Climate Leadership and Community Protection Act Simple Value of Carbon Reduction Benefits

The popular narrative is greenhouse gas emission reductions are necessary to prevent climate change impacts.  In order to justify the monetary costs and loss of personal choices necessary to make those reductions a parameter was developed to “put the effects of climate change into economic terms to help policymakers and other decisionmakers understand the economic impacts of decisions that would increase or decrease emissions.”  At the January 19, 2021 Climate Action Council meeting there was a discussion of New York’s version of this parameter and it has become clear that the Council intends to use it to claim that the costs imposed on New Yorkers are “cost-effective”.  The problem is that they will be comparing real costs today against contrived value-driven estimates of speculative impacts occurring in the far future elsewhere.  In this post I explain the methodology used to value greenhouse gas emission reductions and how assumptions and value judgements radically change the estimated benefits.

On July 18, 2019 New York Governor Andrew Cuomo signed the Climate Leadership and Community Protection Act (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 CLCPA Summary Implementation Requirements and  written extensively on implementation of the CLCPA closely because its implementation affects my future as a New Yorker.  I have described the law in general, evaluated its feasibility, estimated costs, described supporting regulations, listed the scoping plan strategies, summarized some of the meetings and complained that its advocates constantly confuse weather and climateThe 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 CLCPA requires that the Department of Environmental Conservation (DEC), in consultation with the New York State Energy Research and Development Authority (NYSERDA), establish a value of carbon for use by State agencies. This value of carbon represents the present-day value of projected future net damages from emitting a ton of CO2 today.  A draft document was issued for comments in October 2020 and in December the Value of Carbon Guidance (“Guidance”), an appendix with values for carbon dioxide, methane, and nitrous oxide, and a supporting memo were released for use by State agencies along with recommended guidelines for the use of these and other values by State entities.

I followed the development of this guidance throughout the process and if you want to get into the weeds then check out my previous posts. In an earlier post I quantified the impacts of different assumptions in the social cost valuation process and that post documents the information in this post.  I also described the background of the value of carbon after the initial stakeholder webinar, documented the comments I submitted on the draft document, and described the DEC response to my comments.

The Guidance has prepared estimates, in dollars, of the economic damages that would result from emitting one additional ton of greenhouse gases into the atmosphere to justify the costs of mitigating strategies.  Resources for the Future (RFF) prepared an overview summary of the process used to calculate these values and described how the values are used in policy analysis.  Note that Guidance supporting memo was prepared by the New York State Energy Research & Development Authority (NYSERDA) and RFF and includes much of the same information.  The Guidance recommends using the damages approach to valuing carbon.  RFF refers to the value of carbon using that approach as the Social Cost of Carbon (SCC) and I will use the value of carbon and SCC interchangeably in this post.  According to RFF:

The point of this post is that there many choices that affect the value of the SCC. The emissions, climate response and economic calculations are based on research and expertise from many different fields, such as climate science, demography, and economics. While proponents of this approach give the impression that the input presumptions are based on the “science”, the reality is that assumptions made by model developers play as much of a role as “science” on the results.  Inevitably the assumption decisions are subject to value judgements and the biases of the researchers.  RFF also notes that “the modeling must incorporate information that is inherently uncertain, such as projections of future economic growth.”

The Guidance document makes a recommendation for the value of the SCC to use: “The Department specifically recommends that State entities provide an assessment using a central value that is estimated at the 2 percent discount rate as the primary value for decision-making, while also reporting the impacts at 1 and 3 percent to provide a comprehensive analysis.” For CO2 this translates into a 2020 value of carbon dioxide of $53-421 per ton, with a central value of $125 per ton. The full set of values for 2020-2050 is provided in the separate Appendix tables.

Discussion

All evidence suggests that the Climate Action Council responsible for developing a plan to implement the law intends to estimate monetary benefits by multiplying the values of carbon in the Guidance document and the observed emission reductions to claim that the costs of their strategies to reduce emissions are outweighed by those benefits.  Using their recommended values and the official 1990 baseline emissions for all the greenhouse gases included in the CLCPA the total benefits total $668 billion:

Table 1: Recommended Value of Carbon Guidance 1990 Reduction Benefits (millions)

CO2CH4N2OPFCsHFCsSF6NF3Total
$33,100$373,317$260,758$113$6$501$0$667,795

In my detailed post I documented different factors that affect the benefits calculations.  In this post I will qualitatively describe the value judgements used to, in my opinion, maximize the CLCPA narrative that there is value in the proposed emission reductions.  One example of narrative-driven value judgement is the global warming potential (GWP) time horizon.  This parameter weighs the radiative forcing of a gas against that of carbon dioxide over a specified time frame.  Most jurisdictions use a 100-year GWP time horizon but the CLCPA law mandates the use of the 20-year GWP that increases methane (CH4) reductions associated with natural gas.  Note that in Table 1 methane benefits are three times higher than the benefits of CO2.  If the 100-year GWP values were used then reduction benefits would drop 34% 

The biggest driver of social costs from greenhouse gases is the discount value which is used to estimate how much money invested today would be worth in the future so that we can link today’s costs to the future.  It is accepted that there is no consensus or uniform scientific basis for the selection of a discount rate. The CLCPA implementation process claims to follow the “science” but it appears that is only when it is consistent with their narrative to maximize the benefits of reductions.  For example, the Obama Administration Integrated Working Group (IWG) chose a central value 3% and only published results down to 2.5% but New York chose to use 2% as the central value which results in social costs over two times larger.  Combining the GWP and discount value judgements, if New York followed the IWG recommendations the benefits would be 70% lower.

