement

If you want to participate in a process where your comments could affect policy I encourage you to read the policy statement itself.  I will summarize its contents below.

The policy statement starts with a background section.  It notes that states are currently leading the charge to address climate change by adopting policies to reduce their greenhouse gas emissions (GHG) and frequently focus on the electric sector.  It notes that:

Carbon pricing has emerged as an important, market-based tool in state efforts to reduce GHG emissions, including efforts to reduce GHG emissions from the electricity sector. In this proposed policy statement, we use the term “carbon pricing” to include both “price-based” methods adopted by states that directly establish a price on GHG emissions as well as “quantity-based” approaches adopted by states that do so indirectly through, for example, a cap-and-trade system.

The policy statement notes that even though the “Commission is not an environmental regulator” they still have to address proposals that incorporate a state-determined carbon price into Regional Transmission Operators (RTO) or Independent System Operators (ISO) markets.  They conclude that carbon pricing is not unlike other filings that they address so this should be no different.

In the discussion section they “clarify that the Commission has the jurisdiction over RTO/ISO market rules that incorporate a state-determined carbon price in those markets.”  Then they go on to argue that “it is the policy of this Commission to encourage efforts to incorporate a state-determined carbon price in RTO/ISO markets”.  I am not going to try to interpret their legal arguments justifying this policy.

In the sub-section titled “Commission Encouragement of Efforts to Incorporate a State-Determined Carbon Price into RTO/ISO Markets” the policy statement says:

As noted, on September 30, 2020, the Commission held a technical conference on the integration of state-determined carbon pricing in RTO/ISO markets. Participants at the conference identified a diverse range of potential benefits that could arise from such a proposal. Those benefits include the development of technology-neutral, transparent price signals within RTO/ISO markets and providing market certainty to support investment. In addition, participants explained that carbon pricing is an example of an efficient market-based tool that incorporates state public policies into RTO/ISO markets, without in any way diminishing state authority.

We agree that proposals to incorporate a state-determined carbon price in RTO/ISO markets could, if properly designed and implemented, significantly improve the efficiency of those markets. Accordingly, we propose to make it the policy of this Commission to encourage efforts by RTOs/ISOs and their stakeholders—including States, market participants, and consumers—to explore establishing wholesale market rules that incorporate state-determined carbon prices in RTO/ISO markets.

The discussion concludes that:

The Commission will review any FPA section 205 filing that proposes to establish wholesale market rules that incorporate a state-determined carbon price in RTO/ISO markets based on the particular facts and circumstances presented in that proceeding.  Nevertheless, certain questions and issues are likely to arise in any such filing.

They specifically ask for comment on the questions listed in the press release quotation above that are the “appropriate information and considerations the Commission should take into account or whether different or additional considerations may be or must be taken into account” to “determine whether an RTO/ISO’s market rules that incorporate a state-determined carbon price in RTO/ISO markets are just, reasonable and not unduly discriminatory or preferential.”

Conclusion

For the denizens of this blog this is your opportunity to comment on something that could affect policy.  I suggest that those who are skeptical of the value of GHG emission reduction policies concentrate on whether a state-determined carbon price in RTO/ISO markets can be just, reasonable and not unduly discriminatory or preferential.

I intend to personally comment on the concerns I raised in my personal blog post on the FERC technical conference.   The technical conference convinced FERC commissioners that carbon-pricing was an “efficient” market-based tool but nobody asked and no one proved that they work.  In my opinion the first rule of efficient policy is that it works.  I believe that those who support carbon pricing on theoretical economic grounds are overlooking or are unaware of practical issues I have raised.  Cynic that I am, I think the primary value to FERC and the RTO/ISO operators is that the carbon price makes their lives easier.  That it will have significant impacts on consumers and not do anything for the climate is somebody else’s problem.

Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York.  This represents his opinion and not the opinion of any of his previous employers or any other company with which he has been associated.

 

September 2020 FERC Carbon Pricing Technical Conference

The Federal Energy Regulatory Commission (FERC) hosted a technical conference regarding Carbon Pricing in Organized Wholesale Electricity Markets on September 30, 2020.  I had an overview post published at the Watts Up With That blog.  This post addresses potential implications of the conference on New York policy.

I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003.  I have been following the New York carbon pricing initiative since that began.  I understand the basis of the rationale for a carbon price and understand some of the complexities associated with implementing such a program.  I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs.  This represents my opinion and not the opinion of any of my previous employers or any other company I have been associated with.

Background

Carbon pricing is a climate policy approach that charges sources for the tons of carbon dioxide that they emit.  A Resources for the Future summary lists several attributes that they claim makes carbon pricing more attractive than other potential policies to reduce carbon dioxide emissions:

      • Carbon pricing allows emitters to choose the most efficient method to reduce emissions.
      • An economy-wide carbon price applies a uniform price on CO₂ emissions regardless of the source.
      • A carbon price encourages individuals and businesses to reduce their carbon emissions more than conventional regulations.
      • A carbon price creates a new revenue stream that can be used in a number of ways.

The problem is that there is a large gap between the elegant theory of carbon pricing and real world carbon pricing.  In theory applying a carbon price across the globe on all sectors could work as advertised but the reality of a carbon price for one sector in one limited area is that it is a regressive tax and a prescription for potential leakage and misapplied price signals.

        • Proponents have convinced themselves that somehow this is different than a tax but, in my experience working with affected sources, any carbon price is treated just like a tax and very rarely is it used to offset other taxes. It is paid by all who consume electricity including those who can least afford it so it is a regressive tax.
        • Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around the globe rather than actually reducing it. Similarly, economic leakage is a problem where the increased costs inside the control area leads to business leaving for non-affected areas. There also is an economic leakage effect in electric systems where a carbon policy in one jurisdiction may affect the dispatch order and increase costs to consumers in another jurisdiction.
        • The revenue stream from a carbon pricing stream could be very large. In the classical theory those revenues are re-distributed to offset other taxes so that the consumers come out whole.  In practice all or part of the revenues have usually been diverted away from direct consumer rebates to fund carbon reduction programs.
        • If a carbon price is being used to fund reduction programs there is a fundamental problem. As CO2 is reduced revenues decrease and eventually either the carbon price has to increase to a very high level or the revenues used to fund reduction programs will insufficient.
        • Market participants don’t behave as expected by economic market theory so the markets don’t necessarily behave as the economists think they should. As a result, all the modeling and laboratory testing results should be viewed cynically.
        • The carbon price signal is inefficient. I think that the full cost for CO2 reduction options exceed the negative externality costs that are the rationale for the carbon price.
        • The carbon price signal is indirect. Because there are no cost-effective add-on controls for CO2 reductions, affected sources need to switch to a lower emitting fuel or be replaced in whole or part by alternative generation.
        • In order to replace firm, dispatchable capacity the total costs to make in-kind replacement with renewable wind and solar are high and often not included in carbon price planning.
        • Often overlooked are the daunting problems of the implementation logistics of a pricing program.
        • Finally, a real-world study by the Regulatory Analysis Project, Economic Benefits and Energy Savings through Low-Cost Carbon Management, raises additional relevant concerns about carbon pricing implementation. They basically conclude that if you want to reduce carbon emissions it is more effective to target your financing to get the biggest reduction bang for the buck than to set a carbon price.

The September conference was held in response to requests for a technical conference to address this topic.  According to FERC:

“The purpose of this conference is to discuss considerations related to state-adoption of mechanisms to price carbon dioxide emissions, commonly referred to as carbon pricing, in regions with Commission-jurisdictional organized wholesale electricity markets (i.e., regions with regional transmission organizations/independent system operators, or RTOs/ISOs). This conference will focus on carbon pricing approaches where a state (or group of states) sets an explicit carbon price, whether through a price-based or quantity-based approach, and how that carbon price intersects with RTO/ISO-administered markets, addressing both legal and technical issues.”

My other post described the three panel discussions at the conference:

        • Legal Considerations for State-Adopted Carbon Pricing and RTO/ISO Markets,
        • Overview of Carbon Pricing Mechanisms and Interactions with RTO/ISO Markets, and
        • Considerations for Market Design.

Experts were invited to submit comments to FERC before the conference (available in the event details).  During the conference each expert gave an opening statement and then FERC Commissioners posed questions to the panelists.  There is an audio recording of the conference available and I added the approximate times of each speaker to a copy of the agenda here.

New York Participation

There were three panelists from New York.  Two panelists from the New York Independent System Operator (NYISO) participated. Richard Dewey, President & CEO, was a panelist on the Overview of Carbon Pricing Mechanisms and Interactions with RTO/ISO Markets panel and Rana Mukerji, Senior Vice President, Market Structures, was on the Considerations for Market Design panel.  If you recall the NYISO carbon pricing proposal it is not surprising that both their submittals and comments were more or less advertisements for their proposal and arguments supporting it.  Michael Mager, counsel to Multiple Intervenors, an association of approximately 60 of New York’s largest industrial, commercial, and institutional energy consumers, also participated in the Considerations for Market Design panel.

According to Dewey: “The NYISO firmly believes that its Carbon Pricing Proposal is the best option to maintain efficient competitive wholesale electricity market outcomes and to provide New York State with a powerful tool to achieve the CLCPA requirements. Carbon pricing in the NYISO’s wholesale markets has the strong advantage of signaling where new resources should locate for the highest value to the system and consumers. Internalizing a state-determined social cost of carbon dioxide emissions in the NYISO’s energy market pricing would send a meaningful financial investment signal to developers that identifies efficient ways to address State-mandated carbon emission reductions while more efficiently incenting resources to locate and perform according to the needs of the system.”

Mukerji said “In June 2019, the NYISO presented a complete Carbon Pricing Proposal to its stakeholders after nearly two years of stakeholder discussion and design effort. Reflecting a meaningful state/regional-determined price of carbon dioxide emissions in our wholesale electricity markets will allow the co-optimization of energy and ancillary services to develop least-cost solutions that maintain competitive markets and reliable operation of the electric system, while more fully considering the direct economic implications of state and regional initiatives to promote efficient market outcomes.”

