Setting a Price for Carbon in the NY Wholesale Electric Market for the Layman

This post discusses the New York effort to put a price of carbon on the wholesale electric market. I think New Yorkers deserve answers to the following questions:

  • What is this proposal going to do?
  • How is it supposed to work?
  • How much will it cost?
  • What impact will it have?

This post will attempt to provide my answers to these questions to summarize my concerns with the proposal.

I have been submitting comments throughout the process (here and here) and I have posted on this here.   My comments have been submitted as a private retired citizen. They 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. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I was motivated to submit comments and prepare these posts so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered. There are unintended consequences to the proposal that will result in enormous costs for a plan that will have Inconsequential tangible benefits to the environment.

Carbon Pricing

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. Economists support the idea that with a carbon price the market efficiently cuts emissions. Note, however, in order to operate efficiently the carbon price has to be applied to the whole economy.

Not surprisingly, the devil is in the implementation details. A price has to be set for each ton of carbon dioxide emitted but what should the price be and how should the emissions be measured. The disposition of the money earned by the tax is another major issue. In order to minimize regressive effects and let the market efficiently decide how best to make reductions many economists favor a revenue-neutral approach where the carbon tax revenues replace other tax revenue streams and no investments are determined by the regulators.

New York Carbon Pricing Proposal

On August 11, 2017, the New York Independent System Operator (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. That report, Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, (Brattle Report) forms the basis of the proposal.

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. Frankly, this is a frustrating process. This is illustrated by the fact that there are meeting agendas but no meeting minutes. For example, at the May 21, 2018 meeting emissions monitoring experts from the generating industry had a panel discussion on emissions reporting to explain how CO2 is measured and reported. One of the major points was that there is a significant timing issue between the needs of the carbon pricing initiative and regulatory requirements which mandate post-monitoring quality assurance adjustments. On July 16, 2018 NYISO presented its general recommendation for emissions reporting and the ensuing stakeholder discussion ignored the expert presentation discussion of the timing issue. If minutes were available then the timing issue would have been documented. More importantly, It is not clear if the NYISO final recommendation will incorporate the concerns of the experts.

In April 2018, NYISO posted a straw proposal that outlined a potential design for incorporating the cost of carbon emissions into the wholesale electricity market of New York State. The straw proposal recommends that the DPS set the carbon price value and has suggested using the Social Cost of Carbon (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]. The straw proposal recommends that all internal suppliers participating in wholesale electric energy markets pay the carbon charge. Most of the affected sources already report hourly CO2 emissions but there remain difficulties integrating their existing reporting requirements and this new requirement (primarily timing issues) and there are some affected sources that do not report CO2 that will have to develop the necessary infrastructure to report hourly data. Further complicating the problem is the issue of how to deal with imported and exported power. Finally, there has been limited discussion of the disposition of the carbon price funds but it is noticeable by its absence that the concept of returning all the money to rate payers has not been suggested. Instead, it appears that portions of this will be an additional funding mechanism for the Governor’s Reforming the Energy Vision initiative.

Carbon Price

My first concern with this proposal is the choice of the carbon price (for example my comments on the April 23, 2018 addressed this). 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 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. 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.”

Potential Costs to Consumers

Table 1 Potential Costs of the Carbon Pricing Initiative is my best estimate of potential costs. The SCC column lists the annual values from 2015 to 2029. In order to know the costs we have to know the CO2 emissions. I used NYS Regional Greenhouse Gas Initiative (RGGI) historical emissions for 2015 to 2017 and then assumed that emissions would drop 1.5% per year from the 2017 values. At a minimum, ratepayers in New York will have pay the SCC value times the CO2 emissions from the affected New York generators (SCC Charge column in Table 1).

The Brattle Report proposes breaking the SCC charge into two components: the existing RGGI costs and the carbon price to the wholesale market. The RGGI allowance prices in Table 1 are the observed values from 2015 to 2018 and the value assumed by Brattle for 2025. The RGGI costs will equal the RGGI allowance price times the CO2 emissions (RGGI Charge column in Table 1). These are costs already committed to NY ratepayers albeit they are supposed to be invested for the benefit of consumers.