There are other parameters that affect the social benefits of emission reductions.  Part of the argument for using a lower discount rate is that it helps protect our children and grandchildren but the Guidance calculates future net damages out 300 years, far future many generations away.  No one could have imagined the technology available in today’s society one hundred years ago so it is an act of extreme hubris to claim that any projection of how the world will operate in 100 years, much less 300 years, should be used to guide current actions.  In testimony before the U.S. House of Representatives Subcommittee on Environment Committee on Oversight and Reform on September 24, 2020, by Kevin D. Dayaratna determined that if economic impacts are only considered out 150 years the social benefits are reduced 14%.

The entire rationale for the CLCPA is that there is a climate emergency threat to society because of climate change due to greenhouse gas emissions.  The process does not recognize that the climate models used to predict this future are speculative.  One way to minimize modeling uncertainty is to use historical data to estimate climate sensitivity to greenhouse gases.  Dayaratna showed that an empirical approach reduced benefits 48%.

New York chose to calculate world-wide benefits of reductions because “climate change is a global problem”.  It is a fact that climate change impacts will be felt most by countries that are too poor to be resilient.  However, I believe that anyone having trouble paying energy bills today would be hard pressed to accept the higher costs imposed by the CLCPA if they know that their descendants will derive little benefit from today’s sacrifices because most of the benefits will accrue elsewhere.  Considering only benefits that would accrue to the United States from reductions instead of global benefits reduces the benefits 86%.

Conclusion

To sum up, greenhouse gas emission reductions under the CLCPA using the recommended assumptions are supposed to provide benefits of $668 billion.  Using the Obama Administration recommended assumptions the benefits go down to $201 billion.  Using different value-driven estimates, reducing speculation by using observations rather than models, estimates that go out “only” 150 years instead of 300 years, and counting only benefits that occur in the United States instead of the globe results in benefits that are reduced to $12.5 billion.

Ultimately, the value of carbon methodology relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions.  Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”  The fact is that this process focuses exclusively on negative externalities and completely ignores the benefits of fossil fuels.  I believe these facts make this a contrived process.

One final point.  After all these machinations, the social cost values chosen when applied to the 1990 baseline emissions indicate that reducing those emissions will result in $668 billion in benefits.  The Climate Action Council is charged with developing an implementation plan that should include costs.  What happens if those costs are greater than these benefits?

Climate Leadership and Community Protection Act NY Value of Carbon Cost Effectiveness

At the January 19, 2021 Climate Action Council meeting there was a discussion of New York’s value of carbon guidance document and it has become clear that the Council intends to use the value of carbon to claim that the costs imposed on New Yorkers are “cost-effective”.  The problem is that they will be comparing real costs today against contrived value-driven estimates of speculative impacts occurring in the far future elsewhere.  This extensive post provides context for their numbers that maximize the costs and addresses explanations of the value of carbon guidance provided at the meeting. 

On July 18, 2019 New York Governor Andrew Cuomo signed the Climate Leadership and Community Protection Act (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 CLCPA Summary Implementation Requirements and  written extensively on implementation of the CLCPA closely because its implementation affects my future as a New Yorker.  I have described the law in general, evaluated its feasibility, estimated costs, described supporting regulations, listed the scoping plan strategies, summarized some of the meetings and complained that its advocates constantly confuse weather and climate.  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.

In this post I tried to simplify the discussion as much as possible but still ended up with a post that was too long.  In order to address this, I rearranged the order of the sections.  I provide background information first followed by a synopsis that presents the key findings and conclusions.  If you want to learn where the numbers come from a simplified description of the methodology used to calculate the key findings comes next.  Finally, I present a more detailed description of the CO2 societal cost analysis to provide even more details for anyone interested.  Because I have not figured out how to format tables and show them in the text each table has a link to a formatted version. Stay tuned for an even simpler version if this one gets too wonky.

Background

The CLCPA requires that the Department of Environmental Conservation (DEC), in consultation with the New York State Energy Research and Development Authority (NYSERDA), establish a value of carbon for use by State agencies. This value of carbon represents the present-day value of projected future net damages from emitting a ton of CO2 today.  A draft document was issued for comments in October 2020 and in December the Value of Carbon Guidance (“Guidance”), an appendix with values for carbon dioxide, methane, and nitrous oxide, and a supporting memo were released for use by State agencies along with recommended guidelines for the use of these and other values by State entities.

I followed the development of this guidance throughout the process and if you want to get into the weeds then check out my previous posts.  I described the background of the value of carbon after the initial stakeholder webinar, documented the comments I submitted on the draft document, and described the DEC response to my comments.  Be forewarned however, these posts are wonky.  In this post I attempted to show how differences in purported reduction benefits vary as a function of different assumptions.

The Guidance has prepared estimates, in dollars, of the economic damages that would result from emitting one additional ton of greenhouse gases into the atmosphere to justify the costs of mitigating strategies.  Resources for the Future (RFF) prepared an overview summary of the process used to calculate these values and described how the values are used in policy analysis.  Note that Guidance supporting memo was prepared by the New York State Energy Research & Development Authority (NYSERDA) and RFF and includes much of the same information.  The Guidance recommends using the damages approach to valuing carbon.  RFF refers to the value of carbon using that approach as the Social Cost of Carbon (SCC) and I will use the value of carbon and SCC interchangeably in this post.  According to RFF:

The point of this post is that there many choices that affect the value of the SCC. The emissions, climate response and economic calculations are based on research and expertise from many different fields, such as climate science, demography, and economics. While proponents of this approach give the impression that the input presumptions are based on the “science”, the reality is that assumptions made by model developers play as much of a role as “science” on the results.  Inevitably the assumption decisions are subject to value judgements and the biases of the researchers.  RFF also notes that “the modeling must incorporate information that is inherently uncertain, such as projections of future economic growth.”