Mager was unique amongst the panelists in that he represented electric consumers.  He has been immersed in the NYISO carbon policy development process and noted that “the development of a draft carbon pricing proposal within the NYISO stakeholder process revealed a number of areas of concern for large energy consumers that warrant consideration”.  He brought up four concerns:

        1. The appropriate scope of a carbon pricing program, specifically the concern that NYISO’s single-sector, single regional transmission organization proposal would cause leakage;
        2. How the carbon price would be calculated and updated;
        3. How the carbon revenues would be treated; and
        4. Whether carbon pricing can be implemented in a manner that protects consumers from double payments.

The first three concerns were addressed above.  The fourth concern is an implementation issue related to the fact that consumers are already paying for programs to reduce carbon emissions and it is a concern that adding an electric system carbon price will mean consumers pay for that and the old programs too.

Carbon Pricing Theory

The comments submitted by Joseph Bowring, independent market monitor for PJM, represented the majority opinion of the participants: “a market approach to carbon is preferred to an inefficient technology or unit specific subsidy approach or inconsistent RPS rules that in some cases subsidize carbon emitting resources”.  While I don’t disagree with the sentiment, I want to point out that it also represents a bias of most of the participants who work with electric markets.  Namely, a carbon price simplifies their lives because they only have to deal with one carbon policy and not a whole host of rules and subsidies that often have unintended consequences to the electric system.

Nearly every panelist who participated recognized that the theory of a carbon price works best across all sectors and, in this case, across all jurisdictions covered by FERC.  One thing that was missing in the conference was a discussion of the cutoff point the between the likelihood of success for a national carbon price across all sectors and the reduced possibility of success for the much more likely single-sector price in limited jurisdictions.

I do want to call out one carbon theory comment.  Dr. Matthew White, Chief Economist (ISO New England), noted during his comments (starting at the 3:25:55 mark of the audio) that as an economist he supported carbon pricing because “it can be simple, transparent and cost effective”.  He went on to claim that the experience with the Acid Rain Program supported carbon pricing: “To see this you don’t have to rely on economic theory you can look no further than our nation’s experience with the sulfur dioxide market and how that priced emissions over the last three decades. That program has effectively curbed our region’s acid rain problem as it did throughout much of the United States.  It has done so at far lower cost than policy makers anticipated and it presented no impediments to the nation’s electricity markets nor to my knowledge the system’s reliability.”

Unfortunately, Dr. White picked a poor example of a market-based program as a comparison to carbon pricing.  While there is no doubt that the Acid Rain Program (ARP) was responsible for massive reductions and did so at much lower than anticipated costs the key question is why did that occur.  There are cost-effective add on controls for SO2 and many facilities installed those controls but there aren’t any similar options for CO2.  One of the biggest unanticipated results of the ARP was fuel switching to coal with lower sulfur contents.  That was cost-effective because the railroads were de-regulated and it became economical to ship coal from Wyoming’s Power River Basin all over the country.  While fuel switching is a viable control option for CO2 the fact is that nearly all the coal and most of the residual oil generation in New York and New England has already switched so future reduction potential from fuel switching is small.  The supposition that the success of the ARP means that a carbon pricing scheme will be successful is not supported by the observed reasons for the ARP reductions.

Wolak Comments

I also want to highlight the comments submitted by Frank A. Wolak, Director, Program on Energy and Sustainable Development, at Stanford University as they relate to carbon pricing theory and New York policy.  He makes three points:

“First, carbon pricing is the “least cost” way to reduce the carbon content of an electricity sector, and of a national or global economy. Second, it is impossible to measure the carbon content of electricity imported into a regional wholesale electricity market from a neighboring control area. This fact has important implications for policies aimed at limiting GHG emissions leakage. Third, in an uncertain economic environment there is a difference between a carbon tax and a cap-and-trade market. This fact is increasingly relevant to regions with significant intermittent wind and solar generation resources.”

Wolak makes an interesting argument for the effectiveness of carbon pricing: “subsidizing green is a much more expensive way to reduce GHG emissions than taxing brown.” He explains that the subsidies used to build clean, green facilities ensure that they get built but does not guarantee emission reductions.  He points out that “the process of raising these revenues destroys economic value. Less of the product or service providing the subsidy is produced and consumed. The larger the subsidies paid, the greater the amount of economic value that must be destroyed to finance them.”  On the other hand, taxing emissions or “brown” makes it more expensive to produce GHG emissions. “The resulting higher price of goods and services that contain GHG emissions provides strong incentives to find the cheapest, least greenhouse-gas-emitting replacement.”  He claims that “The case for carbon pricing is clear relative to policies that subsidize less GHG-emissions-intensive energy sources. In fact, many studies even find that these subsidy policies increase national or global GHG emissions.”

His second point is especially important relative to the NYISO carbon pricing proposal.  He uses the current situation in the California market to argue that it is impossible to estimate out-of-jurisdiction carbon emissions.  He explains: “Measuring the carbon content of electricity produced in California is straightforward. The GHG emissions of all in-state generation units are measured in real-time. By contrast, with electricity imports, only the flows of energy into the state can be measured, not what color the electrons are—green, brown, or other shades in between.”   It turns out that trying to handle this has been “a source of never-ending debate among stakeholders”.  He concludes “The only definitive conclusion from this debate is that there is no right answer, except to have the geographic footprint of the carbon market be at least as large as the geographic footprint of the wholesale electricity market.” From what I have seen of the NYISO proposal for a New York only carbon price, it will engender the same amount of debate and lack of a right answer.

His third point concludes that carbon pricing is the least cost path to reduce GHG emissions and that “a carbon tax rather than a cap and trade market is likely to do this at a lower cost to consumers and less administrative burden in both the short and long term”.   In this context I agree but not for the underlying reasons he gives.  For the affected sources the reality is that carbon cap and trade markets are treated like a tax so all the administrative burdens just add to the cost.  From what I have seen many economists don’t realize that fossil-fired generators in de-regulated markets have very short-term outlooks and purchase allowances from a cap and trade program merely as a cost of doing business.  The future cost of carbon is not as important to their plans as economic theory would suggest and nobody is buying allowances as an investment strategy.

Conclusion

My ultimate problem with carbon pricing, in general, and the NYISO carbon pricing proposal, in particular, is that the reality of any carbon pricing scheme that can get implemented is nowhere near the global, all sector ideal.  Sadly no one at the conference offered a suggestion for a cutoff point that would ensure success in the range between the two extremes. As shown, there are a whole host of practical problems that have to be overcome for a carbon price to successfully reduce CO2 emissions, maintain affordability and preserve current reliability levels.  To date, NYISO has given short shrift to the practical concerns raised by Mr. Mager and myself.

There are vocal advocates for carbon pricing and their views were well represented at this conference.  I believe that those who support carbon pricing on theoretical economic grounds are overlooking or are unaware of the practical issues I have raised.  Most of the other supporters clearly have vested interests.  The electric system operators are simply looking for an easier way to deal with the admittedly ineffective and potentially dangerous to reliability policies currently in use.  Others smell a revenue stream and want to glom onto that money for their own interests.  As I have shown for NY that may not necessarily be the best thing for electric system consumers.

Mike Mager’s comments sums up the situation well: “In conclusion, the debate about the pros and cons of carbon pricing cannot be divorced from the numerous underlying, implementation-type issues, the resolution of which may have significant impacts on consumers.”

New York Independent System Operator Siena College Carbon Pricing Poll

In an example of polling to achieve a desired public relations outcome, on September 28, 2020 the New York Independent System Operator (NYISO) and the Siena College Research Institute released a new poll of New Yorkers which they say found a large majority of respondents are in favor of incorporating a social cost of carbon dioxide emissions into competitive wholesale energy markets.  I have been following and commenting on the NYISO carbon pricing proposal since the beginning and I want to bring up some points that I think would have changed the outcome of the poll.

I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003.  During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting.  I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs.  This represents my opinion and not the opinion of any of my previous employers or any other company I have been associated with.

The basic problem with the Siena poll is that polling on carbon pricing to someone who probably has never heard about carbon pricing or the social cost of carbon (SCC) means that the description of those concepts can bias the results.  In this post I will provide background on carbon pricing and the SCC then discuss the poll itself to show that the description provided biases the poll answers.

Background

I recommend Bjorn Lomborg’s latest book titled “False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor, and Fails to Fix the Planet” and agree with most of his arguments.  His first recommendation for fixing climate change is to “effectively implement a tax on CO2 emissions.  He notes that “Most economists agree that the most effective way to reduce the worst damage of climate change is to levy a tax on CO2 emissions.”  The basic theory is that the true costs of CO2 emissions are not reflected in the cost to the consumer so the solution is to incorporate those costs with a carbon price.  Someday I will explain my issues with the theory of the approach and his reasoning but in this instance the only thing I want to discuss is his description of the carbon tax.  He states that the optimal climate policy requires a globally coordinated carbon tax.  In other words, he advocates a tax on all sectors that emit CO2 across the world.

I have been following the concept of carbon pricing for quite some time.  While I agree that the theory that setting a carbon price could lead to the least-cost decarbonization, I also believe that there are a whole host of practical problems that mean it won’t work as suggested by the theory.  That is especially true if the carbon price is not implemented globally across all sectors.  Those concerns include the following: leakage, revenues over time, theory vs. reality, market signal inefficiency, control options, total costs of alternatives, and implementation logistics.  I will discuss the most pertinent of these concerns to the NYISO carbon pricing proposal: leakage and market signal inefficiency.

Pollution leakage refers to the situation where a pollution reduction policy simply moves the pollution around geographically rather than actually reducing it.  Ideally you want the carbon price to apply to all sectors across the globe so that cannot occur.  Lomborg notes “that is possible only in a fairy-tale world” and that it won’t happen in real life.  As a result, a carbon price in one jurisdiction and not others will very likely cause leakage.  The NYISO carbon price proposal is proposed for just for the New York control area in a highly connected regional electric transmission grid that is designed to operate the lowest cost generation.  Any significant carbon price just in New York will incentivize generation outside New York simply moving the CO2 pollution elsewhere.  Note that it is even worse because the carbon price is only on the electric generating sector. Even worse, if the price gets too high then sources that stay in New York could generate their own electricity outside of the NYISO carbon price market.

