RGGI – A Cap and Tax Market Program

I think it is wrong to assume that the success of market-based cap and trade pollution control programs for sulfur dioxide (SO2) and nitrogen oxides (NOx) guarantees that market-based trading variations such as cap and dividend or a carbon price will work for carbon dioxide (CO2) reductions.  This post describes the reasons why I think the results from RGGI show that success is unlikely and could end badly.

My Background

I think it is important to understand where I come from on this topic.  You won’t find any papers by me in the literature and I have no background in economics.  However, I have been involved with cap and trade programs since the start of the EPA Acid Rain Program in the early 1990’s.  At the beginning I was responsible for compliance submittals to EPA in a traditional utility but as the electric generation business transitioned to de-regulation in New York my responsibilities grew to helping to develop trading program compliance strategies for affected sources across the country in a non-regulated generating company.  From that time until the present I have evaluated numerous national, regional, and state-only trading programs for SO2, NOx, and CO2.  As a result, I have a niche understanding of the information necessary to critique trading programs from the seldom heard background of affected source staff complying with the rules.

Since my retirement I have turned to blogging with an emphasis on a pragmatic approach to pollution control.  My posts can be very technical because that was necessary to submit substantive comments to regulatory agencies.  I regularly post on the Regional Greenhouse Gas Initiative and update the status of investment proceeds and allowance holdings regularly.  The opinions expressed on this blog and 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.

Cap and Trade

In a standard cap and trade program i a cap is established, allowances are allocated to sources based on historical operations, and affected sources are required to submit an allowance for every ton emitted.  Sources are in compliance if their allowances are less than the cap established.  As long as there are sources that can over-control cost-effectively below their cap limits and trade allowances so that sources that don’t have options to meet their limits, then overall costs are cheaper to meet the cap.  The Environmental Protection Agency’s Acid Rain Program (ARP) is a standard cap and trade program and has been an unconditional success in my opinion.   Annual SO2 emissions are down 92% since 1990 and annual NOx emissions are down 84% since 1990 at a much lower cost than expected at the beginning of the program.

Despite the success of the ARP there are caveats that should be considered.  When the ARP cap was proposed it was assumed that sources would have to install control equipment to significantly reduce SO2 emissions.  However, it turned out that fuel switching was a very effective option because power companies figured out how to burn low-sulfur coal and railroad de-regulation made it cost effective to ship low sulfur coal everywhere.  My point is that the primary reason that the ARP was cheaper and produced greater reductions than expected had much more to do with the fuel switching to meet the cap than trading resulting from pollution control installation providing over-control and generating tradable allowances.

On the other hand, pollution control technology advancements have played a role in the reductions in NOx cap and trade programs.  I feel more comfortable arguing that cap driven technological solutions contributed to the success for those programs than fuel switching.  Importantly though, I believe trading on the open market is not a widespread compliance option.  Rather than depending on the vagaries of the allowance market, power plant operators implemented control programs based on system-wide compliance across their facilities.  The majority of trades necessary for compliance have been within operating systems and not on the open market.

There are some misconceptions about cap and trade programs within the environmental advocacy community.  For example in a description of the cons of cap and trade this author states many of the emissions credits are just given away: “Sometimes these credits are just given away, creating no trade benefit at all. This means it costs a business nothing to expand their emissions and that can harm a local economy, which receives no economic gain in return.”  However, because the cap is lower than the existing emissions even if a business expands their emissions others have to reduce their emissions so the cap is met.  The perception that there is a give-away colors the opinion of traditional cap and trade opponents such as the author’s comment that giving them away creates “no economic gain in return”.  Actually, the allowance credits only have economic value because they are a compliance obligation.  That economic value has to be earned by a facility that invests in pollution control equipment to over-control their emissions.  In doing so they earn the right to sell their excess and fund their investment.

Over time, the concept that the affected sources have received a “windfall” has led to program adjustments where regulators set aside allowances for sale and a variation on cap and trade where the allowances are sold at an auction.  The Regional Greenhouse Gas Initiative (RGGI) is a prime example of cap and auction program.  Note that these programs are commonly branded as “cap and dividend” programs where the money earned is a dividend to the public.

Cap and Auction

It is commonly accepted that RGGI cap and auction program has been successful.  As shown in the RGGI Nine-State EPA CAMD Annual CO2 Emissions table the total emissions have decreased from over 127 million tons prior to the program to just under 75 million tons in 2018, for over a 40% decrease.  However, as I have shown, when you evaluate emissions by the primary fuel type burned it is obvious that emissions reductions from coal and oil generating are the primary reason why the emissions decreased.  Both coal and oil emissions have dropped over 80% since the baseline.  Natural gas emissions increased but because of the inherent low emission rate overall emissions declined.  I believe that the fuel switch from coal and oil to natural gas occurred because natural gas was the cheaper fuel and had very little to do with RGGI because the CO2 allowance cost adder to the plant’s operating costs was relatively small.

I think that there are fundamental differences with CO2 trading programs as compared to SO2 and NOx trading programs that make CO2 trading programs inherently suspect.  Most importantly, there are no cost-effective add-on pollution control systems available to reduce CO2 emissions at existing sources so they have limited options to reduce emissions to meet the cap.  For example, there is no evidence that any affected source in RGGI installed add-on controls to reduce their CO2 emissions.  The only other substantive option at a power plant is to become more efficient and burn less fuel.  However, because fuel costs are the biggest driver for operational costs that means efficiency projects to reduce fuel use means have always been considered by these sources.   In other words, if it made financial sense it was implemented long before this program.  Because the cost adder of the RGGI carbon price was relatively small I do not believe that it changed the business case at any affected source to install an efficiency project as part of its RGGI compliance strategy.  Therefore, because affected sources in RGGI and, arguably any other CO2 cap and auction program, do not have any viable control options, they simply treat the cost of purchasing allowances at an auction as a tax.

Conclusion

Cap and trade programs have proven successful for SO2 and NOx.  The primary reason that those programs have reduced emissions at lower costs as opposed to simply requiring every facility to meet a specified limit is that there were technology or fuel-switching options available to the owners and operators of the affected sources that allowed some facilities to over-control and trade with facilities that did not have cost-effective control options.  Note however, that to date, SO2 and NOx trading programs have not constrained allowances beyond the control option capabilities.  Future cap reductions will have to push this limit so I think future cap and trade reductions will not be as cost-effective as in the past.