The IPPTF refers to the difference between the SCC Charge and the RGGI Charge as the Residual (Residual column in Table 1). The disposition of this money has not been finalized, but we know that a portion will be returned to the Load Serving Entities to offset ratepayer costs and the rest will be invested in carbon-reducing programs.

The Brattle Report analysis of the impact on customer costs uses average annual values and concludes that the carbon charge would have “approximately zero net impact on customer costs”. However, the point of my hourly analyses in my comments submitted on July 5, 2018 is that I think that the carbon charge will raise net energy costs. When I calculated the hourly impact I estimate that the total cost would have been $3,027,266,788 (Energy Increase column in Table 1). Importantly, none of the difference ($1,728,574,766) between this value and the SCC Charge (Energy Impact column in Table 1) will be returned to customers.

Impact

New York State has never provided an estimate of the effect of its clean energy programs on global warming. Governor Cuomo’s plan to “rebuild, strengthen and modernize New York’s energy system is called Reforming the Energy Vision (REV). The ultimate goal of REV is to change the energy system of New York to reduce greenhouse gas (GHG) emissions 80% from 1990 levels by 2050 (“80 by 50”).  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 ultimate impact of the REV 80% reduction of 188.7 million metric tons on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.0028°C by the year 2050 and 0.0058°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 18 inches. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south 0.4 miles.

My calculated values for temperature change are based on the “consensus” estimates of the Intergovernmental Panel on Climate Change which I personally believe over-estimate the impact of temperature changes caused by greenhouse gas emissions. My calculations show that REV and the carbon pricing initiative cannot claim that any observable impacts for the projected small change in temperature due to these emissions reductions.

Conclusion

This post did not delve into the many technical issues associated with implementing carbon pricing in general and as proposed in the straw proposal. Nonetheless, it raises basic questions. The increase in energy prices beyond the carbon price itself is an unintended consequence that will basically double the costs of the program. At the end of the day those enormous costs will have inconsequential tangible benefits to the environment. Even if you believe that we need to do something about climate change these numbers do not support this proposal.

[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.

NYS Carbon Pricing: Implications of Observed CO2 on Peak Hour of 2017

New York’s energy planning process continues its efforts to meet the aggressive goals of a reformed energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. I have been following the process and submitting comments as an unaffiliated public party to the process. This post describes a vivid example of the difficulties of implementing economic theory related to carbon dioxide reduction programs.

 Introduction

I am motivated to submit comments in this process so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered by the Integrating Public Policy Task Force (IPPTF). The questions in these comments are related to the total costs of the program.

This post is based on comments submitted as a private retired citizen. They 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. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding or have any idea of the ramifications of incorporating the cost of carbon emissions into New York State (NYS) wholesale electricity markets. The basis of this initiative is a Brattle Group analysis that outlined a scheme to incorporate a state policy defined cost of carbon in the wholesale market to improve the overall efficiency of the New York Independent System Operator (NYISO) energy and capacity markets.

As of the date of this post one thing that has been conspicuously absent from the discussions has been the total expected cost. In my latest submitted comments I argued that it would be beneficial for all stakeholders to have the NYISO provide an analysis of historical data that shows what would have happened to the markets if the carbon price were in effect. I illustrated the problem estimating this cost by considering one historical hour. It appears that there is a significant overlooked component to this initiative. One feature of a carbon price scheme is usually revenue neutrality where the carbon costs are returned to the consumers to make it less regressive. However, in the New York State wholesale electric market case it looks like in addition to the carbon price itself there will be a general increase in market clearing prices. There is no mechanism to make that component revenue neutral.