Setting the market price is a controversial topic.  Lomborg explains how economists calculate the costs of carbon emissions today on the future.  The theory is that when you have calculated all the climate change costs then you can back-calculate the appropriate carbon price for today to prevent those future losses.  Lomborg strays from the carbon price orthodoxy by arguing that it is appropriate to balance the costs of the program against the climate change costs.  He calculates his carbon price estimates based on “creating the best possible world for the generations that succeed us; that is to create the maximum possible welfare for subsequent generations”.   He advocates a realistic, moderate, and increasing carbon tax policy that starts with a price of around $20 per ton and ends up at $270 per ton by the end of the century.  The NYISO carbon pricing proposes to use a carbon price value determined by New York State.

The Climate Leadership and Community Protection Act includes a provision that mandates the Department of Environmental Conservation develop a value on carbon.  I prepared a non-technical summary on the value of carbon or Social Cost of Carbon (SCC) earlier this year.  The law states that “The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions”. The Social Cost of Carbon (SCC) is the present-day value of projected future net damages from emitting a ton of CO2 today.  The value chosen depends on a lot of assumptions and value judgements.  The Obama Administration Interagency Working Group (IWG) on the Social Cost of Carbon developed a 2020 value of about $50 per ton but the Trump Administration disbanded the IWG and stated that the estimates generated by the Interagency Working Group were not representative of government policy.  Currently, Federal projects use SCC estimates based on the same approach as the IWG that differ in two aspects: the only damages that were considered were those in the United States and different values were used to convert to present costs.  That value is only $7 per ton.

The NYISO claims benefits for their carbon pricing proposal based on the presumption that the funds received will be spent effectively or that the addition of the carbon price will change the viability of CO2 emitting plants relative to carbon-free plants.   I have evaluated the results of the investments made by regulatory agencies to date in New York’s existing carbon pricing program, the Regional Greenhouse Gas Initiative (RGGI).  The RGGI states have been investing investments of RGGI proceeds since 2008 but their investments to date are only directly responsible for less than 6% of the total observed reductions.  Furthermore, from the start of the program in 2009 through 2018, RGGI has invested $2,775,635,415 and reduced annual CO2 emissions by 3,091,992 tons.  The resulting cost efficiency, $898 per ton reduced, far exceeds the $50 per ton IWG SCC that represents the value of reducing CO2 today to prevent damages in the future.  It is also unlikely that the carbon price adder suggested will affect the economic viability of existing plants.

An even more controversial topic is what should be done with the proceeds.  In theory, the costs of the carbon price will be returned to the consumers so that this does not become a regressive tax.  However, I generally have doubts that the State of New York will return a revenue stream of any kind without taking some kind of cut or taking the all the money.  I am particularly worried that the Climate Leadership and Community Protection Act (CLCPA) advisory panels all seem to think that this revenue stream will be available to fund the projects they want developed to meet their sector targets.

The Poll Results

According to the NYISO press release, these were the key findings from the Siena College poll:

When respondents were first asked about the NYISO proposal, a plurality were in favor: 47% support, 36% oppose, and 17% don’t know/no opinion.

After learning more about the proposal and its benefits: 71% of respondents were more likely to support the proposal if they knew the proposal would replace the oldest, most polluting plants with cleaner, less polluting generators; 68% of respondents were more likely to support the proposal when told the growth in clean technology would benefit the state’s economy; 62% of respondents were more likely to support when told the proposal would reduce emissions in urban communities most impacted by power plant emissions; and 54% of respondents were more likely to support the proposal when told investments in new carbon-free energy would increase.

Respondents were then asked again how they felt about the proposal and support increased significantly: 62% support (+15 pts); 27% oppose (-9 pts); and 11% don’t know/no opinion (-6)

The poll, conducted by the Siena College Research Institute, also found that 79% of respondents support the 2030 and 2040 goals laid out in the Climate Leadership and Community Protection Act (CLCPA). Notably, that support extended across all ideological, race, sex, age, geographic, income and religious crosstabs.

The Poll Questions

I am skeptical of polling results because I believe that the poll questions can bias the responses to get the outcome desired.  The Siena Poll Questions provided by the NYISO clearly justify my skepticism.  I will list the questions used in the poll and provide my italicized comments for each.

Q33: Currently, NYS gets about 25% of its electricity from renewable sources.  Do you support or oppose the goal of NYS getting 70% of its electricity from renewable sources by 2030, increasing to 100% from zero-emitting sources by 2040?

I have not been able to get to the Siena College Research Institute web page because it took too long to respond.  The label suggests that there were questions before this one.  If those questions discussed renewable energy it could certainly color the response to this question. 

 More importantly, there is an error in this question. The CLCPA includes nuclear as renewable and that was not included in the question “NYS gets about 25% of its electricity from renewable sources”.  According to the NYISO Annual Net Energy Generation by Zone and Type – 2019 renewable sources including nuclear 61.4% of the total.  That anyone would support a goal that requires increasing energy from renewable resources from 25% to 70% in less than ten years clearly does not understand the electric energy system.

Q34.  One proposal is to add the social cost of carbon to the price of electricity.  The social cost of carbon is an estimate, in dollars, of the economic and public health damages that could result from emitting GHG into the atmosphere.  One estimate is that this proposal could increase customer costs in the short run but return larger cost savings to consumers in the long run.  Do you support or oppose adding the social cost of carbon to the price of electricity?

The definition is adequate but providing only a single defining statement that suggests that costs today will provide savings in the long run is inadequate and biases the responses.  My non-technical summary explains that the increase to customer costs are real but the social cost of carbon “benefit” value depends on the judgement of those developing the numbers. The benefits change if global impacts, nation-wide impacts, or for the sake of argument, just the benefits that would accrue to New Yorkers if NY emissions are reduced because of the carbon price.  This short description does not explain that the IWG costs and benefits are calculated out three hundred years.  Because the biggest climate change impacts occur near the end of that period “returning cost savings to consumers” means consumers many generations in the future.  There is another aspect to paying now for potential damages far in the future.  The money spent today is not available to spend on projects that could alleviate future damages.

Q35.  Industry experts say that adding the SCC to the price of electricity will lead to a number of outcomes.  For each prediction that experts have made, tell me if that outcome makes you more likely to support adding the social cost of carbon to electricity, less likely or that it has no effect on your position.

The NYISO has a vested interest in promoting its carbon pricing proposal.  Naturally the following questions tout the benefits claimed for the proposal.  As shown above there are issues with the NYISO’s benefit claims.

Q35A.  They predict the oldest, most polluting power plants in NY will be replaced with cleaner, less polluting generators.

The NYISO carbon pricing proposal alleges that the added cost from the addition of the SCC price to the sources emitting CO2 will cause the replacement of the old, dirty power plants.  In order for that to happen, then the additional cost has to make the old plants less competitive than other operating plants.  I think there is evidence that is not the case and that means the only effect of the carbon price will be to increase consumer prices to cover the carbon price cost for plants that need to run to maintain reliability.

Q35B.  They predict emissions will be reduced in urban communities most impacted by power plant emissions.

The only NY urban community directly impacted by power plant emissions is New York City.  Because the City is mostly on islands which results in transmission constraints, power plants need to operate in the City.  The old “peaker” units that fulfill this need have been recently targeted as having disproportionate impacts to environmental justice communities.

 The NYISO was put in place to operate the electricity system in a de-regulated market.  The press release says “Carbon pricing uses market-based price signals to achieve reductions in emissions from fossil fuel-based generators”.  The de-regulated market relies on market signals for all its future planning strategies. 

 The NYISO claims “competitive wholesale electricity markets have provided, and continue to provide, significant benefits to electricity consumers, including fuel cost savings, improved generation efficiency, reduced reserve requirements, and reduced emissions.”  However, in the case of the oldest, most polluting power plants in New York City, it has been a failure with respect to the most likely outcome for regulated electric utilities.  There has been a need to replace the old peaking turbines in the City for years and there have been multiple attempts by the merchant owners to develop new and much cleaner replacement units since 2000.  However, none of the units have been built apparently because the market signal was insufficient for the investment.  Because of the clear need I have no doubt that the DEC would have explained the need, a regulated utility would have applied to build replacements, and the Department of Public Service would have approved the construction of clean new power plants to reduce local impacts in the City.  To claim that the carbon price will change the current dynamic in and of itself is wishful thinking.

Q35C.  They predict investments in new carbon free energy technology will increase.

This is true if the carbon price proceeds are directed to investments in new carbon free energy technology.  If that is the case then there will be less and possibly no money available to offset the higher electricity prices for those least able to pay.

35D.  They predict growth in clean technology will benefit New York’s economy.

This is the mantra of the CLCPA.  Who am I to argue that a clean technology economy that depends on subsidies to survive can only grow as long as the subsidies continue?

Q36.  Some experts now predict that adding the social cost of carbon to electricity could result in a savings to consumers within a year.  Regardless of whether or not you accept that prediction, after thinking about this proposal for a moment, do you support or oppose NYS moving towards adding the SCC to the electricity or not.

If I had time, I would like to track down the basis for the statement “Some experts now predict that adding the social cost of carbon to electricity could result in a savings to consumers within a year”.  As noted previously the climate change impact benefits will not be evident for years so that won’t result in any savings in a year.  I cannot imagine a realistic scenario where adding to the cost of electricity to consumers will result in savings to consumers.  The only thing I can think of is that the economic modeling used to support the carbon pricing scenario produced that result.  If so, that is an example of hiring a consultant, hoping for a particular answer, getting the answer, and ignoring the absurdity of the result.

Conclusion

The take home message from the poll was that a “large majority of respondents are in favor of incorporating a social cost of carbon dioxide emissions into competitive wholesale energy markets”.   The announcement came out just before the NYISO goes to the Federal Energy Regulatory Commission’s Carbon Pricing in Organized Wholesale Electricity Markets technical conference and argues for their carbon pricing proposal.  It is the culmination of a public relations campaign that includes a web site, datasheet, and videos extolling the virtues of their plan.  The poll clearly was written to get the desired answer.