There are ramifications to the success of the SO2 and NOx trading programs that have not been acknowledged by the regulators or advocates for stringent CO2 cap programs.  If there are no control options then affected sources provide power as long as they have allowances to cover their emissions.  While in an idealized world advocates may think that a fossil-fired plant operate would invest in carbon-free generation, I think the reality is different simply because the owners background, resources, and expertise is mostly inapplicable to fossil generation.  Those owners simply treat the auction cost as a tax.

In the real world, there is another problem if the cap and auction program actually constrains emissions.  Because RGGI is “successful” the latest program review reduced the number of allowances available in the future so we will conduct an experiment to see what happens.  Because the allowances were sold in an open auction anyone can purchase them[1].  There is a problem associated with the allowances purchased in the past and banked for future use (see posts here and here). At this time, non-compliance entities own the majority of the surplus or banked allowances that were sold in earlier auctions.  When the number of allowances available in future auctions is reduced, the inevitable result will be that entities that have compliance obligations will necessarily have to buy allowances on the market with the non-compliance entity knowing that it is a seller’s market.  Obviously, the price will increase markedly to the consumer’s disadvantage.

Finally, a constraining CO2 allowance program will cause the price of allowances and the ultimate cost of energy to consumers to go up in the best case, but in a worse case, allowances are unavailable and affected sources will simply not run.  However, in the worst case the reliability of the electric grid could be endangered if enough affected sources are unable to run.

[1] In the interest of full disclosure, I should note that I own RGGI allowances that I purchased in an auction.

Not a Lot of People Know That on Carbon Taxes

I recently published a post on my concerns with carbon pricing schemes.  Subsequently Paul Homewood at the Not a Lot of People Know That blog described the flaws in an article supporting yet another carbon tax plan. This post describes Mr. Homewood’s description of the flaws because he brings up additional issues that I did not consider.  I have also included my comment on the original post and a reply to my comment.

AEP’s Carbon Tax Fantasy

Mr. Homewood commented on an opinion piece in the British Telegraph newspaper by Ambrose Evans-Pritchard supporting HR 763, the Energy Innovation and Carbon Dividend Act.  According to the article “this initiative by the Citizens Climate Lobby has the support of Democrats and Republicans in Congress. It has been endorsed by Alan Greenspan, the late Paul Volcker, and Nobel laureate Myron Scholes in the free market camp, and Janet Yellen, Amartya Sen, and Larry Summers on the interventionist side.”

Mr. Homewood described seven flaws in the proposal.  My comments in italics.

    1. 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 CCS, hydrogen heating etc. But when that happens, there are less emissions, and consequently less carbon tax revenue to redistribute. Meanwhile energy consumers will still have to face the extra cost of expensive renewables.
      • The point that energy demand is inelastic is important. Supporters of carbon taxes either underestimate energy demand change assuming, that people will use less or count on magical solutions that will cost less.  If they are wrong then society gets stuck with the higher costs.  I noted the problem with decreasing revenues over time in my post but did not pick up on the fact that consumers will be stuck with higher costs.
    1. It is well established that once governments get their hands on a new source of tax revenue, they don’t give it back. And that’s even before counting the cost of collecting and administering it.
      • I agree completely and should note that New York’s record with the Regional Greenhouse Gas Initiative revenues confirms this problem. Twice since the inception of that program New York has raided the revenues for the general fund.  Governor Cuomo has been circumspect – he simply diverts funds from RGGI to existing programs.
    1. AEP claims in this same article that the cost of renewables is already plunging. In that case why do wind and solar power still need subsidies, guarantees, and now apparently punitive carbon taxes to be able to compete?
      • Clearly this the case everywhere.
    1. His case for carbon taxes assumes that the world can run on predominantly unreliable renewable energy. So far, coal power has been squeezed out in Europe and the US through a combination of carbon pricing, air quality rules etc. But it has been largely replaced by extra gas fired generation. There is no evidence that gas and oil can in turn be replaced by wind and solar, and certainly not in the short time scales he has in mind.
        • The primary reason that coal is no longer used in New York is that natural gas is cheaper. My biggest concern with the Climate Leadership and Community Protection Act mandate to eliminate fossil-fired generation from the electric sector by 2040 is the lack of a plan to do it.
    1. In the UK at least, the power sector only accounts for about a tenth of emissions. Most arise from heating, transport and industry. A carbon tax would have little effect on, for instance, domestic gas usage or car travel. (We do after all already have a punitive carbon tax on cars, called fuel duty – it has not encouraged us to buy EVs). AEP’s colleague Jeremy Warner wrote about carbon taxes a few weeks ago. He reckoned that a $75 carbon tax would raise natural gas prices by 70%. Does he really believe this is acceptable to millions of people up and down the country who are already struggling to make ends meet?  As the Committee on Climate Change accept, to switch domestic heating from gas to heat pumps or hydrogen will cost hundreds of billions, money which neither householders or government has.
      • These concerns should be red flags for the New York Independent System Operator’s proposal to have a carbon price just on the New York electricity market.
    1. If a punitive level of carbon tax really was introduced in Europe, the consequences would be earth shattering. The Gilets Jaune would look like a tea party in comparison with the riots such a policy would cause. As the squeeze took effect, people’s cost of living would be badly affected. At the same time, the economy would quickly tank, with companies contracting, shutting down or simply offshoring.

AEP talks about a “border carbon tax”, but this would make matters even worse. For a start it would put up prices for consumers even more. Secondly it would set off a highly damaging trade war, as China and the rest of Asia would not sit back and take it. There would be only one loser in such a war, and it would not be Asia.

In any event, an EU carbon tax and border tax would never get off the ground, as the East bloc would reject it out of hand. Why, after all, should their economies, which rely heavily on coal, be hamstrung to suit German and French Greens?

      • These are the leakage issues that I described in my original post. I agree that implementation of a carbon tax that actually drove behavior changes and investment decisions would be so expensive that protests and political changes would be inevitable.
    1. Of course, the bottom line with all of this is that a carbon tax would need to be truly global to have any real effect. Would anybody trust China, for instance, to institute a proper system, rather than some fake one which merely shuffled bits of paper around. Many other developing countries would be in the same position.  They won’t stop using fossil fuels, because they know that they work and renewables don’t. No amount of creative accounting will change that.  Maybe he thinks the UN could ultimately administer a carbon tax, collecting and redistributing the revenue itself. If so, heaven help us all!
      • I agree completely with this bottom line.