Input Data

In order to evaluate the emissions data I obtained data from the United States Environmental Protection Agency Clean Air Markets Division (CAMD) website for July 19, 2017 at hour 17. The CAMD website has hourly data for all emissions sources affected by national emissions trading programs. There are significant limitations to the data for this application but they should be indicative of the situation. I manually added the NYISO electric load control zones, made some guesses about whether some small units should be included or not, estimated CO2 emissions at some sources that are not required to provide that data, and revised some inconsistent numbers. There also is an inherent flaw in this approach because the EPA data set includes gross load whereas the NYISO loads are net loads. Also note that I excluded combined heat and power units and steam units from these calculations. My data are available upon request and the submitted comments describe the methodology in more detail.

Energy Markets

The NYISO manages the state’s power grid and de-regulated energy market. In order to understand the implications of carbon pricing on New York electricity market costs some background information is necessary. There is an overview of the price setting approach used in the NYISO document NYISO Markets:

The energy market provides a mechanism for Market Participants to buy and sell energy at prices established through a competitive auction process designed to meet energy demands, or “loads,” with the least-cost resources available; or, through contractual, bilateral transactions where quantities and prices are arranged directly between wholesale suppliers and “load-serving entities” (LSEs) such as utilities. For energy purchases arranged through the NYISO’s auctions, the NYISO administers day-ahead and real-time auctions, resulting in a two-settlement process that sets the price of energy based on market and grid conditions at specific times. Further, the NYISO’s auctions reflect geographic conditions , establishing “Locational Based Marginal Prices” (LBMP) for energy that reflect local demand and supply conditions as well as any constraints that may exist when moving energy across the grid to meet demand. The first settlement is based upon the day-ahead bids and the corresponding schedule and prices, or day-ahead commitment. The second settlement is based upon the real-time bids and the corresponding real-time commitment (RTC) and real-time dispatch (RTD). Market Participants may participate in the DAM and/or the real-time market. Roughly 94% of energy is scheduled in the day-ahead market, while the remaining 6% is accounted for in the real-time market. About 40% of the energy settled in the day-ahead market is scheduled through bilateral contracts.

CO2 Summary

The NYISO Zone CO2 Cost July 19 2017 at hour 17 table lists the gross load, heat input, CO2 mass, and CO2 rate in lbs per mmBtu and tons per MWhr for the entire state, by LBMP zone and aggregating Downstate and Upstate zones. The source data show that the hourly CO2 emissions range from 681 tons per hour at the remaining coal plant to 1.2 tons for a partial operating hour at a natural-fired turbine. More importantly the CO2 emission rate (lbs/mmBtu) data only lists three general emission rates corresponding to natural gas, oil, and coal fuels. If the results for this hour are generally consistent throughout the year then the efficacy of this program to lower CO2 emissions is questionable. There are slight differences within these rate categories but there are relatively minor. The New York Department of Environmental Conservation recently announced a new regulation that will for all intents and purposes ban the future use of coal so this program cannot be expected to shut down the use of coal. The oil generating units do not burn oil for economic reasons so this program cannot be expected to change the use of those units relative to natural gas units. The difference in CO2 emission rate for the natural gas units is so small that this program cannot be expected to lead to the use of lower emitting units. Therefore, this program will not likely cause fuel switching due to the price of carbon.

Carbon Prices

According to the NYSERDA Patterns and Trends report, in 2014 the electric sector CO2 emission rate was 39,406,671 tons per year. If the carbon price is $50 per ton then we can expect this program to generate a minimum of over $1.5 billion dollars per year. The hourly carbon price based only on emissions ($50 per ton times the total tons in the previous table) gives a state-wide cost of $440,373 with $173,995allocated Upstate and $266,978 allocated Downstate.

The Brattle report proposed that the only impact to consumers would be directly related to the carbon price. However, the NYISO has not done an analysis of the potential impact of the carbon price on the wholesale electric market to determine if there could be a general increase in market clearing prices. If that is the case then the consumers will be paying a whole lot more than just the carbon price and there will be no way to even to try to make any extra costs revenue neutral.