The Guidance document makes a recommendation for the value of the SCC to use: “The Department specifically recommends that State entities provide an assessment using a central value that is estimated at the 2 percent discount rate as the primary value for decision-making, while also reporting the impacts at 1 and 3 percent to provide a comprehensive analysis.” For CO2 this translates into a 2020 value of carbon dioxide of $53-421 per ton, with a central value of $125 per ton. The full set of values for 2020-2050 is provided in the separate Appendix tables.

Synopsis

All evidence suggests that the Climate Action Council responsible for developing a plan to implement the law intends to use the monetary benefits derived by multiplying the values of carbon in the Guidance document and the observed emissions to claim that the costs of their strategies to reduce emissions are outweighed by those benefits.  The problem is that they will be comparing real costs today against contrived value-driven estimates of speculative impacts occurring in the far future elsewhere as I show in this post.  Table 1 lists the monetary benefits for seven assumption scenarios that result in a benefits range of $668 billion to 12.6 $billion.

Table 1: Alternative New York 1990 Value of GHG Reduction Benefits ($millions)

1) CLCPA Value of Carbon Guidance 2% Discount & GWP-20
CO2CH4N2OPFCsHFCsSF6NF3Total
$33,100$373,317$260,758$113$6$501$0$667,795

2) CLCPA Value of Carbon Guidance 2% Discount Rate & GWP-100

CO2CH4N2OPFCsHFCsSF6NF3Total
$33,100$111,113$294,751$170$3$653$0$439,789
3) IWG 3% Discount Rate Using GWP-100
CO2CH4N2OPFCsHFCsSF6NF3Total
$14,034$60,988$125,764$72$1$277$0$201,136
4) Dayaratna 300 year horizon, 3% Discount Rate Using GWP-100
CO2CH4N2OPFCsHFCsSF6NF3Total
$10,007$33,592$89,109$51$1$197$0$132,957
 5) Dayaratna 150 year horizon, 3% Discount Rate Using GWP-100 (-14.3%)
CO2CH4N2OPFCsHFCsSF6NF3Total
$12,025$52,257$107,759$62$1$237$0$172,342
 6) Dayaratna empirical ECS, 150 year horizon, 3% Discount Rate Using GWP-100 (-48%)
CO2CH4N2OPFCsHFCsSF6NF3Total
$6,256$27,187$56,061$32$0$123$0$89,660
7) Domestic benefits, empirical ECS, 150 yr horizon, 3% Rate Using GWP-100 (-86%)
CO2CH4N2OPFCsHFCsSF6NF3Total
$876$3,806$7,849$4$0$17$0$12,552

Section 1 lists the benefits (2020 social cost times 1990 emissions for each greenhouse gas.  One example of narrative-driven value judgement is the global warming potential (GWP) time horizon.  This parameter weighs the radiative forcing of a gas against that of carbon dioxide over a specified time frame.  Most jurisdictions use a 100-year GWP time horizon but the CLCPA law mandates the use of the 20-year GWP.   As a result, methane reductions associated with natural gas are valued three times higher as shown in Section 2.

The biggest driver of social costs from greenhouse gases is the discount value which is used to estimate how much money invested today would be worth in the future so that we can link today’s costs to the future.  It is accepted that there is no consensus or uniform scientific basis for the selection of a discount rate. The CLCPA implementation process claims to follow the “science” but it appears that is only when it is consistent with their narrative to maximize the benefits of reductions.  For example, the Obama Administration Integrated Working Group (IWG) chose a central value 3% and only published results down to 2.5% but New York chose to use 2% as the central value which results in social costs over two times larger (Section 3).

In order to consider the effect of other parameters, I calculated social benefits values based on different assumptions derived from testimony before the U.S. House of Representatives Subcommittee on Environment Committee on Oversight and Reform by Kevin D. Dayaratna.  Section 4 lists his estimated benefits using the same assumptions as the IWG.  I calculated the % reduction between Section 4 and each of the different assumptions and applied the resulting percentage reductions cumulatively to the Section 3 benefits.

Part of the argument for using a lower discount rate is that it helps protect our children and grandchildren but the Guidance calculates future net damages out 300 years, many generations away.  Moreover, it is an act of extreme hubris to claim that any projection of how the world will operate in 100 years, much less 300 years, should be used to guide current actions simply because no one could have imagined the technology available in today’s society one hundred years ago.  If the economic impacts are only considered out 150 years the social costs are reduced 14%. (Section 3 benefits times (1- 14%))

The entire rationale for the CLCPA is that there is a climate emergency threat to society because of climate change due to greenhouse gas emissions.  The process does not recognize that the climate models used to predict this future are not without shortcomings.  One way to minimize modeling uncertainty is to use historical data to estimate climate sensitivity to greenhouse gases and, as shown here, that can reduce impacts 48%.

New York chose to calculate world-wide benefits of reductions because climate change is a global problem.  It is a fact that climate change impacts will be felt most by countries that are too poor to be resilient.  However, I believe that anyone having trouble paying energy bills today would be hard pressed to accept the higher costs imposed by the CLCPA if they know that their descendants will derive little benefit from today’s sacrifices.  Considering only benefits that would accrue to the United States from reductions instead of global benefits reduces the value of carbon 86%.