 My Comment

I commented (December 27, 2019 9:31 pm) with the following:

I agree that all carbon pricing schemes are flawed. I think that there are a number of practical reasons that carbon pricing will not work as theorized. Because a global program is impractical, leakage is always going to be a problem. The carbon price has to be set such that revenues over time increase significantly and either the funding to make reductions dries up or as you point out the rebates dry up. The economists who support this theory seem to be blissfully unaware of the reality of the energy market or how inelastic demand is. Based on observed emission reduction programs in New York I think that indirect market signals are going to lead to less cost-effective reductions in the time frame necessary for the aggressive reduction rules. Finally, no supporters seem to understand the very real problems of implementation logistics. More here https://wp.me/p8hgeb-gw.

Phoenix44 replied to my comment (December 28, 2019 9:20 am):

None of that is true. The simple point about a carbon tax is that it encourages markets to come up with solutions. Unless you believe there are no solutions, it is the best way of solving the problem. We can continue to argue on here that there is no problem, but nobody who matters is listening.

Refusing to then support the least damaging solution is I am sorry to say, stupid.

My reply comment to Phoenix44 (December 28, 2019 1:57 pm):

With all due respect I think you miss the point of our critiques.  Even if you believe that a carbon tax is the best solution, that does not mean that our criticisms are incorrect.  It just means that this theoretical solution is not perfect.  I believe that it can be claimed to be the best solution only if you can implement this across the globe and across all the energy sectors.  If that cannot be done, then to claim that it is the least damaging solution because it is the best theory is flawed.  At the link above I posted on this problem in New York.  Advocates claim this is the best theory so it should be least damaging when we apply it to just the electric sector, in just New York State.  I don’t think it is going to work.

So, what would I do to address your problem?  I believe that the only way to successfully de-carbonize is to make the alternatives cheaper with no subsidies or externalities considered.  One way to try to do that would be to have a small carbon tax on those that feel we have to do something and invest all that money in research and development for cheaper and safer alternatives – how about small modular thorium reactors or fusion?   If you want to electrify transportation then you need a cheap, environmentally benign battery too.  Unfortunately, there are those opposed to nuclear in any form and even oppose getting cheap, abundant electric power to those who don’t have it.  Ultimately that is the stupid position.

Conclusion

Despite all the theoretical advantages  of carbon pricing I believe that any carbon pricing scheme that gets implemented will suffer from the practical constraints that Mr. Homewood and I have described.  In New York, I believe direct funding of emission reduction efforts will be more cost-effective.  As noted in my reply comment I think that the only way to successfully de-carbonize is to make the alternatives cheaper with no subsidies or externalities considered.  If the real goal is to de-carbonize the world, then it would be far better for New York to mobilize its intellectual capital for research and development for cheaper alternatives than to try to use intermittent and diffuse renewable energy to make emissions reductions now.  Carbon pricing will not provide incentives for the breakthrough technology needed to solve the global problem.

Generic Carbon Pricing Issues

The New York Independent System Operator (NYISO) is currently campaigning for its Carbon Pricing Initiative as the preferred approach to meet the requirements of New York’s Climate Leadership and Community Protection Act (CLCPA).  For example, they sponsored a blurb in the Politico New York Energy daily newsletter.  I have written extensively on my issues with the NYISO initiative and this post explains my concerns with carbon pricing schemes in general.

 The NYISO sponsored the following message in Politico New York Energy:

An increasing number of organizations recognize this unique, market-based solution as a viable, scalable option for helping to reduce carbon emissions. The World Economic Forum recently published an article by New York ISO, CEO Rich Dewey, Putting a Price on Carbon Will Help New York State Achieve a Clean Energy Future.

The World Economic Forum, an organization for public-private cooperation, engages the foremost political, business, cultural and other leaders of society to shape global, regional and industry agendas. New York, the 11th largest economy in the world, recently enacted the United States’ most aggressive climate change legislation. The New York ISO’s proposal for carbon pricing would embed a cost per ton of CO2 emissions in the sale of wholesale electricity, creating a price signal for investment in new clean energy resources. Read article.

Carbon pricing theory says that when the price of energy is raised by adding a cost for carbon, the increased costs at the higher CO2 emitting sources of energy will provide incentives to transition to lower or zero CO2 energy sources.  This is supposed to lead to the most cost-effective reductions.  I think that there are a number of practical reasons that carbon pricing will generally not work as theorized: leakage, revenues over time, theory vs. reality, market signal inefficiency, and implementation logistics.  Based on those concerns the NYISO plan is not going to solve anything in NYS.

Leakage

Leakage refers to the situation when a pollution reduction policy simply moves the pollution around rather than actually reducing it.  Ideally you want the carbon price to apply to all sectors across the globe so that cannot happen.  I don’t think a global carbon pricing scheme is ever going to happen because of the tradeoff between the benefits which are all long term versus the costs which are mostly short term.  I don’t see how anyone could ever come up with a pricing scheme that equitably addresses the gulf between the energy abundant “haves” and those who don’t have access to reliable energy such that “have nots” will be willing to pay more to catch up with those who have abundant energy.

Ultimately, I think that leakage will be a problem for any limited area carbon pricing policy.  Trying to force fit this global theory into the New York electricity market is an even more difficult problem.  As proposed, it will likely result in locational leakage where energy and emissions are not reduced but simply shift emission location within the inter-connected electric grid.   Additionally note that a carbon price on just the electric sector may result in leakage if more consumers generate their own power using unpriced fossil fuel.

Revenues Over Time

A fundamental problem with all carbon pricing schemes is that funds decrease over time as carbon emissions decrease unless the carbon price is adjusted significantly upwards over time.  This problem is exacerbated because over time reducing CO2 emissions becomes more difficult.  It has been observed that roughly 80% of the effects come from 20% of the causes and everyone knows the meaning of low hanging fruit.  This has been observed with regard to New York’s observed CO2 emission reductions to date.  New York electric sector emissions dropped 56% between 1990 and 2016 mostly by retiring old units and fuel switching to lower emitting fuels.  It can be argued that those reductions would have happened anyway because retirements and fuel switching were lower cost options without even considering CO2 emissions.   Furthermore, I believe that air pollution control costs increase exponentially as efficiency increases which makes this issue even more problematic.