 I used the hourly data to estimate LBMP zone costs in theNYISO Zone CO2 Cost July 19 2017 at hour 17 table. I assumed that the zone cost equals the total load times the maximum CO2 rate (tons per MWhr) times the Social Cost of Carbon (Tab “LBMP”). Because of the magnitude of the carbon price I also assumed that the price of carbon sets the price of the most expensive unit in the zone. If that presumption is correct then the results are far different than the example estimate simply multiplying emissions by the cost of carbon. The total statewide cost is $773,644 and the Upstate portion is $209,394 and Downstate is $564,251. Note that most of the additional cost is due to a $306,048 increase Downstate because the Upstate cost only increases $35,999.

Conclusion

Based on this example I believe it is necessary and appropriate for the NYISO to provide estimates of the expected historic market response to the carbon price for an entire year based on hourly LBMP values. The NYISO knows the marginal economic unit and can use the USEPA data to show the marginal and maximum emission rates, CO2 mass/MWH and CO2 mass/mmBtu. At the proposed price of carbon that analysis could determine what would happen to the LBMP prices.

In addition to the financial impacts we can estimate what kind of impacts the carbon price will have on generation patterns. Based on the CO2 rates in the example hour it appears that we will find very small shifts in the marginal economic unit. Only when we have annual results can we verify whether this proposed program will have any effect on carbon emissions.

Finally, the analysis I recommend will not only estimate how the carbon price will affect LBMP prices but also provide information about where those revenues end up.  If my assumption that the LBMP prices are based on the maximum emission rate but the residual that goes back to the consumers is based on the actual rates for each generator then the only facility that fully pays its residual is the maximum emission rate unit. All the other units contribute less to the consumer. The NYISO should provide the analysis so that we can determine what portions of the LBMP price increases remain with which generator sectors and what residuals could be returned to the LSEs. Finally, we can estimate the portion of LBMPs that could be credited to new renewables.

Carbon Pricing Initiative Discussion of Social Cost of Carbon

New York’s energy planning process continues its efforts to meet the aggressive goals of a remodeled energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. As part of that process a recent meeting had a presentation on the social cost of carbon. I submitted the following comments.

Introduction

These comments are submitted as a private retired citizen. They 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. The majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I am motivated to submit these comments so that there is at least one voice of the unaffiliated public whose primary interest is low electricity rates.

This attempt to incorporate carbon pricing in wholesale electric prices flies in the face of carbon price theory. In theory, the idea is to apply a carbon price across all energy sectors in as broad a market as possible so that market forces determine the most cost-effective solution. This plan to put a price on carbon on one sector in one state is therefore bound to fail to do anything other than raise NYS electricity prices at the expense of all NYS ratepayers.

I have an understanding of the basis of the rationale for a carbon price as embodied in the SCC as discussed in the April 23, 2018 IPPTF meeting. Based on the discussion at the meeting I got the impression that even many of those in attendance who have heard of the SCC don’t understand the short-comings of the parameter. Therefore, I am submitting a third set of comments that addresses the SCC presentations at the meeting. I also want to point out a recent article to readers unfamiliar with the SCC: Julian Morris, Climate Change, Catastrophe, Regulation and the Social Cost of Carbon.

Social Cost of Carbon Presentation

Bethany Davis Noll gave a presentation (Agenda 2 – Social Cost of Carbon) on the SCC at the April 23 meeting. I submitted comments on 10/31/17 advocating a range of values for the SCC. I argued that there are three technical reasons that the single value the IWG developed and proposed for use in this initiative should not be used exclusively: global benefits, discount rates and equilibrium climate sensitivity. Ms. Noll addressed two of those topics in her presentation but ignored the more important climate sensitivity issue.

The IWG SCC value considers global benefits and impacts not just New York State benefits and impacts. In other words New Yorkers are being asked to pay today for some estimated far future impact mostly elsewhere. Given that the State has limited resources to provide benefits to New Yorkers today is reason enough to consider whether the State can afford that luxury.