Unfortunately, while the theory of carbon pricing is admirable, there are practical reasons why it won’t work in practice.  At the top of the list for the NYISO carbon pricing proposal is the fact that it covers one sector in one area in a highly interconnected system.  If the market signal is strong enough to effectuate change then the most likely change is to leak generation outside New York without actually reducing CO2 emissions.  I believe the most likely outcome for New Yorkers is that the NYISO carbon pricing proposal will simply increase the cost of electricity with few if any offsetting benefits.  This poll made no attempt to explain these concerns.

The poll claims that a “large majority of respondents are in favor of incorporating a social cost of carbon dioxide emissions into competitive wholesale energy markets”.   In the first place they did not discuss competitive wholesale electric markets in the questions that were provided.  They asked the public about other concepts that they very likely were hearing about for the first time.  The description of the social cost of carbon and carbon pricing simplified the concepts so much that the possibility of any negative consequences was not mentioned.  The explanations that caused respondents to increase their support for the carbon pricing were based on benefits that are controversial.  As a result, the claim that there is support for this carbon price proposal is based on a biased poll.  I am sure that rewording the poll to reflect an unbiased explanation of carbon pricing and social cost of carbon would have changed the results.

Carbon Price Needed to Fund Climate Leadership and Community Protection Act Reductions

I have been following the concept of carbon pricing for quite some time.  While I agree that the theory that setting a carbon price could lead to the least-cost decarbonization, I also believe that there are a whole host of practical problems that mean it won’t work as suggested by the theory.  One of the problems I have noted is that the actual costs of decarbonization are very large and that means a carbon price would also have to be high.  In this post I try to estimate the carbon price needed to fund the CO2 reductions necessary to meet New York’s Climate Leadership and Community Protection Act (CLCPA) goal to eliminate fossil-fired generation by 2040.

I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003.  During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting.  I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs.  This represents my opinion and not the opinion of any of my previous employers or any other company I have been associated with.

Background

In a post at Watts Up With That, Carbon Pricing is a Practical Dead End,  I noted that carbon pricing proponents have convinced themselves that somehow a carbon price is different than a tax but, in my experience working with affected sources, it is treated just like a tax simply because the affected sources have no options to cost-effectively reduce emissions.  As a result, they just add the carbon price to their cost of doing business – just like a tax.  As a result, the over-riding problem with carbon pricing is that it is a regressive tax raising the price to those least able to afford it.  In that article, I described a number of other practical reasons that cap-and-invest carbon pricing, or any variation thereof, will not work as theorized: leakage, revenues over time, theory vs. reality, market signal inefficiency, control options, total costs of alternatives, and implementation logistics.  In addition, The Regulatory Analysis Project (RAP) recently completed a study for Vermont, Economic Benefits and Energy Savings through Low-Cost Carbon Management, that raises additional relevant concerns about carbon pricing implementation.

In this post I will estimate a cost for decarbonizing the electric sector by 2040, project the CO2 emissions between the present and 2040 and calculate the carbon price needed to make those reductions.

Decarbonization Costs

The first step is to estimate how much electric capacity will be needed in 2040 so I can figure out how much additional wind and solar energy will be needed when fossil fuels are eliminated from New York’s electric generation fuel mix in 2040.  Until I see a convincing argument otherwise, I believe that distributed solar, utility-scale solar, on-shore wind and off-shore wind will provide nearly all the additional energy needed to decarbonize New York’s electric generating sector.  The Citizen’s Budget Commission not only provided a great summary of the CLCPA but also made estimates of the renewable capacity needed as shown in the Forecast of 2040 Capacity (MW) Resources to Meet CLCPA Goals table.

The second step is to estimate the cost of replacement power.  A recent blog post at the edmhdotme blog determined the excess cost of weather dependent renewable power generation in the EU provided a technique and a reference to calculate those costs.  The U.S. Energy Information Administration (EIA) Annual Energy Outlook 2020 published Cost and Performance Characteristics of New Generating Technologies in January 2020.  The document includes a table with Total overnight capital costs of new electricity generating technologies by region that includes development costs for New York City and Long Island (NYCW) and Upstate New York (NYUP).

The Estimated CLCPA Cost for Wind and Solar Additional Capacity Needed for Citizen’s Budget Commission Projected Load table lists the estimated costs for each category.  For the grand total I assumed all the renewables would be in the Upstate New York region.  I could not find an EIA estimate for installed costs for residential solar but I did find a National Renewable Energy Laboratory (NREL) comparison of the 2018 costs which found that residential PV $2.17 per watt and that utility-scale PV with a one-axis tracker was $1.13 per watt.  I estimated the residential solar costs in the table by using the 2.17 to 1.13 ratio from the NREL presentation. The grand total is $169.5 billion.

In 2019 New York electric sector CO2 emissions were 24,866,404 tons.  In 2040 they are supposed to be zero.  If the annual reduction is 1,184,115 tons this goal will be met.  The sum of all the CO2 emitted with that annual reduction is 273,530,329 tons between now and 2040. If the carbon price is set so that the money obtained for the cumulative emissions is sufficient to pay for the $169.5 billion needed for the additional wind and solar capacity, then the carbon price would have to equal $619.54 per ton as shown in the Projected CO2 Emissions through 2040, Total Costs, and Revenues table.

This is an initial estimate of costs.  The $169.5 billion capacity cost does not include the cost to provide storage when the intermittent solar and wind are unavailable, the cost to modify the transmission system to move the diffuse solar and wind where needed, or the cost to provide additoinal transmission support so that the grid can deliver power where needed.  Nor does it include the cost to replace generation because the expected life-time of these renewable resources is on the order of 20 years.  This is also an estimate of the costs only for power generation so the costs to electrify heating, cooking, and water heating needs and the transportation sector are not included.  On the other hand, there should be some reduction of the costs for renewable generation development over time but the scale of that reduction likely is much lower than these unincluded costs.

Conclusion

I have previously stated that market signal inefficiency, the total costs of alternatives, and decreasing revenues over time were three practical reasons that carbon pricing is a practical dead end.  This post quantifies these issues.  This estimate only considered the installed costs of residential solar, utility-scale solar, on-shore wind and off-shore wind but estimates that the carbon price would have to be $681 per ton to provide enough money to build those facilities.  This is an inefficient market signal because the Obama-era Interagency Working group social cost of carbon with a discount rate of 3% and considering global benefits is $50 in 2020 which is an order of magnitude less than the projected carbon price.  Also note that in the Projected CO2 Emissions through 2040, Total Costs, and Revenues table the revenues go down significantly over time.  Because the expected lifetime of the wind and solar resources is on the order of 20 years there will be a continuing need for funding these projects and there won’t be any carbon price revenues available.

My fundamental problem with the CLCPA is that it presumes that the target reductions mandated by the act are technically and financially feasible.  No other jurisdiction remotely approaching the size of New York has reduced its emissions anywhere near the CLCPA targets so there are technical challenges.  This analysis of carbon pricing feasibility projects enormous costs even without including storage and transmission requirements.  Besides the fact that these costs are far above the purported negative externality cost in the social cost of carbon, they are so large that I cannot imagine a scenario where they would be willing accepted by the citizens of the State.  Pielke’s Iron Law of Climate, “While people are often willing to pay some price for achieving climate objectives, that willingness has its limits”, surely will be the inevitable result of these programs.

Court Decision: Interim Social Cost of Greenhouse Gas Metric

This article was also posted at Watts Up With That

Recently a federal district judge found that the Bureau of Land Management (BLM, sorry it was their acronym first) arbitrarily relied on an aggressively scaled-back social cost of greenhouse gases metric to justify a rollback of methane standards for oil and gas equipment.  This post summarizes the decision, the reaction of the trade press, and a discussion on the background of the issue.

Background

The General Accounting Office (GAO) published a report to Congressional requesters, Social Cost of Carbon: Identifying a Federal Entity to Address the National Academies’ Recommendations Could Strengthen Regulatory Analysis, that provides good background information on the current controversy regarding the valuation of greenhouse gas emission climate impacts used by Federal agencies.  The Social Cost of Carbon (SCC) is the metric most commonly used and represents the long-term net economic damages associated with an incremental increase in carbon dioxide or other greenhouse gas emissions in a given year.  In 2009, the Office of Management and Budget and the Council of Economic Advisers convened the Interagency Working Group on Social Cost of Carbon (IWG) to develop government-wide estimates of the social cost of carbon for federal agencies to use in conducting regulatory cost-benefit impact analyses for rulemaking.  The IWG issued updates to the Technical Support Document that included revised estimates of the social cost of carbon in 2013, minor technical corrections in 2015, and enhanced discussion of uncertainties around the estimates in 2016.

In 2016, the BLM promulgated a rule to reduce waste of natural gas from venting, flaring, and leaks during oil and natural gas production activities on onshore Federal and Indian leases.  The benefits out-weighed the costs primarily because the social cost of methane, same idea as the social cost of carbon, IWG values showed benefits.  On March 28, 2017, President Trump issued Executive Order 13783, “Promoting Energy Independence and Economic Growth,” directing the BLM to review the 2016 rule and, if appropriate, to publish proposed and final rules suspending, revising, or rescinding it.  An interim SCC value was prepared as part of the Executive Order  The BLM reviewed the 2016 rule and determined that it would have imposed costs exceeding its benefits based on the interim SCC values and on September 28, 2018 rescinded the rule after determining that it would have imposed costs exceeding its benefits.

The GAO report was prepared to explain the differences between the IWG values and the interim values.  It found “Although both the prior and current estimates were calculated using the same economic models, two key assumptions used to calculate the current estimates were changed: using (1) domestic rather than global climate change damages (see table) and (2) different discount rates (3 and 7 percent rather than 2.5, 3, and 5 percent). As a result, the current federal estimates, based on domestic climate damages, are about 7 times lower than the prior federal estimates that were based on global damages (when both prior and current estimates are expressed in 2018 US dollars and calculated using a 3 percent discount rate).” 