This difficulty should be even more of a concern with CO2 emission reductions because at some point replacing existing fossil-fired generation not only has to consider the direct power output conversion costs but must also address dispatchability and grid support costs.  When those costs are included there will be a sharp increase in total costs per CO2 reduced.  Like many others, the NYISO Carbon Pricing Initiative proposes to use the social cost of carbon (SCC) as the carbon price.  The SCC cost increases over time but the costs over time do not increase enough in my opinion to keep pace with the necessarily more expensive total costs to maintain reliable electricity to consumers.

Theory vs. Reality

Another problem with carbon pricing theory is that in practice affected sources may not act rationally or as theory expects.  The Regional Greenhouse Gas Initiative (RGGI) is a market-based carbon pricing program and I have written extensively on it.  The academic theory for RGGI market behavior is that affected sources will treat allowances as a storable commodity and act in their own best interest on that basis.  If that were true affected sources would be purchasing allowances for long-term needs and “playing” the market to maximize earnings.  In practice RGGI affected sources plan and operate on much shorter time frames and have shown no signs of making compliance obligations a profit center.

Carbon pricing theory claims that when the cost of using higher emitting energy increases that will provide incentives to develop alternatives and discourage continued use of existing resources.  However, these incentives are indirect and again assume rational behavior in the market.  While theory says that a company that currently operates a fossil-fired plant will change its business plan and develop a renewable energy facility to stay in business, there are a whole host of reasons why the company may not go that route and instead treat the carbon price as a tax and continue to operate with that constraint.  In my opinion RGGI did not induce any NYS companies to change their business plans.

Market Signal Inefficiency

I am also concerned because the carbon price signal is an indirect inducement for emission reductions. CO2 emission reduction efficiency is an issue based on New York’s experience in RGGI.  The New York State Energy Research and Development Authority (NYSERDA) report New York’s RGGI-Funded Programs Status Report – Semiannual Report through December 31, 2018 (“Status Report”) describes how New York invested the proceeds from the RGGI auctions.  That report lists the many programs that are funded using RGGI proceeds as shown in Table 2 Summary of Expected Cumulative Annualized Program Benefits through December 31, 2018. There are six program categories: Green Jobs – Green New York, Energy Efficiency, Renewable Energy, Community Clean Energy, Innovative GHG Abatement Strategies, and Clean Energy Fund.

I combined the data for the six program categories in the Consolidated Summary of Expected Cumulative Annualized Program Benefits through 31 December 2018 table.  It summarizes the emission reduction benefits and costs for those categories.  The cost per ton reduced ratio ranges from $167 to $3,437.  At the high end the GHG Abatement Strategies category emphasizes long-term research and development.  Because this research could lead to a cost breakthrough this funding can be justified.  Looking at the other categories it appears that the more investments are focused on direct reductions rather than indirect investments the better the cost benefit ratio.  For example, the best ratio ($167 per ton removed) is in Community Clean Energy and that category includes direct support for renewable energy projects.   The Energy Efficiency category is an example of indirect support because investments in this category do not directly reduce emissions.  Instead the investments reduce energy use which reduces the need for energy production and indirectly reduces emissions.  However, the cost per ton removed, $425, is markedly higher than the best category.

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. However, as a result of these observations, I do not think that carbon pricing schemes, like the NYISO initiative, that raise the cost of energy and do not include specific funding aspects will work as efficiently in the short term and in limited markets like New York as theory suggests.  There are risks involved so who is going to make the investments and when will they make investments?

Implementation Logistics

Finally, I believe that there are significant logistical issues associated with carbon pricing that the NYISO process has simply ignored.  In order to set a carbon price, you have to know what the carbon emissions are for every source providing energy to the market.  For a global all-sector pricing scheme, you could set the price as the fuel is produced so that everyone pays the cost all the way through its end use.  On the other hand, the NYISO has to set the price as electric energy is sold on a real-time basis.  That is a non-trivial problem.  In New York, NYISO knows which generator is running and has a pretty good idea of their emission rate.  However, the final emission numbers are not available real-time because the emission values reported to prove compliance are not finalized until quality assurance post processing is complete and that can be months after the fact. The more significant problem is that NYISO has no way to calculate imported electricity carbon emissions on a real-time basis so cannot assign a carbon price value that accurately reflects how imported electricity is being generated.  These issues have been glossed over to date.

Conclusion

The NYISO claims that “An increasing number of organizations recognize this unique, market-based solution as a viable, scalable option for helping to reduce carbon emissions market-based solution”.  I frankly don’t think those organizations have had actual experience with a carbon pricing initiative logistics and have not evaluated whether the carbon prices proposed will provide the market signals necessary to spur the necessary renewable development needed to meet any CO2 emission reduction goals as a viable, scalable option for helping to reduce carbon emissions for the CLCPA.

The success of any carbon pricing scheme boils down to the question whether the carbon price set will provide enough of an incentive for projects that produce emission reductions that displace today’s generators and eventually covers the costs to provide the dispatchability and grid support functions provided by today’s generation mix. There are no estimates that this will be the case for the NYISO initiative.

In my opinion, NYISO carbon price initiative support is based on parochial interests.  In the case of NYISO they appear to believe it will simplify the cost accounting for New York’s renewable implementation efforts.  I think they have under-estimated the difficulty implementing the infrastructure necessary to accurately track the price of carbon and have ignored the potential that the complex scheme needed to reduce leakage will lead to unintended consequences.  Other support appears to be based on the potential to make money and it is not clear that is in the best interest of the State’s desire to reduce CO2 emissions as cost-effectively as possible.

The more I study the practical implementation of carbon pricing schemes the more skeptical I become.  I think that there are a number of practical reasons that carbon pricing will not work as theorized.  Because a global program is impractical, leakage is always going to be a problem.  The carbon price has to be set such that revenues over time increase significantly.  The economists who support this theory seem to be blissfully unaware of the reality of the energy market. Based on observed results I think that indirect market signals are going to lead to less cost-effective reductions in the time frame necessary for the aggressive reduction rules.  Finally, no supporters seem to understand the very real problems of implementation logistics.

Update December 30, 2019:  Please check out the companion post describing additional problems with carbon pricing raised by Paul Homewood at Not a Lot of People Know That blog.