The EPA RIA for the revised Clean Power Plan includes an “interim” SCC value that uses a domestic rather than international social cost of carbon value which I think makes more sense for New York policy. Ms. Noll’s presentation argues that it is more appropriate to consider global impacts. The presentation responds to the use of domestic only damages as follows:

    • But existing models cannot accurately calculate a domestic‐only estimate because they were not built to include spillover effects.
    • Even if the models could calculate an accurate domestic‐only number, the calculation ignores the need to spur reciprocal actions from other countries to curb emissions.

Ms. Noll only gave one spillover effect example but a Columbia Journal of Environmental Law paper addresses the spillover effect in more detail:

In 2010, the interagency working group used the results of one economic model as well as the U.S. share of global GDP to generate an “approximate, provisional, and highly speculative” range of 7–23% of the global SCC as an estimate of the purely direct climate effects to the United States. Yet, as the interagency group acknowledged, this range is almost certainly an underestimate because it ignores significant, indirect costs to trade, human health, and security likely to “spill over” to the United States as other regions experience climate change damages.

In the paper spillover effects described include:

  • Climate change disruption of the economies of other countries will spill over to the US as decreased availability of imported inputs, intermediary goods, and consumption goods and “may cause supply shocks to the U.S. economy. Shocks to the supply of energy, technological, and agricultural goods could be especially damaging. As seen historically, economic disruptions in one country can cause financial crises that reverberate globally at a breakneck pace.”
  • The human dimension of climate spillovers includes migration and health effects. Water and food scarcity, flooding or extreme weather events, violent conflicts, economic collapses, and a number of other climate damages could precipitate mass migration to the United States from regions worldwide.
  • Infectious disease could also spill across the U.S. borders, exacerbated by ecological collapses, the breakdown of public infrastructure in poorer nations, declining resources available for prevention, shifting habitats for disease vectors, and mass migration.
  • Climate change is predicted to exacerbate existing security threats—and possibly catalyze new security threats—to the United States.

Ultimately whether or not a domestic SCC approach fails to include spillover effects matters only if decision makers decide that those effects should be a driver of NYS policy. While these spillover scenarios could entail a variety of serious costs to the United States the question for New York is whether the surety of increased costs of a price on carbon to our wholesale electric market is appropriate relative to those speculative effects. If we decide that we should worry about those effects then it is as important to decide whether New York should fund mitigation efforts like a carbon price or adaptation efforts that avoid climate damages to foreign countries to reduce the chance that these impacts will radiate benefits back to New York. It is likely that investments in foreign infrastructure adaptation will be a more cost-effective response.

The Columbia Journal of Environmental Law paper also claims that the need to spur reciprocal actions from other countries to curb emissions is a rationale for a global rather than a domestic SCC. The paper states that:

Game theory predicts that one viable strategy for the United States to encourage other countries to think globally in setting their climate policies is for the United States to do the same, in a tit-for-tat, lead-by-example, or coalition-building dynamic.

The fundamental issue for New York is that even the domestic SCC is not really appropriate for this program. If a New York SCC economic model were developed the direct impacts to New York would be a fraction of any global SCC value. I believe that our potential to lead-by-example potential is proportional to our proportional NY-only SCC value. As a result, advocates for this policy must explain how this New York action will lead to a “coalition-building dynamic” that will have anything more than a symbolic effect on global policies as opposed to simply adding cost to New York electric bills.

In previous comments I noted that the IWG SCC value did not follow Office of Management Budget Circular A-4 guidance that states that regulatory analyses “should provide estimates of net benefits using both 3 percent and 7 percent.” The 7 percent rate is intended to represent the average before-tax rate of return to private capital in the U.S. economy. The 3 percent rate is intended to reflect the rate at which society discounts future consumption, which is particularly relevant if a regulation is expected to affect private consumption directly.

In response to the 7 percent discount rate used in the “interim” SCC value in the EPA RIA for the revised Clean Power Plan Ms. Noll noted that:

    • The7 % discount rate obscures the harm that emissions will have on the younger and future generations.
    • It was rejected by the IWG as inappropriate.