The litigation in question only focused on the adequacy of the Rescission, and not the 2016 Rule itself. In this regard, Judge Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of CA found “that the rulemaking process resulting in the Rescission was wholly inadequate”.  I am only going to focus on one aspect of the decision – the cost benefit calculation.  The Court analyzed whether BLM acted in an arbitrary and capricious manner in using a new model, the “interim domestic” social cost of methane, for its analysis in enacting the Rescission, instead of using the previous social cost of methane model that was developed and used for the 2016 rule.

Trade Press Reaction

The environmental trade press discussed the flaws Rogers used for her decision. Bloomberg Law said the judge “rebuked the Bureau of Land Management for eliminating Obama-era restrictions on releases of the potent greenhouse gas from oil and gas infrastructure on public and tribal lands” and that “Her opinion included a detailed assault on how the land agency used a metric called the social cost of methane, calling the approach ‘riddled with flaws’”.  The Hill quoted parts of the decision: “In its haste, BLM ignored its statutory mandate under the Mineral Leasing Act, repeatedly failed to justify numerous reversals in policy positions previously taken, and failed to consider scientific findings and institutions relied upon by both prior Republican and Democratic administrations” and “In its zeal, BLM simply engineered a process to ensure a preordained conclusion” In the decision’s conclusion she said:  “Where a court has found such widespread violations, the court must fulfill its duties in striking the defectively promulgated rule.”  Energy & Cleantech Counsel discussed the implications of the rejection of BLM’s redefinition of the social cost of methane on other rules.

The environmental activist trade press, not surprisingly, thought the decision was good.  One headline crows: Court Slaps Down Trump Administration’s Rollback Of Methane Rule and another article states “Since the first day they came into office, the Trump administration has sought and failed to undermine the Methane Waste Prevention Rule at every turn – in Congress, through the regulatory process, and in the courts. Today’s ruling shows their efforts are illegal, and provides for the reinstatement of common sense protections that are in the best interest of the American public,” said EDF senior attorney Rosalie Winn.”

Decision Rationale Discussion

In the Costs Exceeded Benefits section of the decision there is a sub-section giving the Court’s background description.  For this discussion, the following is the relevant text, absent footnotes and the legal references:

“In 2016, to estimate the benefits of reducing methane emissions, BLM drew upon the conclusions of an Interagency Working Group (“IWG”) founded under the Administration of George W. Bush. The IWG was specifically organized to develop a single, harmonized value for greenhouse gas emissions for federal agencies to use in their regulatory impact analyses for rulemaking under Executive Order 12866. The IWG’s approach, known as the social cost of greenhouse gases, estimates the present value of the damages caused from each additional ton of greenhouse gas emitted at a point in time, or conversely, the present value of the benefits from reducing a ton of greenhouse gas emissions. As the IWG stated in 2015, these damages must be considered globally “because emissions of most greenhouse gases contribute to damages around the world and the world’s economies are now highly interconnected.” This approach was developed over several years through robust scientific and peer-reviewed analyses and public processes, and represents the best available science on this issue. (Notably, federal agencies have relied on the IWG’s valuation of the impacts of greenhouse gas emissions in rulemaking since 2009, and courts have upheld this approach.”

Firstly, a clarification note.  This paragraph refers to the social cost of greenhouse gases rather than the social cost of carbon.  Carbon dioxide is not the only greenhouse gas and this regulation specifically addressed methane.  The IWG ”Addendum Valuing Methane and Nitrous Oxide Emission Changes in Regulatory Benefit-Cost Analysis” argues that using directly calculated societal cost values for methane and other non-CO2 greenhouse gases rather than global warming potential values (i.e. converting them to CO2 equivalents) is more appropriate. 

The simplistic argument that the social cost of greenhouse gases must be considered globally because it is a global problem overlooks the fact that the rationale for the IWG work was to evaluate costs and benefits of regulations in the United States.  The Federal requirements for these analyses all call for assessments based on national, not global impact. See, for example, discussion by Gayer and Viscusi.

The paragraph notes “This approach was developed over several years through robust scientific and peer-reviewed analyses and public processes, and represents the best available science on this issue”.  While this sounds impressive and scientific the reality is different.  In 2016, when the IWG was preparing their analyses, they noted that “new estimates of the social cost of non-CO2 GHG emissions have been developed in the scientific literature, and a recent study by Marten et al. (2015) provided the first set of published estimates for the social cost of CH4 and N2O emissions that are consistent with the methodology and modeling assumptions underlying the IWG SC-CO2 estimates”.

During the earlier iteration of the IWG work the US Environmental Protection Agency (EPA) realized that a social cost of gases other than CO2 were needed and found that there was a “paucity of peer-reviewed estimates of the social cost of non-CO2 gases in the literature”.  In response the EPA National Center for Environmental Economics developed estimates of the social cost of methane and nitrous oxide consistent with the methodology and modeling assumptions underlying the IWG SCC estimates.  Their work was published in two papers: Marten, A.L., and S.C. Newbold. 2012. Estimating the social cost of non-CO2 GHG emissions: methane and nitrous oxide Energy Policy 51: 957-972 (paywalled) and Marten, A.L., Kopits, E.A., Griffiths, C.W., Newbold, S.C., and A. Wolverton. 2015. Incremental CH4 and N2O Mitigation Benefits Consistent with the U.S. Government’s SC-CO2 Estimates. Climate Policy. 15(2): 272-298 (published online, 2014). (Paywalled)

I suspect that I am not the only one suspicious when an agency prepares a study that forms the basis of the regulatory metric proposed by other agencies.  I question the independence of the results in that approach.  Ultimately, the work and findings of agency work go through political appointees before they are released and there is no question that process motivates particular outcomes.  In anticipation of such cynicism the Addendum states:

“The methodology and estimates described in this addendum have undergone multiple stages of peer review and their use in regulatory analysis has been subject to public comment. With regard to peer review, the study by Marten et al. (2015) was subjected to a standard double-blind peer review process prior to journal publication. In addition, the application of these estimates to federal regulatory analysis was designated as Influential Scientific Information (ISI), and its external peer review was added to the EPA Peer Review Agenda for Fiscal Year 2015 in November 2014. The public was invited to provide comment on the peer review plan, though EPA did not receive any comments. The external peer reviewers agreed with EPA’s interpretation of Marten et al.’s estimates; generally found the estimates to be consistent with the approach taken in the IWG SC-CO2 estimates; and concurred with the limitations of the GWP approach, finding directly modeled estimates to be more appropriate. All documents pertaining to the external peer review, including a white paper summarizing the methodology, the charge questions, and each reviewer’s full response is available on the EPA Science Inventory website.”

I had no idea that the EPA Science Inventory website existed so I looked up this reference. According to the peer review plan: a contractor picked three reviewers, the public, including scientific or professional societies was not asked to nominate peer reviewers, no public nominations were allowed through the Peer Review Agenda, the Agency did not provide significant and relevant public comments to the peer reviewers before they conducted their review, the review was not a public panel, and public comments were not allowed at the panel review.  The fact that no comments were received from the public suggests that this was not well publicized and I am annoyed that the papers are paywalled when my tax dollars paid for the work.  Having to pay for the privilege to review their work is not inclusive.

EPA asked the three external reviewers recommended by a contractor to provide comments: Karen Fisher-Vanden, Professor of Environmental and Resource Economics, Director, Institute for Sustainable Agricultural, Food, and Environmental Science (SAFES), and Co-Director, Program on Coupled Human and Earth Systems (PCHES) at Penn State College of Agricultural Sciences; John Reilly, Senior Lecturer, Sloan School of Management and Co-Director, MIT Joint Program on the Science and Policy of Global Change at the Massachusetts Institute of Technology; and Steven Rose, Energy and Environmental Analysis Research Group, Electric Power Research Institute.  All three are well-qualified to review the work but I have this nagging concern that the reviewers from academia would be reluctant to provide negative feedback lest it affect review of future funding.

The request for peer review focused on the mechanics of vetting the Addendum.  The Science Inventory includes a peer review report that describes the process.  EPA developed a white paper, Valuing Methane Emissions Changes in Regulatory Benefit-Cost Analysis, that described the problem, the two different approaches for estimating societal valuation of impacts, the limitations of the global warming potential approach (GWP), and then developed its estimate of the direct estimation social costs.  The reviewers were asked seven questions about the white paper and the primary Marten et al. reference.  The peer review report includes the responses from the three reviewers and concludes with a summary and response description: 

“EPA recently conducted a peer review of the application of the Marten et al. (2014) non-CO2 social cost estimates in regulatory impact analysis (RIA). Three reviewers considered seven charge questions that covered issues related to the EPA’s interpretation of the estimates, the consistency of the estimates with the social cost of carbo estimates used in RIAs, EPA’s characterization of the limits of the alternative GWP approach to approximate the social cost of non-CO2 GHGs, and the appropriateness of using the Marten et al. estimates in RIAs. The reviewers agreed with EPA’s interpretation of Marten et al.’s estimates; generally found the estimates to be consistent with the social cost of carbon estimates; and concurred with the limitations of the global warming potential approach, finding directly modeled estimates to be more appropriate.”

Judge Rogers claimed that the approach used was “developed over several years through robust scientific and peer-reviewed analyses and public processes”.  I do not accept that the social cost of methane developed by one group, published in two papers, and peer-reviewed by three people is robust science. 

If you are interested in the social cost of GHG emissions metric, the peer review report is a worthwhile read.  It explains the metric and problems well and the comments from the experts indicate that there are significant issues that need to be resolved. 

Conclusion

When judges make decisions based on the “science”, the results generally reflect more their biases than the science itself.   The opinion by Judge Rogers reversed the recission because it “failed to consider scientific findings and institutions relied upon by both prior Republican and Democratic administrations” and “In its zeal, BLM simply engineered a process to ensure a preordained conclusion.”  Based on a review of the specific scientific findings used to develop the social cost of methane the same conclusions could be said for the metric developed by the IWG.