Analysis Group “Potential New Carbon Pricing in the NYISO Market” Presentation October 2019

After nine months without posting on the New York State Carbon Pricing Initiative some things have come up that have led to posts as the initiative relates to New York’s Climate Leadership and Community Protection Act (CLCPA).  I am motivated to submit comments and prepare blog posts on the carbon pricing initiative so that there is at least one unaffiliated critical voice that has an understanding of the basis of the rationale for a carbon price and understands some of the complexities associated with implementing such a program. New York State energy planning is trying to choose between many expensive policy options like pricing carbon in the electric sector 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 they make a good pick then state ratepayers spend the least amount of a lot of money, but if they get it wrong, the State will be left with lots of negative outcomes and even higher costs for a long time.

At the time of this writing in October 2019, the New York Independent System Operator (NYISO) carbon pricing initiative is being addressed by internal working groups without the opportunity for public input.  On October 3, 2019 the Market Issues Working Group, Installed Capacity Working Group, and Price Responsive Load Working Group Meeting included a presentation by the Analysis Group entitled “Potential New Carbon Pricing in the NYISO Market”.  This post addresses that presentation.

Background

The Analysis Group was hired by the NYISO to examine potential economic impacts of the proposed carbon-pricing mechanism for NY’s wholesale power markets.  In the latest round of work conducted without the public input component, they were supposed to evaluate the latest round of modeling impacts and incorporate other economic considerations.  The enactment of the CLCPA in the summer of 2019 required changes to their approach and, in fact, the entire premise of the analysis.  It has changed from whether New York would pursue aggressive goals for reducing carbon emissions and do so through administrative and other mechanisms, to how New York will best accomplish its goals and meet the CLCPA mandates for reducing GHG emissions in the power sector and in the economy at large.

The report notes that the different premise fundamentally changed the nature of the study.  Now it examines “how NYISO’s proposed carbon-pricing mechanism can help the State meet its new statutory requirements for decarbonizing the electric system through efficient market design and at the lowest cost, and how New York’s wholesale competitive electric markets can help the state achieve its climate goals more broadly, efficiently, and effectively.”

Presentation

The presentation at this meeting was a typical power point slide deck.  The summary for policy makers, full report and technical appendix will be made available later this month.  The presentation itself included a list of fourteen key findings that I will address below.

  1. New York has the strongest set of climate policies in the U.S

The basis for this finding is the passage of the CLCPA that includes “a requirement for the state to eliminate greenhouse gas (GHG) emissions from all man-made sources in New York by 2050”.  The CLCPA “codifies a mandate for the electric system to rely on renewables for 70 percent of supply by 2030 and on zero-emitting resources for 100 percent of supply by 2040”. To the extent that New York now has bragging rights I agree.  However noble the intent, the fact is that no one has proposed a plan to get to a 100% zero-emitting electric system supply by 2040.  This presentation glibly assumes that these goals can be met with no caveats about the difficulties of this task.

  1. New York State has long been a policy leader

This slide is thinly veiled cheer-leading.  Their basis for supporting this leadership is this: “Considering that New York’s economy accounts for one out of every 200 tons of energy-related carbon dioxide (CO2) emitted anywhere in the world, the Act’s new commitments represent a significant action to reduce and mitigate the costly impacts of global climate change”.  Frankly, I was surprised at that number so I did some checking.  The World Resources Institute listed global CO2 emissions since 2010.   In 2016, the last year that the NYSERDA Patterns and Trends document has New York State total CO2 emissions data, the world emissions total was 35,700 million metric tons and NY’s emission total was 167 million metric tons which works out to one out of every 214 tons, close enough.  However, what was not mentioned was that between 2016 and 2017 global emissions increased 500 million metric tons – three times the NY total and between 2017 and 2018 global emissions increased 900 million metric tons – over five times the NY total.

  1. This work will not be easy

This statement is certainly true.  The slide concludes: “To keep these costs as low as possible, New York will need to draw on the long and successful history of market-based policies and pursue every effective tool at its disposal”.  Here is the problem.  There is no consideration of why previous market-based policies were successful.  I believe that switching to a fuel that was not only lower polluting, but as cheap or cheaper, was the primary cause for the success of the EPA Acid Rain program and to whatever success can be claimed for the Regional Greenhouse Gas Initiative (RGGI).  The problem is that the opportunities for fuel switching are used up.  Reductions in New York’s future will have to increase the cost of energy because future reductions will have to displace a cheaper source of energy.  I should also note that the premise that carbon pricing is “an effective tool” is an assumption, particularly in the context of this proposal.  The theory of carbon pricing is that an economy wide program covering as many jurisdictions as possible will provide incentives to make the transition more efficiently than other approaches.  This proposal is for one jurisdiction and one energy sector.  It is not clear how the program can deal with all the interface issues that causes.

  1. The CLCPA envisions using an array of measures

This statement is necessarily true.  The slide also notes that the CLCPA “anticipates putting measures in place as soon as possible”.  I think this is a prescription for problems.  This initiative is roaring ahead without the time and effort to develop a feasibility study, an implementation plan and outside critical review.  Given the scope and potential impacts to New York society that seems rash.

  1. The CLCPA envisions a big role for the electric grid

“The provisions to expand the role of electricity into transportation and buildings will go hand in hand with the Act’s requirements that the state’s electric system eventually eliminate its carbon emissions by 2040.”  I cannot over-emphasize that the CLCPA is legislation that did not include provisions to develop a plan to see if this goal is feasible.  The Brattle Group recently released a report entitled “Achieving New England’s Ambitious 2050 Greenhouse Gas Reduction Goals Will Require Keeping the Foot on the Clean Energy Deployment Accelerator”.   That report expects that the New England electrical load will need to double to meet an 80% reduction by 2050 so that “beneficial electrification” will CO2 displace emitting sources.  I see no reason why New York should not expect an even bigger increase in load in order to eliminate GHG emissions from all man-made sources in New York by 2050.  How much renewable energy will be needed, where does it have to be located, and how much will all this cost are all reasonable unresolved questions.

  1. New York has a home-grown policy proposal: a carbon-pricing mechanism

“NYISO can unleash the power and creativity of market forces through adoption of a carbon price in the state’s wholesale electricity market.  In fact, if NYISO were a state agency (which it is not), it would be obligated under Sections 7 and 8 of the Act to contribute to achieving the statewide GHG emissions limits, and adoption of a carbon price would be a natural response to such a mandate.”

The last I checked the NYISO was supposed to be independent.  Until such time as the NYISO or the State has come up with a feasibility study showing that the aspirational goals of the CLCPA can be met without endangering the goals of safe, adequate, and reliable service at just and reasonable rates, I think that it is premature to adopt a carbon price just because of this mandate.  Only when there is a plan can we really analyze how the carbon-pricing mechanism will work for New York.