To sum up, greenhouse gas emission reductions under the CLCPA using the recommended assumptions are supposed to provide benefits of $668 billion.  Using the Obama Administration recommended assumptions the benefits go down to $201 billion.  At the extreme end of value and scientific judgements the benefits are as low as $12.5 billion.

Ultimately, the value of carbon methodology relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions.  Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”  The fact is that this process focuses exclusively on negative externalities and completely ignores the benefits of fossil fuels.  I believe these facts make this a contrived process.

One final point.  After all these machinations, the social cost values chosen when applied to the 1990 baseline emissions indicate that reducing those emissions will result in $668 billion in benefits.  The Climate Action Council is charged with developing an implementation plan that should include costs.  What happens if those costs are greater than these benefits?

Greenhouse Gas Reduction Benefits Estimates

This section describes the methodology used to calculate the values shown in Table 1.

The Climate Action Council plans to multiply the values of CO2 in the Guidance document by CO2 emissions to come up with “benefits”.  Table 2, NY Social Cost of CO2 Value of Reductions ($millions), lists the recommended 2020 values for CO2, the DEC Part 496 CLCPA baseline emissions, and the total benefits for completely eliminating 1990 emissions (multiplies the Guidance values by the emissions). It shows how differences in the assumptions changes the potential benefit costs for CO2 for three different discount rates.  In the absence of a recent estimate of New York CO2 emissions I used the DEC official baseline 1990 value of 264.8 million metric tons of CO2 to estimate the potential benefits. Using the 2020 value of carbon dioxide of $53-421 per ton, with a central value of $125 per ton and the 1990 emissions the benefits of eliminating those emissions ranges between $111.5 billion and $14.0 billion with a central value of $33.1 billion.

Table 2: Recommended NY Social Cost of CO2 Value of Reductions ($millions)

2020 Value of Greenhouse Gas Reductions
DiscountCO2CH4N2OPFCsHFCsSF6NF3
1%$421$6,578$140,766$421$421$421$421
2%$125$2,782$44,727$125$125$125$125
3%$53$1,527$19,084$53$53$53$53
1990 Statewide Greenhouse Gas Emissions (million metric tonnes)
GWPCO2CH4N2OPFCsHFCsSF6NF3
GWP20264.8134.195.830.90.054.010
GWP100264.839.946.591.360.025.220
Recommended Value of Carbon Benefits (millions)
DiscountCO2CH4N2OPFCsHFCsSF6NF3Total
2%$33,100$373,317$260,758$113$6$501$0$667,795

The first, and arguably, the biggest judgement that has to be made when the values are developed is the economic discount rate.  According to the Guidance document “Discounting is a common and useful aspect of economic analyses that allows for the balancing of present versus future value and it has been widely discussed in the literature, particularly in its application to the federal social cost of carbon. However, the selection of the discount rate has a large effect on the estimate of the value of carbon, and there is no consensus or uniform scientific basis for the selection of a discount rate.”  I emphasized the key point that there is no consensus for selecting the discount rate chosen.   The discount price chosen boils down to value judgements on the part of the State and the model developers.

During the January 19, 2021 Climate Action Council meeting, Jared Snyder, New York Department of Environmental Conservation Deputy Commissioner for Air Resources, Climate Change, & Energy, described the NY Value of Carbon Guidance and talked about the discount rate choices.  I tried to transcribe his comments but did edit out superfluous wording.   He stated that: “We proposed central values of 2 or 2.5% for public comment.  The Obama Administration did use 3% but a number of economists have indicated their views that 3% is somewhat too high and recommended looking at and establishing a value of carbon based on lower values.”   A key point is that the Integrated Working Group did a more thorough analysis of the discount rates and chose a central value that was not even proposed for comment.  The Guidance 2% value is $72 more per ton and results in increased benefits of over $19 billion compared to the IWG 3% value.  In my opinion the Guidance did not adequately justify their choice to deviate from the IWG expert analysis.

Snyder went on to say that based on information from various economists, “we moved towards the 2% range based on a view that impacts that occur significantly in the future that impact our children, grandchildren and the like, are still important and we did not want to discount those too much.”  He concluded “Informed by the economists and that value judgement we decided that 2% is an appropriate value”.  Snyder states that the discount rate values “impacts in the future versus impacts now”.  An alternative explanation is that the discount rate is used to estimate how much money invested today would be worth in the future so that we can link today’s costs to the future.  Snyder’s response is disingenuous because while it may be appropriate to value impacts today similar to impacts tomorrow for our children and grandchildren, the SCC valuation process considers impacts out to 2300.  According to the internet there are 25.2 years in a generation which means that benefits are being calculated for twelve generations, not exactly our children and grand-children.

There are two other aspects of the CLCPA law that directly affect the social costs.  In addition to CO2, the CLCPA mandates that other greenhouse gases should also be addressed: methane (CH4), nitrous oxide (N2O), hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride (SF6).  According to the Guidance document, Global Warming Potential (GWP) weighs the radiative forcing of a gas against that of carbon dioxide over a specified time frame.  Contrary to every other jurisdiction the CLCPA mandates that the specified time frame is 20 years, while everyone else uses 100 years. EPA notes in  Understanding Global Warming Potentials that the ”20-year GWP prioritizes gases with shorter lifetimes, because it does not consider impacts that happen more than 20 years after the emissions occur”.