The bigger problem in my opinion, is an inappropriate reliance on peer review in the regulatory process.  Peer review focuses on the veracity of a specific scientific problem.  Even if the validity of the analysis is not subject to the value judgements of the use of certain parameters and assumptions, peer review does not address the needs of the public affected by the regulation.

The social cost of greenhouse gas emissions is a particularly important metric for any emission reduction program related to global warming.  Although there have been some attempts to describe the parameter and how it is used, the thing that is missing is an explanation of the impacts of the input parameters for the layman.  Consider the choice whether the benefits should be considered globally or nationally.  While climate change is a global problem, I am sure the public generally does not understand that the money that they have to spend for emission reductions provide minimal direct benefits to themselves or their families because most of the benefits are elsewhere on the globe.  I am positive that they don’t understand that the calculations of the benefits extend out 300 years and that the majority of expected benefits occur in the later years.  Surely there is a limit to how much they would be willing to pay for such a low payback on their investments?

Climate Leadership and Community Protection Act Value of Carbon

In the summer of 2019 Governor Cuomo and the New York State Legislature passed the Climate Leadership and Community Protection Act (Climate Act) and this summer the implementation process is in full swing.  I have written a series of posts on the feasibility, implications and consequences of this aspect of the law based on evaluation of data, but those posts are generally technically oriented.  A key component in this process is the Value of Carbon or Social Cost of Carbon which is supposed to place a price on emissions of greenhouse gases (GHG) relative to climate change impacts  Because the concept is complicated and important for the implementation and justification of the Climate Act and I have prepared this is a non-technical summary to explain to those outside the bubble of this process what this means.

I am a retired electric utility meteorologist with nearly 40-years experience analyzing the effects of meteorology on electric operations. I believe that gives me a relatively unique background to consider the potential effects of energy policies related to doing “something” about climate change.  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 Climate Act establishes a Climate Action Council at §75-0103 that will develop a scoping plan to implement the requirements of the law.  The Citizens Budget Commission developed an overview of the CLCPA targets in Green in Perspective: 6 Facts to Help New Yorkers Understand the Climate Leadership and Community Protection Act.  The current emphasis is implementation of plans to meet the requirement to reduce GHG emissions from electricity production by 70% in 2030 and eliminate them altogether by 2040. 

This post addresses section § 75-0113 in the law.  In that section the Climate Act explicitly mandates how the value of carbon will be determined:

  1. No later than one year after the effective date of this article, the department, in consultation with the New York state energy research and development authority, shall establish a social cost of carbon for use by state agencies, expressed in terms of dollars per ton of carbon dioxide equivalent.
  2. The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions. As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero.
  3. In developing the social cost of carbon, the department shall consider prior or existing estimates of the social cost of carbon issued or adopted by the federal government, appropriate international bodies, or other appropriate and reputable scientific organizations.

Value of Carbon

The law states that “The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions”. The Social Cost of Carbon (SCC) is the present-day value of projected future net damages from emitting a ton of CO2 today.  The idea is that New York will calculate the dollar-value of the Climate Act’s effect on climate change due to changes in greenhouse gas emissions. 

What that means to the public is when the costs of the control strategies proposed to meet the Climate Act targets are announced they will be compared to the benefits calculated using this metric, and, presumably will show that the benefits out-weigh the costs.  For example, a recent report contains this paragraph:

“NYSERDA estimates that the proposed Tier 1 procurements, as set out in Section II.c.1 below, – from 2021 to 2026 – would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer). Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.”

The net benefit of $7.7 billion is certainly impressive, however, it is important to understand how the value was calculated in order to determine whether the alleged benefits are valid.  In the following I will interpret specific statements in the Climate Act.

According to the Climate Act: “As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero”.  The department referred to is the New York State Department of Environmental Conservation.

The first SCC basis possibility would be “based on marginal GHG abatement costs”. In this application, the marginal cost measures the cost to reduce a ton of greenhouse gas.  Presumably the goal is to develop a Marginal Abatement Cost Curve which is “a succinct and straightforward tool for presenting carbon emissions abatement options relative to a baseline (typically a business-as-usual pathway)”. This curve “permits an easy to read visualization of various mitigation options or measures organized by a single, understandable metric: economic cost of emissions abatement”.  For each control option, a block with width equal to the amount of potential reductions and height equal to marginal cost of the option is prepared.  An example, based on the widely cited 2007 McKinsey & Company study and reproduced for the King County Strategic Climate Action Plan, is shown below combining various measures from different sectors.  Note that if there are sufficient savings from the energy efficiency measure, consider residential lighting in this example, then those benefits out-weigh the costs and the marginal abatement cost is negative.

The second Climate Act carbon value alternative is “the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere and that refers to the SCC.

In order to estimate the SCC impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts.  The future projected global economic damage is then converted to present value. Finally, the future damage is allocated to present day emissions on a per ton basis to get the SCC value.  The SCC is already used in New York to, for example, determine the value of “zero emission credits” which is a subsidy to generating nuclear facilities.

There are value-judgement choices in each step of the SCC calculation process.  As shown below different choices in only two of the many parameters lead to an Obama-era SCC value of $50 in 2020 vs. the current SCC value of $7 in 2020.  Needless to say the difference of over seven times in this value has an impact on cost benefit calculations.

To this point New York has used the Obama Administration’s SCC values developed by the Interagency Working Group on the Social Cost of Carbon (IWG).  In 2017, President Trump signed Executive Order 13783 which, among other actions, disbanded the IWG and stated that the estimates generated by the Interagency Working Group were not representative of government policy.  Currently Federal projects use SCC estimates based on the same approach as the IWG that differ in two aspects: the only damages that were considered were those in the United States and different values were used to convert to present costs. 

Figure 1: Prior and Current Federal Estimates of the Social Cost of Carbon Dioxide in 2018 U.S. Dollars, 2020-2050 from the recent GAO report show that changing just those two variables results in very different damage estimates.  As shown in the table below, at the common 3% discount rate, the prior federal estimate and the one currently used in New York was $50 but the current federal estimate is only $7. 

Prior and Current Federal Estimates of the Social Cost of Carbon, per Metric Ton, at a 3 Percent Discount Rate in 2018 U.S. Dollars

 
Year of emissionsPrior estimates (based on global climate change damages)Current estimates (based on domestic climate change damages)
2020$50$7
2030$60$8
2040$72$9
2050$82$11

Source: GAO analysis of data from the Interagency Working Group on Social Cost of Greenhouse Gases, EPA, and the United States Gross Domestic Product Price Index from the U.S. Department of Commerce, Bureau of Economic Analysis. | GAO-20-254

Initially, the social cost of carbon sounds like authoritative science.  However, the differences boil down to the value judgements used to choose the parameters used to determine the benefits of the Climate Act.  The previously mentioned NYSERDA claim that one particular aspect of the plan would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer) sounds great. In their words, “taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects”.  However, the electric bill cost is real, everyone is going to pay that and the social cost of carbon “benefit” value depends on the judgement of those developing the numbers.

Consider whether New York should address global impacts, nation-wide impacts, or for the sake of argument, just the benefits that would accrue to New Yorkers if their emissions are reduced.  There is no doubt that because there are global impacts that looking at global impacts should be considered but what value is that to a New Yorker already on the edge of energy poverty.  If the cost of energy goes up significantly, and other jurisdictions that tried to implement less ambitious GHG emissions reductions programs has seen significant increases, then those New Yorkers least able to afford energy increases will be hit hard.  Therefore, I think it is entirely appropriate to provide New Yorkers with benefits based on all three geographical coverages.

Another little recognized aspect of the SCC calculation methodology is that the costs are calculated far into the future.  Proponents argue that because most of the warming caused by carbon dioxide emissions persists for many years, changes in carbon dioxide emissions today may affect economic outcomes for centuries to come.  The GAO report notes: “To create a social cost of carbon estimate for emissions occurring in a given year, models use discounting to convert the projected monetized climate damages into a present value. This process involves reducing the damages in each future year by a percentage known as the discount rate”.   As the graphs show, a higher discount rate reduces future values to a greater degree than applying a lower discount rate. If we use a higher discount rate, then we are weighting today’s costs as more important than impacts hundreds of years in the future.  The emotional alternative is worded as leaving the world a better place for our grand-children by using a low discount rate.  Note that the Climate Act specifies using a discount rate of zero that will surely show very high social costs of carbon.  But remember that the impacts of climate change will become more evident much further in the future than our direct descendants so choosing a low discount rate that considers future impacts and current costs as equally significant not only means that our grandchildren will have to pay high prices now but won’t even see the benefits.

There is another aspect to paying now for potential damages far in the future.  The money spent today is not available to spend on projects that could alleviate future damages.  For example, if sea-level rise is a concern, then spending money today emulating the Dutch experience keeping the ocean out of their land would make more sense.  Similar arguments for many of the damages included due to climate change can also be made but are routinely ignored by proponents of a high SCC value.

Context

Finally, I want to point out that the SCC, as proposed for use in the Climate Act, has two basic flaws.  In general, there is no consideration of benefits of GHG emissions and, particular to our situation, it does not consider NY’s actions relative to the world’s actions.  The effect of the two items is related.

In most environmental impact assessments, a primary consideration is the direct consequence of the action.  In this case, if New York reduces its GHG emissions how will global warming be affected.  Prior to the passage of the Climate Act I calculated the potential change.  If the Climate Act were to stop emitting 218.1 million metric tons (1990 emissions) the projected global temperature rise would be reduced approximately 0.0032°C by the year 2050 and 0.0067°C by the year 2100.  In order to give you an idea of how small this temperature change consider changes with elevation and latitude.  Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000-foot increase in elevation above sea level.  The projected temperature difference is the same as going down 27 inches.  The general rule is that temperature changes three (3) degrees Fahrenheit for every 300-mile change in latitude at an elevation of sea level.  The projected temperature change is the same as going south two thirds of a mile. 