  1. A NYISO carbon price can help deliver NY’s clean-energy transition in faster, cheaper, more reliable, more efficient, and more creative ways

“NYISO and key stakeholders have already developed a carbon-pricing proposal that—once in place—can send positive signals to encourage early action, consistent with the Act’s intent.”  I do not dispute that the carbon-pricing proposal can send a price signal.  However, I have seen no evidence that price signal from the proposal will actually send a strong enough signal to provide all the benefits suggested.  For example, according to the NYSERDA Patterns and Trends document in 2016 the electric sector emitted 27.7 million metric tons of CO2.  At a social cost of carbon value of $50 the carbon price initiative revenues would be $1.386 billion.  At the same time the CLCPA was signed, Governor Cuomo “executed the nation’s largest offshore wind agreement and the single largest renewable energy procurement by any state in U.S. history – nearly 1,700 megawatts -with the selection of two offshore wind projects”.  According to the Electricity Market Module chapter of the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2019 the New York region cost per kW is $8,380.  This means that the “overnight capital costs” of the two announced offshore projects (1,696 MW) will cost $14.212 billion.  Is an indirect price signal that is less than 10% of the cost of just these two projects amongst the many more that will be required really going to spur investments?

The second slide with the same title goes on to say that the price will also “help retain existing generating units with zero or low carbon emissions in operation as long as safely possible”.  While it surely cannot hurt, I again wonder if this is strong enough a signal.

  1. A carbon price will position private investment and operations in the direction of State goals

“Since 2000, private power companies and public power authorities have added nearly 13,000 MW of new power-production capacity (which now equals more than one-third of the capacity on today’s NYISO system). Most of these more-modern and more-efficient power plants have located in downstate New York where most of the state’s power consumption occurs, and where the operation of competitive and efficient markets minimizes production costs and investment risks for the state’s consumers of electricity.”  The report claims that the carbon price will incentivize even more investment where it is needed.  I cannot argue with that but the record shows that investment is occurring where it is needed anyway.  Is this untried theoretical approach needed?

  1. A carbon price in NYISO markets creates synergy between the state’s wholesale electricity market design and the Act’s GHG-reduction targets

The presentation claims “Adoption of a carbon price would help to send efficient price signals to market participants about the value of clean energy resources, and would establish an electric system strongly aligned with the goals of the Act.”  I don’t question the theory and it makes sense that this is an added incentive.  The real issue is whether the social cost of carbon price adder provides a strong enough signal to create “synergy”.

  1. A carbon price can work hand in hand with other policies to amplify innovation in clean-energy products and services, the control of air pollution, investment in advanced energy infrastructure, and improvements in public-health outcomes

I think this argument is weak.  The unresolved question is whether the social cost of carbon price indirect cost adder will be strong enough to provide more incentives for clean energy than direct subsidies.  I have analyzed the results of RGGI investments in New York and it appears to me that direct subsidies reduced emissions more effectively than indirect subsidies.  A carbon pricing scheme is the ultimate indirect approach.  If it covers the entire energy sector, I think this effect will be reduced but we simply don’t know.

  1. There will be out-of-pocket costs to transition NY’s energy economy

“Certainly, it will be difficult to achieve the goals of the Act without incurring costs”.  This is a big understatement.  This is the biggest unknown for New York’s “strongest set of climate policies”. How can anyone know what the costs will be until we have a plan how the goals will be met.  The relevant question for the carbon pricing initiative is whether it is worth the risk trying to implement a theoretical solution at the same time all these other unresolved plans are developed.

The presentation goes on to say:

“New York policy makers have decided, at least implicitly in the findings of the Act, that the real costs of climate change are significant enough to warrant urgent, aggressive action to transition the state’s economy away from fossil fuels.”  The legislative approach ignores numbers.  If, as I believe is likely, the cost of this transition exceeds the social cost of carbon what is the value of urgent, aggressive action?  We won’t know until there is a plan.

“The Act is premised on policy makers’ recognition that New Yorkers are already experiencing hardships and real economic costs—in the form of air pollution, harm to public health (especially for vulnerable populations), damage to property and critical infrastructure, declines in fish populations, and injury to key industries like ‘agriculture, commercial shipping, forestry, tourism, and recreational and commercial fishing’.”  This is an emotional rather than quantitative argument because the potential economic costs and benefits have not been quantified.  I believe it is appropriate for an independent organization to make this claim.

“The Act seeks to reduce and mitigate even worse impacts from a changing climate by requiring the actions the state will undertake to reduce GHG emissions.”  The state has never quantified the expected reduction and mitigation of worse impacts.  The reality is that it is inappropriate to expect that there will be any alleged impacts when the reduction in global warming potential cannot be measured if the State manages to eliminate CO2 emissions.

  1. The Act is still new.

“None of the prior studies that have modeled consumer cost impacts from a carbon price in NYISO markets reflects the timing and depth of changes that will be needed in NY’s electric system under the Act.”   At the risk of repeating myself again, if there is not plan then we cannot calculate consumer cost impacts.  The slide goes on to say “we observe that various studies to date indicate that a carbon price will lead to billions of dollars of positive economic benefits”.  Rather than argue about the value of the alleged benefits I will simply note that it is not clear why this report advocates for the rationale for the program.

  1. A carbon price will help move NY’s clean-energy economy forward in ways that are hard to predict

“Just as we are unable to quantify the actual costs to consumers of New York’s transition to a lower-carbon electricity system and lower-carbon economy, we are unable to quantify the actual costs (or net benefits) of adding a carbon price into NYISO’s market.”  Even if the theory works out, there significant logistical implementation issues.  The possibility that there may be dis-benefits, unanticipated problems and negative unintended consequences is ignored.

“Yet we strongly expect—based on the efficiencies achieved in electricity pricing since the start of competitive wholesale electricity markets, and on the similarly successful history of SOx and NOx emissions pricing in electricity markets—that NY’s economy and consumers will benefit from the operation of a carbon price to internalize into market prices the costs of carbon emissions alongside the deployment of myriad other public policies aimed at advancing the state’s energy transition.”  Because of fundamental differences between control options the success of historical SOx and NOx emissions pricing is no guarantee of future performance of a different market approach for CO2.