I am not enough of an expert on economics to argue these points. However, I am a cynic and suggest that the fact that it was rejected by the IWG was as much because when it was used it indicated much less cost as any other reason.

Throughout Ms. Noll’s presentation and the Columbia Journal of Environmental Law paper the harms of climate change impacts were repeatedly emphasized. For example, the paper includes the following: “greenhouse gas pollution can impose great harms”, “significantly increased risks of severe harms”, and “A handful of geographic regions may experience short-term benefits from climate change, such as temporary agricultural gains in colder regions, but even in those areas, long-term, catastrophic scenarios would bring significant harms.” The problem is that the estimates of catastrophic impacts are directly related to the likelihood of high sensitivity of temperature to carbon dioxide levels.

My fundamental problem with the IWG SCC value is that they did not use the latest value of the Equilibrium climate sensitivity (ECS). This is the expected change in temperature when the atmospheric CO2 concentration doubles. As noted, the costs of this warming are dominated by the higher possible values of the ECS. This problem was documented on July 23, 2015 by Patrick Michaels who presented relevant testimony to the House Committee on Natural Resources.  Excerpts:

“In May 2013, the Interagency Working Group produced an updated SCC value by incorporating revisions to the underlying three Integrated Assessment Models (IAMs) used by the IWG in its initial 2010 SCC determination. But, at that time, the IWG did not update the equilibrium climate sensitivity (ECS) employed in the IAMs. This was not done, despite there having been, since January 1, 2011, at least 14 new studies and 20 experiments (involving more than 45 researchers) examining the ECS, each lowering the best estimate and tightening the error distribution about that estimate. Instead, the IWG wrote in its 2013 report: “It does not revisit other interagency modeling decisions (e.g., with regard to the discount rate, reference case socioeconomic and emission scenarios, or equilibrium climate sensitivity).”

“Clearly, the IWG’s assessment of the low end of the probability density function that best describes the current level of scientific understanding of the climate sensitivity is incorrect and indefensible. But even more influential in the SCC determination is the upper bound (i.e., 95th percentile) of the ECS probability distribution. Apart from not even being consistent with the AR4, now, more than five years hence, the scientific literature tells a completely different story. And this is very significant and important difference because the high end of the ECS distribution has a large impact on the SCC determination—a fact frequently commented on by the IWG2010.”

I previously commented that Dr. Judith Curry had prepared a table of different values of the ECS that illustrates the relative impacts of the indefensible cherry picking of a value that suited the agenda of the IWG rather than a more recent value.

Because the extreme values are a key driver of the ECS, the 95th percentile values are of most interest. Refer back to the Michaels testimony above to see that the IWG had lower values available to it for years but chose not to use them.

Furthermore, a paper just published by the Journal of Climate concludes that high estimates of future global warming from most computer climate simulations are inconsistent with observed warming since 1850. The implication is that future warming will be 30 to 45% lower than suggested by the simulations. This continues the trend of more recent data reducing the likelihood that temperature is highly sensitive to CO2 and therefore reduces the probability of the high impact “harms” that advocates for this carbon pricing initiative claim justify the use of the IWG SCC value.

Conclusion

For the purposes of this effort to develop a system that could put a price on carbon in the New York State wholesale electric market I agree that the IWG SCC estimate minus the RGGI cost is the appropriate parameter to use. However, when the time comes for policy decision makers to decide whether to proceed, a range of SCC values should be provided.

The 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. The final report must also explain the rationale for NYS ratepayers to definitely increase our cost of electricity with a price on carbon is appropriate relative to the speculative effects of any SCC value.

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.”

My Comments on New York Carbon Pricing 3

New York’s energy planning process continues its efforts to meet the aggressive goals of a remodeled energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. I have posted on previous submittals here and here.  The following is the comment that I submitted to the State on March 29 2018.