In order to consider the impacts of other greenhouse gases relative to CO2, the concept of equivalency is used. Carbon dioxide equivalence is “a simple way to normalize all these greenhouse gases and other climate influences in standard units based on the radiative forcing of a unit of carbon dioxide over a specified timeframe (generally set at 100 years)”.  The Guidance document found sufficient information to develop social cost values for methane and nitrous oxides so those numbers are used directly.  The CO2 equivalents are used in the subsequent analysis for hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3), which was included in the Part 496 inventory despite the fact that the numbers are listed as zeros.

Table 3 lists the values of carbon that New York included in the Guidance document, GWP-20 and GWP-100 for 1%, 2% and 3% discount rates.  The recommended central value benefits are $668 billion and the range of benefits goes from $201 billion to $1.86 trillion for all the greenhouse gases in the CLCPA.  Note that methane benefits are more than half of the total and an order of magnitude greater than the CO2 benefits. Using the 20-year GWP increases the benefits three times the 100-year GWP benefits. Nitrous oxide benefits are over seven times greater than carbon dioxide benefits.

Table 3: NY Social Cost of CO2 Value of Reductions ($millions)
CLCPA Social Cost Requirements – Value of Carbon Guidance Recommendations
2020 Value of Greenhouse Gas Reductions
DiscountCO2CH4N2OPFCsHFCsSF6NF3
1%$421$6,578$140,766$421$421$421$421
2%$125$2,782$44,727$125$125$125$125
3%$53$1,527$19,084$53$53$53$53
1990 Statewide Greenhouse Gas Emissions (million metric tonnes)
GWPCO2CH4N2OPFCsHFCsSF6NF3
GWP20264.8134.195.830.90.054.010
GWP100264.839.946.591.360.025.220
D.R.GWPCO2CH4N2OPFCsHFCsSF6NF3Total
1%GWP20$111,481$882,702$820,666$379$21$1,688$0$1,816,937
2%GWP20$33,100$373,317$260,758$113$6$501$0$667,795
3%GWP20$14,034$204,908$111,260$48$3$213$0$330,465
1%GWP100$111,481$262,725$927,648$573$8$2,198$0$1,304,633
2%GWP100$33,100$111,113$294,751$170$3$653$0$439,789
3%GWP100$14,034$60,988$125,764$72$1$277$0$201,136

Table 1, Alternative New York 1990 Value of GHG Reduction Benefits ($millions), lists seven scenarios that compare the reduction benefits as a function of different assumptions and value judgements.  The first section, CLCPA Value of Carbon Guidance 2% Discount & GWP-20, reproduces the recommended benefits from Table 2.  The second section, CLCPA Value of Carbon Guidance 2% Discount Rate & GWP-100, compares the differences in benefits when using the 100-year GWP commonly used.  Total benefits drop from $668 billion to $440 billion.  Using the IWG approach, 3% discount rate and 100-year GWP, the total benefits drop to $201 billion.  The only values I have for the IWG approach are for CO2.  To calculate the remaining gases, I made the crude assumption that their social costs would be proportional to the change in social costs of CO2 using values from the second section.

In the remaining analyses I calculate social benefits values based on different assumptions derived from testimony before the U.S. House of Representatives Subcommittee on Environment Committee on Oversight and Reform on September 24, 2020, by Kevin D. Dayaratna.  He used one of the primary integrated assessment models (DICE) used by the IWG to calculate SC-CO2 to calculate the social costs for different scenarios.  My derived values are rough estimates and I applied the reductions in each analysis to accumulate the impacts.  In order to refine the numbers, it is necessary to run multiple models thousands of times and that is way beyond my capabilities.

In the section of Table 1 labeled Dayaratna 300 year horizon, 3% Discount Rate Using GWP-100 (-70%) I list the his values for comparison to the IWG values in the third section.  There is the same issue for the other gases as described for the IWG section and I applied the same approach.

Recall that Snyder justified the 2% discount rate “based on a view that impacts that occur significantly in the future that impact our children, grandchildren and the like, are still important and we did not want to discount those too much.” Note however, that the economic modeling calculates cost impacts 300 years out. But because the impacts of climate change will become more evident further in the future the benefits of reductions today will be much more of a factor closer to 2300.  Dayaratna estimated the effect of the time horizon calculating the social costs out 150 years instead of the 300-year time horizon and found that assumption reduces societal benefits by 14%.

The effect of greenhouse gases on climate is a fundamental driver of the impacts and is another factor affecting the social cost estimates.  Equilibrium climate sensitivity (ECS) is the expected change in temperature when the atmospheric CO2 concentration doubles.  The IWG analysis depended upon outdated, model-derived ECS values.   In his testimony before the Environment Committee on Oversight and Reform on September 24, 2020, Dayaratna also estimated the effect of the ECS on the SC-CO2.  In section 6, he used an ECS estimate based on observed data and found that the benefits would be reduced 48%. 

Snyder’s presentation also noted that the benefits were calculated on a global basis because it is a global problem.  This is another value judgement and the public should be aware of the effect on the benefit values.  In 2017, President Trump signed Executive Order 13783 and Federal projects used social cost estimates based on the same approach as the IWG but differed 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.  A recent GAO report show that changing just those two variables results in very different damage estimates.  I estimate that would reduce benefits another 86%.

By using different value judgements and a different ECS value the $668 billion in societal benefits from greenhouse gas reductions under the CLCPA are reduced to $12.5 billion in benefits.

CO2 Methodology

For the summary analysis I considered all the greenhouse gases but that necessitates the crude assumption that their social costs would be proportional to the change in social costs of CO2.  This section provides a more-detailed description of my CO2 calculation methodology and the discussion of value of carbon cost effectiveness at the January 19, 2021 Climate Action Council meeting.  I suggest that this section is best used as a stand-alone reference to the previous text.