  1. Powering more of NY’s economy on electricity will help lower the costs of reducing GHG emissions from buildings and vehicles, compared to other approaches

In order to further justify their approach the report states: “This positioning of the electric system to help lower carbon emissions in the economy is consistent with the academic literature which strongly suggests that an electric system comprised of diverse, zero-carbon supplies coupled with an economy that is more reliant on electricity increases the possibility of significantly reducing GHG emissions at lower costs than other approaches.”  I agree electrification is probably the cheapest reduction approach for economy-wide GHG emissions.  The questions that remain are how much will the approach cost and how will it be implemented?

Conclusion

The report concludes with 14 outcomes that the authors believe provide incremental value for the NYISO carbon-pricing mechanism.  I don’t necessarily disagree with any of them.  The problem is the matter of degree.  I have seen no evidence that the price signal will be strong enough to drive investments.  For example, this initiative certainly will not be a dis-incentive for innovation but will it provide enough value to be worth the risks.

I describe a number of potential issues with the carbon pricing initiative in this post.   Among the implementation issues are the requirement to track CO2 emissions not only within the state but also from outside sources and reporting requirements that are incompatible with existing regulations. The carbon price will generate over a billion dollars.  In theory the money will flow where and reward who it is supposed to but there could be issues such as getting back the money so that it does not negatively impact consumers. The biggest unresolved question is whether the social cost of carbon signal proposed for this initiative will be strong enough to produce any of the claimed benefits.  No one has addressed that to date.

Finally, I believe that there is one over-arching issue that dictates caution and delay.  The regulations were written without a feasibility requirement.  Until such a study has been done so we have a planning scenario for the amount of renewable power needed, the amount of storage needed to back the intermittent renewable power up and the amount of transmission needed to move the diffuse renewable power to where it is needed, I don’t believe we should be assuming that a carbon price approach will be the best way to pay for it.  Therefore, it only seems logical to delay implementation until you know what you are going to do.

Can Carbon Pricing Support the New York CLCPA

It has been a long time since I have posted anything about the New York State Carbon Pricing Initiative.  A couple of recent events precipitated my desire to do another post especially as it relates to New York’s Climate Leadership and Community Protection Act (CLCPA).  This post describes my concerns with carbon pricing in general and the New York proposal in particular.

Reason to Post

I am posting because of two recent items.  According to Marie French in Politico’s New York Energy September 18, 2019 edition:

“The state’s top utility regulator said Gov. Andrew Cuomo’s administration continues to await evidence on whether carbon pricing offers a better way to achieve New York’s energy policy goals before offering a verdict on the proposal’s fate. Public Service Commission Chairman John Rhodes spoke to a gathering of energy industry executives at the Independent Power Producers of New York’s annual fall conference at the Gideon Putnam. He was asked head-on about the administration’s position on carbon pricing and reiterated the wait-and-see tack taken by policymakers thus far. “When carbon pricing was first proposed, we were interested and as it’s been shaped and subjected to analysis we have remained interested,” Rhodes said. “But from the very beginning we stated the basis on which we would be interested … which is as long as it’s a more effective instrument of state policy.” The New York Independent System Operator (NYISO) has been grappling with how to implement carbon pricing since a process was kicked off by Rhodes and then-NYISO leader Brad Jones in August 2017. NYISO has indicated it doesn’t plan to take a vote on the proposal without support from the Cuomo administration, and the state would have to set the price for carbon under the scheme.”

The other item is a video entitled How carbon pricing can help support the CLCPA posted by the NYISO on August 14, 2019.  The video features NYISO principal economist Nicole Bouchez who explains “how injecting a “social cost of carbon” into wholesale electricity markets provides an efficient dispatch mechanism for selecting energy resources with the lowest emissions. This offers the state another tool for achieving its aggressive carbon reduction goals.”

It sounds to me like the Administration is nervous about this approach and so won’t make a commitment.  Bouchez who has spent the last 18 months or so developing the proposal is lobbying for its use.  I have not been following the proposal this year because my comments to the NYISO during their development phase last year were ignored and this year it went to a different phase with a different committee that does not even allow comments from outside parties.  I have plenty of other things to do to so wasting my time commenting on this topic to an organization that ignores comments was not a priority. I will post once again on this topic for your edification.

New York Carbon Pricing

In its simplest form, the carbon pricing initiative would add a carbon cost adder to all electric generation sources in New York.  This is supposed to reflect the social cost of carbon dioxide emissions.  My last post on this initiative translated the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force for an outside the New York Capital District energy wonk audience.  Upon further review of that post I still stand by all of my concerns.  There are significant logistical issues associated with implementation of the proposed scheme.  NYISO has consistently downplayed those issues.  I am concerned that implementation will be a logistical nightmare for the people who have to do the work but that is not my biggest worry.  There are so many unknowns in how this will work that I think it is likely that there will be inadvertent gaming of the system and the potential for intentional gaming that will not be in the interest of the public’s need for just and reasonable electric rates.

When I came back to this topic after stepping away from the nitty-gritty details of this initiative for eight months, I realized that my primary concern was not in the details of the application but in the theory.  For some reason my top viewed post at my blog is Academic RGGI Economic Theory of Allowance Management and there is a similar problem with the carbon pricing theory.  Economist theorize that the CO2 allowances in the Regional Greenhouse Gas Initiative are treated as storable commodities.  As such the current price and the plan for accumulation of allowances should depend on the expected long-run total supply compared to the expected long-run total demand.  However, in the real-world, allowances are not treated as storable commodities by the affected sources.  Instead, allowances are treated as compliance requirements with short-term horizons by sources who own the most allowances.  I am not about to disagree that they should not be taking a longer-term view but the reality is that for a variety of reasons it does not happen that way.  Eventually I predict that the departure from reality in the theory that has driven the RGGI plan will cause problems because the latest round of revisions to the rule depended on the theory more than the history of the program.

For the NY carbon pricing initiative, I have a similar concern rationalizing theory and practice.  The theory says that when the price of electricity is raised by pricing carbon, the increased costs at the higher CO2 emitting facilities will reward existing lower emitting units and will incentivize investment in new lower emitting facilities.  If the market is efficient then the most cost-effective reductions will occur and everyone will be happy.  I think that there are a number of practical reasons that this will not work as proposed in the New York market.

My most general concern is that the carbon pricing initiative is just for the electric sector in one market.  Ideally you want a carbon price on all sectors across the globe.  I don’t think that is ever going to happen because of the tradeoff between the benefits which are all long term versus the costs which are all short term.  I don’t see how anyone could ever come up with a cost scheme that equitably addresses the gulf between the energy abundant “haves” and those who don’t have access to reliable energy.  Trying to force fit this global theory into the New York electricity market will likely bring up many unintended consequences.  The biggest problem is simply leakage between New York and every other neighboring electric market.