These comments are submitted as a private retired citizen. They do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone. I am motivated to submit these comments so that there is at least one voice of the unaffiliated public whose primary interest is low rates and an understanding of the basis of the rationale for a carbon price. New York State energy planning based on the Reforming the Energy Vision goal to change the energy system of New York to reduce greenhouse gas (GHG) emissions 80% from 1990 levels by 2050 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 we make a good pick then we’ll spend the least amount of a lot of money, but if we get it wrong we will be left with lots of negative outcomes and even higher costs for a long time.

These comments are being submitted before the carbon charge setting and adjustment topic is discussed in April. The basic rationale of this policy to price carbon to offset the cost of its impacts hinges on the Social Cost of Carbon value used. I believe it is unfair and inappropriate to determine its viability based on the use of a single value so I recommend using a range and this comment provides further justification for alternative values.

I previously submitted two comments on this initiative. I have recommended that the carbon pricing initiative consider a range of SCC values including the proposed value and the values included in the Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal. In my other submitted comments I noted that there are serious issues with only including the electric sector. I noted that there are barely enough electric sector emissions available to meet the 2030 goal and nowhere near enough for the 2050 goal. Because the proposed carbon tax is on only one sector of the economy, the overall goal of carbon reductions could fail simply because driving up the price of electricity makes the conversion to electric based residential heating and transportation more difficult.

Because of the importance of the SCC on the very basis of this initiative, this comment provides another reference documenting the weaknesses of its use. I endorse the findings of Climate Change, Catastrophe, Regulation and the Social Cost of Carbon by Julian Morris as representing my views on the use of the SCC in this matter.

Julian Morris on the Social Cost Carbon

In the following section I only edit the summary of the analysis as published at the Reason Foundation for use in this comment. I refer the reader to the reference for the supporting graphs and figures and recommend reading the full document.

Federal agencies are required to calculate the costs and benefits of new regulations that have significant economic effects, but initially, different agencies applied different SCCs. To address this problem, the Office of Management and Budget and Council of Economic Advisors organized an Interagency Working Group (IWG) to develop a range of estimates of the SCC for use by all agencies. However, the IWG’s estimates were deeply flawed. In April 2017, President Trump issued an executive order rescinding the IWG’s estimates and disbanded the IWG. The question now is what value regulatory agencies should use for the SCC—if any—when evaluating rules that affect greenhouse gas emissions.

Mr. Morris writes that:

Most analyses of the social cost of carbon, including the IWG’s, have utilized “integrated assessment models” (IAMs), the basic methodology of which involves the following six steps:

  • Develop (or choose from existing) scenarios of future emissions of GHGs;
  • Use those scenarios to estimate future atmospheric concentrations of GHGs;
  • Project changes in average global temperature and/or climate resulting from these future atmospheric GHG concentrations;
  • Estimate the economic consequences of the resultant changes in temperature/climate;
  • Estimate the costs of abating specific amounts of GHG emissions;
  • Combine the estimates from steps 4 and 5 to produce an assessment of the net economic effect of different scenarios and thereby identify the optimum path of emissions.

Each step in this process is fraught with difficulty:

  1. Future emissions of GHGs are unknown—and unknowable—but likely lower than assumed in most IAMs.

Future human-related emissions of GHGs will depend on many factors, especially: the human population, the extent and use of technologies that result in energy consumption, the types of technology used to produce energy, and the efficiency with which technologies use energy.

None of these factors can be forecast with any precision. Predicting future technologies is particularly challenging. However, greenhouse gas emissions from U.S. sources have declined from their peak, mainly as a result of using more energy-dense, lower carbon fuels (and by using energy more efficiently. Global emissions are rising but at a declining rate, in spite of robust economic growth. If these trends continue, future concentrations of greenhouse gases are likely to be at the low end of estimates used by the IWG when calculating the SCC.