The Climate Action Council plans to multiply the values of carbon in the Guidance document by the greenhouse gas emissions to come up with “benefits”.  Table 4, NY Climate Social Cost of CO2 Value of Reductions ($millions), shows how differences in the assumptions changes the negative externality costs for CO2.  In the absence of a recent estimate of New York CO2 emissions I will use the DEC official baseline 1990 value of 264.8 million metric tons of CO2 to estimate the potential benefits.  The benefits are simply the 1990 emissions multiplied by the values of CO2.

Table 4: NY Social Cost of CO2 Value of Reductions ($millions)
DEC Value of Carbon Guidance 
 
1990 NY CO2 Emissions (million metric tonnes) 
264.8Per DEC Part 496
DiscountValueBenefit of Reductions
1%$421$111,481
2%$125$33,100
3%$53$14,034

According to the Guidance document “Discounting is a common and useful aspect of economic analyses that allows for the balancing of present versus future value and it has been widely discussed in the literature, particularly in its application to the federal social cost of carbon. However, the selection of the discount rate has a large effect on the estimate of the value of carbon, and there is no consensus or uniform scientific basis for the selection of a discount rate.”  I emphasized the key point that there is no consensus for selecting the discount rate chosen.   The price chosen boils down to value judgements on the part of the State.

During the January 19, 2021 Climate Action Council meeting, at 1:23:30 in the video of the meeting Jared Snyder, New York Department of Environmental Conservation Deputy Commissioner for Air Resources, Climate Change, & Energy, described the NY Value of Carbon Guidance.   Snyder explained that “one of the key issues in establishing the value of carbon is establishing a discount rate”.  He went on to say that refers to: ”How do you value impacts in the future versus impacts now?”. He claimed that if you value impacts now the same as impacts in the future you would apply a discount rate of zero.  He noted that in the past experts have looked at discounts in a range of 2% to 5% which values current impacts more than future impacts.  He explained that the Guidance considered a range of discount rates, including zero.  It recommends a central value of 2% ($125 per ton of CO2 in 2020 dollars) with an evaluation range of 1% to 3% ($421 –$53 per ton of CO2 in 2020.  As shown in Table 1 that translates into total benefits due to New York CO2 reductions of $33.1 billion at the central value with an evaluation range of $111.5 billion to $14.0 billion.

After Snyder’s presentation, Council member Bob Howarth asked for the justification of the choice of the discount value especially because the CLCPA mandates evaluation of a zero discount rate.  I tried to transcribe the response made by Snyder to this question but did edit out superfluous wording.   He stated that: “We proposed central values of 2 or 2.5% for public comment.  The Obama Administration did use 3% but a number of economists have indicated their views that 3% is somewhat too high and recommended looking at and establishing a value of carbon based on lower values.”   He went on to say that based on information from various economists, “we moved towards the 2% range based on a view that impacts that occur significantly in the future that impact our children, grandchildren and the like, are still important and we did not want to discount those too much.”  He concluded “Informed by the economists and that value judgement we decided that 2% is an appropriate value”. 

Snyder’s response does not give all the details.  Snyder states that the discount rate values “impacts in the future versus impacts now”.  An alternative explanation is that the discount rate is used to estimate how much money invested today would be worth in the future so that we can link today’s costs to the future.  Snyder states that the Obama Administration recommended a central value estimate of 3%.  The Guidance and supporting Memo discuss the discount rate and address some of the controversies associated with choosing a value.  The Guidance notes that “The federal IWG’s central value applies a 3 percent discount rate that is consistent with the economics literature and in the federal government’s Circular A-4 guidance for the consumption rate of interest” Neither mention that Circular A-4 guidelines state that all cost/benefit analyses are to be scored using both a 3% and a 7% discount rate.  Both the IWG and the Guidance document used their values to choose the rates used.

There are two other aspects of the CLCPA law that directly affect the social costs.  In addition to CO2, the CLCPA mandates that other greenhouse gases should also be addressed: methane (CH4), nitrous oxide (N2O), hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride (SF6).  According to the Guidance document, Global Warming Potential (GWP) weighs the radiative forcing of a gas against that of carbon dioxide over a specified time frame.  Contrary to every other jurisdiction the CLCPA mandates that the specified time frame is 20 years, while everyone else uses 100 years. 

In order to consider the impacts of other greenhouse gases relative to CO2, the concept of equivalency is used. Carbon dioxide equivalence is “a simple way to normalize all these greenhouse gases and other climate influences in standard units based on the radiative forcing of a unit of carbon dioxide over a specified timeframe (generally set at 100 years)”.  The Guidance document found sufficient information to develop social cost values for methane and nitrous oxides so those numbers are used directly.  The CO2 equivalents are used in the subsequent analysis for hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3) which was included in the Part 496 inventory despite the fact that the numbers are listed as zeros. In testimony before the U.S. House of Representatives Subcommittee on Environment Committee on Oversight and Reform on September 24, 2020, Kevin D. Dayaratna estimated the effect of a wider range of discount rates.  He used one of the primary integrated assessment models (DICE) used by the IWG to calculate SC-CO2 to calculate the social costs for different scenarios.  As shown in Table 5 the range of total benefits based on different discount rates ranges by an order of magnitude from $1.5 billion to $15 billion. 