I also don’t think that advocates for this approach have fully considered how reductions could be implemented.  Who is going to invest in the alternatives?  Existing fossil-fired generating sources in New York are on death row if we are to believe that the CLCPA target to eliminate CO2 emissions from the electric sector by 2040.  Even if there were cost-effective add-on CO2 controls for existing sources, I doubt that anyone would invest given that end date.  I don’t think that there are any existing power facilities with room for much in the way of diffuse renewable generation.  Solar cells could work but there isn’t enough room for much at existing facilities.

Ultimately, I think that the investment problem boils down to an indirect signal versus a direct signal. In a recent post, I analyzed NYSERDA’s investment of RGGI auction proceeds.  Comparing different programs, I concluded that the more there is a focus on direct investments in emission reductions the better the cost benefit ratio.  On one hand it could be seen as intuitively obvious but the point is that carbon pricing proposals rely on a completely indirect impetus for emission reductions.  As such those proposals, as theoretically appealing as they may be, may be much less cost effective than suggested.

That same post showed that RGGI investments are not very cost efficient.  New York will likely propose to use the Obama era Social Cost of Carbon value which is $50 in 2019.  The best NYSERDA investment program category cost benefit ratio is three times greater than that value.  The cost benefit ratio for all the NYSERDA investments is over nine times greater than the $50 SCC value.  If a mix of investments has this poor a record of cost efficiency then how could can an indirect price signal at that level trigger any response?  It may well be that the carbon price SCC value is not a strong enough signal to drive investment.

Before New York commits to this “bright and shiny object” that advocates can brag about, someone should do some analysis of market price signals for actual investments.  While the theory might sound grand, if the proposed signal does not actually drive investments the only thing this will do is raise electricity prices. Among the many logistical implementation issues is how the money collected will be equitably returned to ratepayers.  Even if there were a logical and equitable way to apportion costs back across the state, the Cuomo Administration has a record of diverting funds intended for climate mitigation to suit its purposes.

Layman’s Guide to My Rationale to Oppose the NYISO Carbon Pricing Concept Proposal

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

New York Carbon Pricing Proposal History

On August 11, 2017, NYISO and the New York State Department of Public Service (DPS) jointly initiated a process to engage with stakeholders to examine the potential for carbon pricing in the wholesale energy market to further New York State’s energy policy goals. This initiative began in the fall of 2016 as a project commenced by the NYISO through its stakeholder process. The NYISO retained The Brattle Group to evaluate conceptual market design options for pricing carbon emissions in the competitive wholesale energy markets administered by the NYISO. The Integrating Public Policy Task Force (IPPTF) was created to solicit stakeholder feedback for the carbon pricing proposal. The IPPTF meeting materials page lists all the documents produced by NYISO and stakeholder comments.

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

Reasons to Oppose the New York Carbon Pricing Proposal

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

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

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

Reason #4: Clearly in order to have a carbon pricing program at some point the cost of carbon has to be established. In order to justify its CO2 reduction agenda the Obama Administration organized a working group to estimate the economic harm of CO2 emissions They developed a value for the Social Cost of Carbon (SCC) which is an estimate of the economic harm of a ton of CO2 emissions.   The NYISO carbon pricing proposal recommends that the DPS set the carbon price value and has suggested using the SCC as estimated by the U.S. Interagency Working Group (IWG) on the Social Cost of Carbon, starting at $43/ton CO2 today and rising to $65/ton by 2029[1].  My fundamental problem is that the IWG SCC value does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. As a result that value over-estimates the potential benefit of New York emission reductions. Julian Morris critiqued the IWG SCC value and noted the effect of changing the following four assumptions:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reason #6: I think that all carbon reduction proposals should clearly state the potential impact of the proposed action on global warming. New York State has never provided an estimate of the effect of any of its clean energy programs or direct emissions control programs on global warming. In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation. The Brattle analysis estimates that the change in CO2 estimates of reductions in system-wide CO2 emissions due to a New York carbon charge will be 1.5 million metric tons and Resources For the Future estimates 1.2 million metric tons. The impact of these reductions on projected global temperature rise would be at most a reduction, or a “savings,” of approximately 0.000022°C by the year 2050 and 0.000046°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000 foot increase in elevation above sea level. The projected temperature difference is the same as going down less than half an inch. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south 44 feet. I oppose this because it clearly will have no effect on global warming.

[1] See New York Public Service Commission Order Adopting a Clean Energy Standard (2016) pp. 49, 51, and 131 http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7B1A8C4DCAE2CC-449C-AA0D-7F9C3125F8A5%7D, and U.S. Government (2015) Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. May 2013, revised July 2015.

NYISO Carbon Pricing Concept Proposal Translation

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

New York Carbon Pricing Proposal History

On August 11, 2017, NYISO and the New York State Department of Public Service (DPS) jointly initiated a process to engage with stakeholders to examine the potential for carbon pricing in the wholesale energy market to further New York State’s energy policy goals. This initiative began in the fall of 2016 as a project commenced by the NYISO through its stakeholder process. The NYISO retained The Brattle Group to evaluate conceptual market design options for pricing carbon emissions in the competitive wholesale energy markets administered by the NYISO. The Integrating Public Policy Task Force (IPPTF) was created to solicit stakeholder feedback for the carbon pricing proposal. The IPPTF meeting materials page lists all the documents produced by NYISO and stakeholder comments.

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

Overview of Carbon Pricing Concept

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

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

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

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

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

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. The carbon price will be set at the social cost of carbon (SCC) which will be determined by the DPS “pursuant to the appropriate regulatory process”. The choice of the carbon price provides the entire basis for this approach and that issue has not been considered in this process. I have commented on that problem (for example my comments on the April 23, 2018 ). The SCC value proposed was developed by a working group established by an Obama Executive Order to estimate the economic harm of CO2 emissions. My fundamental problem with that SCC value is that it does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. As a result that value over-estimates the potential benefit of New York emission reductions. Ultimately the SCC relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.” In addition, the Trump Administration has proposed a different and far lower value for the SCC. For me the bottom line is that most of New York State ratepayers are aware of the ramifications of this value and the possibility that it could add a billion dollars per year to the rates of the state.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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