Another aspect of environmental impact assessment is a discussion of trade-offs.  However, the social cost of carbon does not consider any of the benefits of carbon dioxide.  The “CO2 fertilization effect” — the fact that rising emissions are making plants grow better, is not considered.  The satellite data show that “there has been roughly a 14 per cent increase in the amount of green vegetation on the planet since 1982, that this has happened in all ecosystems, but especially in arid tropical areas, and that it is in large part due to man-made carbon dioxide emissions”.  More importantly, Alex Epstein in the Moral Case for Fossil Fuels makes a compelling case for using fossil fuels use because: “the cheap, plentiful, reliable energy we get from fossil fuels and other forms of cheap, plentiful, reliable energy combined with human ingenuity, gives us the ability to transform the world around us into a place that is far safer from any health hazards (man-made or natural), far safer from any climate change (man-made or natural), and far richer in resources now and in the future.”

The International Energy Agency claimed that world population without access to electricity fell below 1 billion in 2017.  In order to reduce that number further, improve access to more electricity, and reap the benefits of abundant, reliable of energy, developing countries are building fossil-fired power plants.  According to the China Electricity Council, about 29.9 gigawatts of new coal power capacity was added in 2019 and a further 46 GW of coal-fired power plants are under construction.  If you assume that the new coal plants are super-critical units with an efficiency of 44% and have a capacity factor of 80%, all the reductions provided by the Climate Act will be replaced by the added 2019 Chinese capacity in just over three years or less than an year and a quarter if the 2019 capacity and the units under construction are combined. If construction of all coal plants elsewhere were included, then the time to subsume New York reductions would be even less.

Conclusion

Up until this point the State of New York has thus far relied on a single value of the SCC.  While that may be necessary for use in calculating credits for emissions reductions, elsewhere, and particularly in the case of claimed benefits relative to the costs of the program, it is more appropriate to consider a range of values because of the massive uncertainties associated with this metric. 

The  comments on the SCC prepared by Dr. Richard Tol in a Minnesota Public Utilities Commission hearing on that state’s use of the SCC provide a technical discussion of potential problems with the SCC. Dr. Tol is Professor of the Economics of Climate Change at Vrije Universiteit Amsterdam and a Professor of Economics at the University of Sussex and has direct experience estimating the social cost of carbon.  He concludes: “In sum, the causal chain from carbon dioxide emission to social cost of carbon is long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”

According to the National Academies, the present value of damages reflects society’s willingness to trade value in the future for value today.  The Climate Act mandates that the carbon value consider a zero discount rate that means that value in the future equals value today.  However, the fact that New York’s potential emission reductions will be subsumed by increases elsewhere means that the valuation arguments are theoretical and that in practice New York reductions are only symbolic.

The calculation and use of the SCC is complicated and subject to mis-interpretation.  Such is the case with NYSERDA’s claim noted earlier that “these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects”.  In response to my question about the calculation of lifetime benefits, Dr. Tol explained that the SCC should not be compared to lifetime savings or costs.  Therefore, the $7.7 billion net benefit claim is incorrect.

In conclusion, New Yorkers should be aware of the back story of the social cost of carbon benefits claimed to date for Climate Act projects when compared to the costs.  The costs to implement the Climate Act will be real changes to ratepayer bills.  The benefits claimed are based on numerous value judgements, ignoring world-wide emission increases that will subsume New York’s reductions, and, if lifetime benefits are claimed, are much higher than appropriate.  For all intents and purposes, today’s costs for the Climate Act will provide negligible benefits to those paying the bills.

NY Climate Leadership and Community Protection Act “Benefits”

I was prompted to prepare this post while reading the White Paper on Clean Energy Standard Procurements to Implement New York’s Climate Leadership and Community Protection Act (white paper) prepared by the New York Department of Public Service (DPS) and the New York State Energy Research and Development Authority (NYSERDA) because that document claims a “net benefit of around $7.7 billion” over the lifetime of projects they believe are required to meet the goal that 70% of electric energy will be produced by renewable energy by 2030 (70 by 30).  Although I have written about the approach used by the State before I believe it is necessary to re-iterate my concerns in the current context.

I am a retired electric utility meteorologist with nearly 40-years experience analyzing the effects of meteorology on electric operations. I believe that gives me a relatively unique background to consider the potential quantitative effects of energy policies based on doing something about climate change.  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

In the summer of 2019 the Governor Cuomo and the New York State Legislature passed the Climate Leadership and Community Protection Act (Climate Act) which was described as the most ambitious and comprehensive climate and clean energy legislation in the country when Cuomo signed the legislation.

The legislation includes not only the 70 by 30 requirement but also a mandate to eliminate all fossil fuel use in the electricity sector by 2040. I have written a series of posts on the feasibility, implications and consequences of this aspect of the law based on evaluation of data.

Unfortunately, the politicians that passed the Climate Act never bothered to figure out how it could be done.  Among problems to resolve are development of a plan for renewable resources and an implementation plan to pay for those resources.  The DPS has a mandate to establish a program whereby jurisdictional load serving entities (today’s jargon for what used to be called the electric utilities) secure renewable energy resources to serve the 70 by 30 target.  The white paper explains how they propose to do this.  It includes the following:

        • Description of the key provisions in the Climate Act relating to the 70 by 30, including the role of jurisdictional LSEs and the definition of renewable energy systems;
        • Projection of the quantity of renewable energy that must be deployed to achieve 70 by 30;
        • Establishes average annual procurement targets for different tiers in the existing procurement process;
        • Proposal for a new tier for the procurement process; and
        • Cost and benefit analysis.

The following quote from the cost and benefit analysis sparked my interest:

“NYSERDA estimates that the proposed Tier 1 procurements, as set out in Section II.c.1 below, – from 2021 to 2026 – would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer). Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.”

This post will show the fallacies in this benefit claim.

Social Cost of Carbon

It is New York State policy to calculate benefits of greenhouse gas emission reductions using the Social Cost of Carbon (SCC).  The SCC is the present-day value of projected future net damages from emitting a ton of CO2 today.  In order to estimate the impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts.  The projected global economic damage is then discounted to the present value. Finally, the future damage is allocated to present day emissions on a per ton basis to get the SCC value.

I have previously argued that there are several technical reasons that the single value the State of New York has thus far relied on should not be used exclusively.  It is more appropriate to consider a range of values because of the massive uncertainties associated with this metric.  The  comments on the SCC prepared by Dr. Richard Tol in a Minnesota Public Utilities Commission hearing on that state’s use of the SCC better explain potential problems with the SCC.

Dr. Tol is Professor of the Economics of Climate Change at Vrije Universiteit Amsterdam and a Professor of Economics at the University of Sussex and has direct experience estimating the social cost of carbon.  In his testimony, Tol explains that there are differences between SCC and traditional damages cost methodologies: “The causal chain for the social cost of carbon is rather long, complex and contingent. In this way it is different from the traditional damages cost methodology for a pollutant like mercury or lead.”  He uses a couple of examples to explain that the many interactions between purported changes to the environment from a changed in the greenhouse effect due to a ton of CO2 depend upon assumptions every step of the way which makes it “rather difficult to the climate effects of CO2 emissions.”  He concludes: “In sum, the causal chain from carbon dioxide emission to social cost of carbon is long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”

My biggest concern is that tweaking any one of many inputs to the SCC calculation radically change the results. New York uses the SCC values developed by the Obama administration. In 2017, President Trump signed Executive Order 13783 which modified two aspects of the calculation:  only considering damages occurring within the United States and employing discount rates of 3 percent and 7 percent for the use of this parameter in regulatory policy. The Obama values used global damage numbers and discount rates of 2.5 percent, 3 percent, and 5 percent. The difference between those two assumptions results in a SCC for domestic economic impacts at a 7 percent discount rate would be $2.20 in the year 2050, while the SCC for global economic impacts at a 2.5 percent discount rate would be $100.62. These changes reflect economic and policy judgements without advising the public what is happening.  When the costs hit the consumers, someone is going to have a lot of explaining to do.

Lifetime Benefits

Despite these issues, New York State uses the SCC without conditions to claim benefits from their proposed investments.  The white paper states “Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.”  NYSERDA regularly calculates benefits based on the lifetime of their projects.  This is a different approach than that used in air pollution control regulation cost reduction calculations.  In the Environmental Protection Agency’s Reasonably Available Control Technology rule when you calculate the cost effectiveness of a control program, the cost of the control system is divided by the annual emissions reduction to get the dollars per ton reduced.  There is no consideration of lifetimes.

If you are interested in the cost of the Climate Act, you need to know the annual reductions possible from technologies implemented to reduce emissions.  The Climate Act specifies reductions from 1990 annual emissions so the apples to apples comparison is the annual reduction.  On the other hand, in a NYSERDA energy efficiency program, the avoided energy saved by the efficiency program equates to money saved.  It seems reasonable to count the total savings to the ratepayer.

When it comes to the SCC, I believed that it was inappropriate to consider lifetime savings but could not find anything specific in the literature to validate my belief.  I contacted Dr. Tol and asked the following question:

There is a current proceeding where NYSERDA is claiming that their investments are cost-effective but they use life-time benefits.  I concede that the ratepayer cost-benefit calculation should consider the life-time avoided costs of energy and can see how that reasoning might also apply to the social cost of carbon.  However, in the following definition, SCC is the present-day value of projected future net damages from emitting a ton of CO2 today, I can interpret that to mean that you shouldn’t include the lifetime of the reduction.  Am I reading too much into that?

His response explains that the use of life-time savings or costs is inappropriate:

Dear Roger,

Apples with apples.

The Social Cost of Carbon of 2020 is indeed the net present benefit of reducing carbon dioxide emissions by one tonne in 2020.

It should be compared to the costs of reducing emissions in 2020.

The SCC should not be compared to life-time savings or life-time costs (unless the project life is one year).

stay healthy

Richard

Dr. Richard S.J. Tol MAE
Professor
Department of Economics, Room 281, Jubilee Building
University of Sussex, Falmer, Brighton BN1 9SL, UK

Conclusion

I am convinced that the majority of New York State ratepayers are unaware of the ramifications of the Climate Act and even if they know about it, it is unlikely that they know how the state calculates its claims that the costs will be out-weighed by the benefits.  In this instance, the quotation: “there are three kinds of falsehoods, lies, damned lies and statistics” could be modified to “there are three kinds of falsehoods, lies, damned lies and climate benefit estimates”.