Table 5: NY Social Cost of CO2 Value of Reductions ($millions)
DICE Model Average SCC End Year 2300 
 
1990 NY CO2 Emissions (million metric tonnes) 
DiscountValueBenefit of Reductions
2.5%$56.92$15,072
3.0%$37.79$10,007
5.0%$12.10$3,204
7.0%$5.87$1,554

Snyder said that based on information from various economists, “we moved towards the 2% range based on a view that impacts that occur significantly in the future that impact our children, grandchildren and the like, are still important and we did not want to discount those too much.” The fact is that the in order to justify using a low discount rate people have to know that the Guidance methodology calculated cost impacts 300 years out and according to the internet there are 25.2 years in a generation which means that benefits are being calculated for twelve generations, not exactly our children and grand-children.  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.  This is described as leaving the world a better place for our grand-children. But because the impacts of climate change will become more evident further in the future the benefits of reductions today will not be a factor until further in the future.  Dayaratna estimated the effect of the time horizon calculating the social costs out 150 years instead of the 300-year time horizon.  Table 6 compares the time horizons using the same discount rates and shows that he found that using a 2.5% discount rate the 150 year time horizon total benefits would drop by 22% but at a 7% discount rate they only drop 0.3%. 

Table 6: NY Social Cost of CO2 Value of Reductions ($millions)
Comaparison of 300 Year and 150 Year Estimates
 
1990 NY CO2 Emissions (million metric tonnes) 
264.8Per DEC Part 496
DICE Model Average SCC End Year 2300
DiscountValueBenefit of Reductions
2.5%$56.92$15,072
3.0%$37.79$10,007
5.0%$12.10$3,204
7.0%$5.87$1,554
DICE Model Average SCC – End Year 2150
DiscountValueBenefit of Reductions
2.5%$44.41$11,760
3.0%$32.38$8,574
5.0%$11.85$3,138
7.0%$5.85$1,549

Snyder’s presentation also noted that the benefits were calculated on a global basis because it is a global problem.  This is a value judgement and in the interest of full disclosure the effects should be noted.  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.  Federal projects used social cost estimates based on the same approach as the IWG but differed 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.  A recent GAO report show that changing just those two variables results in very different damage estimates.  As shown in Table 7, at the common 3% discount rate, the prior federal estimate a was $50 but the current federal estimate is only $7.  The value of the reductions goes down from $13.2 billion to $1.9 billion.

Table 7: NY Social Cost of CO2 Value of Reductions ($millions)
Global vs Domestic Damages at 3% Discount Rate
ImpactsValueBenefit of Reductions
Global$50.00$13,240
Domestic$7.00$1,854

The effect of greenhouse gases on climate is a fundamental driver of the impacts and is another factor affecting the social cost estimates.  Equilibrium climate sensitivity (ECS) is the expected change in temperature when the atmospheric CO2 concentration doubles.  The IWG analysis depended upon outdated, model-derived ECS values.   In his testimony before the Environment Committee on Oversight and Reform on September 24, 2020, Dayaratna also estimated the effect of the ECS on the SC-CO2.  Table 8 shows using the Lewis and Curry 2015 ECS values (based on monitoring and not modeling) that in 2020 for a discount rate of 2.5%, the SC-CO2 is reduced 49% using a 300-year time horizon and that the reduction decreases for future estimates.   Using those values, the benefits of the reductions goes from $15.1 billion down to $7.7 billion at the 2.5% discount rate.

Table 8: NY Social Cost of CO2 Value of Reductions ($millions)
DICE Model Average SCC – ECS Distribution Updated in
 Lewis and Curry (2015), End Year 2300
DiscountValueBenefit of Reductions
2.5%$28.92$7,658
3.0%$19.66$5,206
5.0%$6.86$1,817
7.0%$3.57$945
DICE Model Average SCC End Year 2300
DiscountValueBenefit of Reductions
2.5%$56.92$15,072
3.0%$37.79$10,007
5.0%$12.10$3,204
7.0%$5.87$1,554

Response to My Comments on the New York Value of Carbon Guidance

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.  On December 30, 2020 New York’s Department of Environmental Conservation (DEC) announced finalization of this guidance.  This post summarizes the final guidance and describes the response to comments on the draft guidance document.  In general, the guidance document and the responses all are consistent with the CLCPA narrative that climate change is an imminent, inevitable disaster that can only be averted by reducing greenhouse gas emissions.

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 guidance for a value of carbon for use by State agencies. According to the DEC press release:

“The guidance is different than a regulation and does not propose a carbon price, fee, or compliance obligation. It is a metric that will be broadly applicable to all State agencies and authorities to demonstrate the global societal value of actions to reduce greenhouse gas emissions. The guidance establishes a value of carbon focused on the federal social cost of carbon and incorporates public comments DEC received when the draft guidance was proposed earlier this year, including recommending a lower central discount rate of two percent, which should be reported alongside a one and three percent discount rate for informational purposes. In some decision-making contexts, particularly those that have a history of valuing carbon, such as the New York electric industry, the guidance suggests that alternative approaches to valuing carbon may be more appropriate for both resource valuation and benefit-cost analyses.  Use of the lower central discount rate translates into a 2020 central value of carbon dioxide of $125 per ton; methane of $2,782 per ton; and nitrous oxide of $44,727 per ton.”

The 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. Four 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.”

Response to Comments

In general, a major point in my comments was that I believe the focus of the guidance is wrong.  According to the document:

“The purpose of this guidance is to aid State entities in decision making by establishing a monetary value of greenhouse gas emission reductions or increases that reflects global societal impacts. This guidance does not itself establish a price or fee on emissions, and the value of carbon presented here is not the only value that may be used by the State. Alternative methods for establishing a value of carbon may be used by State entities, including the Department, as needed to achieve the goals and requirements of the CLCPA as well as other State goals, such as to protect public safety, welfare, and the environment.”

The guidance does not recognize that the CLCPA has specific targets so the proper way to address social costs is through a cost efficiency approach.  The damages approach recommended in the guidance is an efficiency concept inappropriate when developing control measures.  The emphasis of the guidance is on state agency use and not for supporting the Climate Action Council scoping plan mandate.

DEC’s responses to comments are listed below with my italicized reply below each paragraph.

“The Department received comments from individuals, elected officials, municipal officials, environmental advocacy groups, community groups, academic and other nonprofit research institutions, and private businesses particularly those related to the electricity sector. Most commenters responded to DEC’s specific request for input on the selection of a central discount rate or commented on three other areas: the use of a range of discount rates, the application of other approaches such as marginal abatement, or technical details of the damages-based or marginal abatement approaches. As discussed in the Guidance, DEC is providing guidelines regarding the use of the damages-based approach to enable New York State agencies to use this tool, where needed. DEC is not seeking to develop guidelines for the use of other approaches, such as marginal abatement, at this time.”

My comments explained that there are other metrics that describe ‘equivalences’ between climate-changing species used to determine contributions to climate impacts.  Tol et al (2012) present a unifying framework that clarifies the relationships among four metrics establishing ‘equivalences’ among emissions of various species. Importantly, the framework distinguishes between cost benefits and cost effectiveness. This paper explains that once a cap is set, you should not use 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.  Instead, the cap requires that emissions are valued to the shadow price of the cap. There was no response to this argument.

 “The majority of commenters who responded to DEC’s request for feedback on the selection of a central discount rate support the lower of the two suggested values, i.e., 2% rather than the 2.5% that was previously established as the lower bound of discount rates by the federal government. Some of these commenters suggested that the central rate should be no higher than 2%. Other commenters requested a rate that is lower, such as zero or 1%, or suggested that the DEC should adopt higher rates that would be consistent with that previously used by other New York State agencies and the federal government.”

 A lower discount rate produces higher values which supports the narrative of the CLCPA and likely the majority of the commenters who have a vested interest in climate change catastrophes.  My argument that on a global basis using lower discount rates memorializes the status quo for the world’s poor was ignored.

“While DEC maintains that the public is best informed by reporting a range of discount rates, given the responses received, DEC has revised the Guidance to apply a central 2% discount rate. However, as many commenters pointed out, the damages-based approach is continually refined and improved and DEC will continue to consider incorporating new research. DEC will also consider additional ways to address uncertainty and intergenerational equity issues raised by the commenters, such as through a declining discount rate or the incorporation of a 95th percentile on the central discount rate, as the research continues to improve. While not specifically raised in the public comments, one issue with applying a non-standard discount rate, such as 2%, is that this affects the applicability of published analyses, because the analyses are unlikely to apply the same discount rate.”

I raised problems with damages-based approaches in my comments but one would not know that from this response. 

“Several commenters took issue with the use of a range of discount rates and stated a preference that DEC require all State entities to use one discount rate. DEC has revised the Guidance to clarify the initial intent of the Guidance. Namely, DEC’s guidance follows the federal government’s approach to using the damages-based value of carbon, under which agencies use the central rate, but also report the results for a higher and lower rate. DEC did not intend to suggest that State entities use any discount rate within the range. Instead, DEC suggests that, if State agencies apply a damages-based value of carbon as a part of their decision-making, they should use the 2% discount rate to estimate the value (as opposed to the federal government’s central rate of 3%) and also report the values estimated using the 1% and 3% discount rates. This enables the public to see the effect of the discount rate and, in the case of the 3% rate, compare their assessment to federal actions and previous State policies.”

I agree with the DEC response that the public should be able to see the effect of the discount rate.  The suggestion in my comments that the public should also be able to see the effect of the time horizon, the location of impacts, and equilibrium climate sensitivity was ignored.  I also argued that the one reference used to justify using a lower discount rate was inadequate and that additional justification was needed.  There were no changes to the document to respond to that.

“The remaining comments covered a diverse set of topics, including topics beyond the scope of the Guidance. DEC will use all relevant feedback in refining the Guidance and in developing future guidance. An example is to provide additional guidance on how to consider public health impacts and the social costs for co-pollutants. The CLCPA specifically refers to the social cost of emitting greenhouse gases into the atmosphere, but the Guidance does discuss how the damages-based approach can be used to assess other impacts and other pollutants. The Guidance is a complement to other, more standard methods used.”

Topics beyond the scope of the Guidance are ignored if they don’t fit the narrative.  I raised fundamental issues raised about the mis-use of the value of carbon when emission targets have been chosen and no response.  Instead, they highlight comments that claim the values are too low.  Honestly, if they want to provide New York’s citizens information rather than just propaganda they should describe both sides of the valuation issues, explain why they chose what that chose, and explain why only the negative externalities of fossil fuels are considered without any consideration of the benefits.

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, do not represent the latest climate sensitivity science, and that no consensus exists on what approach or rate to use for discounting uncertain climate impacts over long time horizons.  Instead, the basis is buried in a technical document that does not even acknowledge that there are uncertainties and issues with basis for cost savings based on these values of carbon.

Furthermore, there are fundamental technical considerations overlooked or ignored by the guidance and response to comments. 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.  A value of carbon approach that addressed that concern as its primary goal would be great support to address this problem.

 

 

 

 

 

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?