This post explains that the SCC is a weak tool for climate policy.  I am most concerned that the SCC values are not robust because small changes in any of the large number of assumptions give contradictory results.  When used in policy making, like the Climate Act, the values chosen are politically expedient rather scientifically based.  The costs of the Climate Act will be enormous and I believe it is incumbent upon its advocates to explain their analyses and use of the SCC.

However, this post also shows that even if you accept the SCC as a valid approach and use the values chosen by New York, then the cost benefits claimed by NYSERDA, in general, and the white paper, in particular, are flawed because they rely on life-time benefits.  Today’s SCC is the net present benefit of reducing carbon dioxide emissions by one ton this year.  The SCC should not be compared to life-time savings or life-time costs.  As a result, the claim that the “procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects” is wrong.

 

Carbon Free New York May 26 2020 Letter to the Governor

Carbon Free New York” is a coalition of organizations who believe “implementing the NYISO carbon pricing proposal in a timely and efficient manner and incorporating the cost of carbon into the electricity sector, New York will align its wholesale electricity markets with its public policy objectives to decarbonize the electricity sector as set forth in the Climate Leadership Community Protection Act (CLCPA)”.  Under the heading of not letting any crisis go to waste they recently sent a letter to NY Forward Advisory Board and Governor Cuomo on Carbon Pricing For COVID-19 Economic Recovery Efforts linking the COVID pandemic and the climate change crisis and suggesting that the NYISO carbon pricing proposal will “give New York a tool to kickstart its health and economic recovery efforts”.  I disagree.  I previously explained that this coalition does not understand the ramifications of carbon pricing,

I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003.  During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting.  I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs.  I have followed the New York State Independent System Operator (NYISO) carbon pricing initiative since its inception and my work on that program is the primary basis for this summary.  I am retired now and these comments represent my personal opinions only.

Health impact link

According to the letter:

Our most vulnerable populations, such as seniors and low-income communities of color, are already disproportionately affected by climate-influenced health issues and face the most exposure to dirty air due to their proximity to fossil fuel power plants. Now, these underlying respiratory issues have allowed COVID to impact these very people with pre-existing health conditions the hardest, showing just how important reducing pollution and improving air quality are to protecting public health, especially in times of crisis. In addition to protecting public health and addressing the disastrous and irrevocable effects of climate change, we also need solutions to reboot New York’s economy in the aftermath of COVID with more than 1.9 million New Yorkers having to file for unemployment insurance claims, according to the state Labor Department.

I believe the claim that there is a link between air pollution and COVID is based on a nationwide study from Harvard T.H. Chan School of Public Health that claims that people with COVID-19 who live in U.S. regions with high levels of air pollution are more likely to die from the disease than people who live in less polluted areas.  However, the paper was not peer-reviewed and the initial claim that people in areas with high levels of pollution are 15% more likely to die was clarified on April 24: “We have revised our finding as that an increase of 1 μg/m3 in PM2.5 is associated with an 8% increase in the COVID-19 death rate.”  I recently looked at PM2.5 data in New York City and found that the latest available three-year average (2016-2018) at the Botanical Garden site in New York City is 8.1 µg/m3 which represents a 38% decrease since 2005-2007 and is 85% lower than the average of the last three years of Chinese PM2.5 annual average data.  If the Harvard health impact effects model is correct it should show significant differences in mortality between China and New York City.  Until then I am unimpressed.

Investments

The letter makes the claim that NYISO’s carbon policy will be efficient:

The attendant goals of the CLCPA are more important than ever as we begin the process of preparing for a post-COVID-19 economic recovery. NYISO’s carbon pricing plan advances these objectives by providing New York with an essential tool to restart the economy and build it back cleaner and stronger than ever. Pricing the social cost of carbon within New York’s electricity markets will align our environmental and public health interests––while simultaneously jump-starting the economy at a very timely moment.

In tandem with New York’s broad CLCPA implementation, NYISO’s carbon pricing proposal will support investments in green jobs and accelerate the build-out of renewable energy infrastructure, putting thousands back to work while safeguarding the health of our environment. At a time when the state has limited resources, carbon pricing offers a consistent mechanism to incentivize carbon-free energy production and clean energy job creation and business growth. Leveraging the power of markets, NYISO’s carbon pricing proposal ensures the most efficient utilization of public resources to achieve the CLCPA goals.

In my previous post on Carbon Free New York I showed that New York’s investments are anything but efficient.  Historical results show that making investments at a cost per ton less than the social cost of carbon metric that is supposed to estimate the future damage cost impacts of a ton of CO2 emitted today is difficult even when the tax proceeds are directly invested.  According to the letter, the NYISO carbon pricing proposal will “charge those who produce carbon-intensive electricity and reward those who produce carbon-free electricity”.  In other words, reductions in carbon-intensive electricity will occur indirectly.  Moreover, rewarding the coalition members for their carbon-free electricity is another term for a windfall profit on top of all the other subsidies they already receive.

Reality

The letter justifies the need for bold leadership by making the following claim:

New York accounts for one out of every 230 tons of energy-related carbon dioxide (CO2) emitted anywhere in the world. With the CLCPA’s mandate to achieve carbon-free electricity by 2040, 70 percent renewable generation by 2030 and a net-zero carbon economy by 2050, incorporating the social cost of carbon into New York’s energy markets is the most efficient and affordable approach to reaching these goals, while protecting public health and rebuilding the state’s green economy. This is a moment for bold leadership.

Frankly, that number caught my attention because it seemed like a bigger fraction that I expected.  I checked out the data and found that the number was reasonable -my estimates were that New York has an even bigger contribution.  However, there is more to the story.  The New York State Energy Development Authority (NYSERDA) Greenhouse Gas Inventory 1990-2016 report contains a detailed inventory of historical greenhouse gas emission data from 1990-2016 for New York State’s energy and non-energy sectors.  I found global energy sector CO2 emissions data for 1990 to 2019 at the International Energy Agency (IEA). In the New York Energy-Related CO2 Emissions Relative to the World’s CO2 Emissions table I combined NYSERDA data and IEA for common years to estimate how New York emissions were accounted for since 1990.  The NYSERDA summary lists energy-related GHG emissions that include CH4 and N2O.  In order to directly compare with the IEA CO2 data, I assumed that the fraction of CO2 in the total GHG emissions would equal the average of the 2015 and 2016 data I had on hand.  EIA lists their data in Gt and NYSERDA in MMt.  I list the EIA data for two categories, advanced economies and the rest of the world and then total them and covert to MMt.  The NYS tons out of every global ton simply is the Global total divided by the NYS total.  In 2016 this methodology predicts that in 2016 New York accounted for one out of every 191 tons of energy-related CO2 emitted anywhere in the world.  Close enough to the letter’s number for this application.

There are two aspects of the trend of the energy-related CO2 emissions numbers that have to be addressed.  Between 1990 and 2016 NYS emissions dropped 17%, global advanced economies emissions increased 3%, global rest of the world economies emissions increased 124%, and global total energy-related CO2 emissions increased 57%.  Clearly world-wide emissions are increasing because many countries are using more energy.  While some may decry that, the fact is that World Bank World Development Indicators over this time frame show that the world has become healthier and wealthier. The World Development Indicators table lists selected parameters. The world mortality rate, for children under five dropped from 93.2 to 38.6 (per 1,000 live births) between 1990 and 2018.  The life expectancy at birth increased from 58.1 to 61.2 total years between 1990 and 2018.  The world’s PM2.5 mean annual exposure dropped 1.1 (µg/m3) between 1990 and 2017.  Finally, the world’s gross domestic product increased from $8.8 billion to $31 billion.

The trend in New York State emission sources is another aspect of note.  Table A-1. GHG Emissions by Sector, in Patterns and Trends – New York State Energy Profiles: 2002-2016,  lists emission reductions from 1990 to 2016.  Overall GHG emissions have dropped 18.5%, 37.9 MMt.  Four sectors have reduced emissions: the residential sector is down 9.8% or 3.4 MMt, the commercial sector is down 22.2% or 5.9 MMt, the industrial sector is down 48.9% or 9.8 MMt and electric generation is down 56% or 35.3 MMt.  On the other hand, transportation has increased 24.2% or 14.4 MMt and imported electricity has increased 120% albeit only 2.1 MMt.

The letter claims “this is a time for bold leadership”.  I believe that the industrial emissions have gone down because manufacturing in New York is shutting down and in my previous post on this coalition I explained that electric sector emissions have gone down mainly because of fuel switching to natural gas.  State “leadership” had nothing to do with historical reductions and it can be argued relative to natural gas that they occurred despite Cuomo’s “leadership”.  Natural gas became the cheaper fuel alternative because of fracking technological improvements but the State has banned that technology.

 Conclusion

I believe that there is a tendency for those who do not have a strong case to argue louder.   In my first post  I charitably argued that the coalition just did not understand carbon pricing.  The hyperbole and exaggerations in this letter suggest that they are aware that the case for a carbon pricing scheme in a single sector in a limited area is tenuous at best, despite the attractiveness of the theory.  This letter raises the ante and invokes a tenuous link between the real problem of COVID-19 and the NYISO carbon pricing proposal.

The fact is that New York State is in trouble because of the economic consequences of the COVID-19 response and it is not clear we can afford the cost of this program.  The proposed carbon pricing scheme increases the cost of electricity by incorporating the social cost of carbon.  Generators who emit carbon dioxide will pay that cost and those revenues are supposed to be returned to consumers.  However, the carbon price will increase the prices paid to the members of the Carbon Free New York coalition and that money will not be returned to the consumer.  It is supposed to “support investments in green jobs and accelerate the build-out of renewable energy infrastructure, putting thousands back to work while safeguarding the health of our environment”.  Cynic that I am, I doubt that much of the additional profits made by the coalition will actually be invested as they claim.

My work has shown that carbon pricing proposals have practical limitations and that if you want to reduce emissions direct investments are more effective.  Nothing in the letter or on the Carbon Free New York website prove otherwise.