  1. The relationship between emissions and concentrations of greenhouse gases is complicated.

Calculating future atmospheric concentrations of GHGs, based on estimates of future human emissions, requires knowledge of the length of time that these GHGs will remain in the atmosphere. That, in turn, requires knowledge about the rate at which they will break down and/or be absorbed. This is no simple task. The rate at which GHGs such as methane and dinitrogen monoxide break down depends on such things as temperature and the amount of water vapor and other chemicals in the atmosphere with which they might react. The rate at which CO2 is taken up by plants, soil and oceans varies considerably depending on factors such as temperature and the availability of nutrients. The dynamic and interactive nature of these effects complicates the picture further.

  1. The climate is likely much less sensitive to increased emissions of GHGs than has been presumed in most IAMs, including those used by the IWG.

Early estimates of the sensitivity of the climate to increased concentrations of greenhouse gases found that a doubling of atmospheric carbon dioxide would result in a warming of between 1.5°C and 4.5°C, with a “best guess” of 3°C. But those estimates were based on poorly specified models. Tests of models using those estimates of climate sensitivity predict about twice as much warming as actually occurred. Nonetheless, the IWG used those early, inaccurate estimates. More recent estimates of climate sensitivity suggest that future emissions are likely to result in much more modest warming of the atmosphere (with a doubling of carbon dioxide concentrations resulting in a warming of 1.5°C or less).

  1. The effects of climate change are unknown—but the benefits may well be greater than the costs for the foreseeable future.

If the recent lower estimates of climate sensitivity are correct and emissions follow a relatively low path, warming will likely be modest and its effects mild. Likely effects include:

  • Warming will be greater in cold places (i.e. farther from the equator), seasons (winter), and times (night) than in warm places (equatorial regions), seasons (summer) and times (day).
  • At higher latitudes, winters will be less extreme.
  • Precipitation will increase, but not everywhere, and some places will become drier.
  • Sea levels will continue to rise slowly, as the oceans expand and land-based glaciers melt. (If current trends continue, sea level will rise by about 11 inches by 2100.)
  • The incidence of extreme weather events will not change dramatically.

While increased temperatures in warm places and seasons may result in higher mortality among those who are less able to cope with higher temperatures, warmer winters will reduce the number of people who die from cold. Since 20 times as many people currently die from cold as die from heat, modest warming will reduce temperature-related deaths. These effects will be tempered by the use of heating and cooling technologies, but the costs of additional cooling will be more than offset by reduced expenditure on heating.While rising temperatures have the potential to increase the incidence of some diseases, such as diarrhea, these effects are likely to be moderated by the adoption of better technologies, including piped clean water and sewerage.

Increased concentrations of carbon dioxide and higher temperatures are likely to increase agricultural output in many places. While agricultural output may fall in other places, this effect is likely to be moderated by the adoption of new crop varieties and other technologies. On net, crop production is likely to rise in the U.S. and globally.

Many economic models of climate change, including two of the three IAMs used by the IWG assume very limited adaptation. Yet the history of human civilization is one of adaptation. Food availability per capita and access to clean water have risen dramatically over the past half-century, reducing malnutrition and water-borne diseases and increasing life expectancy. Rising wealth and the adoption of new technologies have reduced mortality from extreme weather events by 98% in the past century. It seems highly likely that continued innovation and more widespread adoption of adaptive technologies will continue to reduce mortality, mitigating most—if not all—the adverse consequences of rising temperatures.

  1. The costs of reducing future emissions of GHGs are unknown—and will depend very much on the extent and timeframe of any reduction.

Proponents of taking action now argue that any delay would increase the total cost of emissions reductions—because baseline emissions (i.e. the emissions that would occur without any mandated reductions) would be higher and the size of any such future reduction would have to be greater. But such arguments presume both significant increases in baseline emissions and a need dramatically to reduce such emissions. If the trends in technology identified earlier do continue, growth in baseline GHG emissions will continue to slow and in the longer term may even fall without any government mandates. Indeed, it is possible that baseline emissions in the future (i.e. after 2050) will be consistent with a pathway of emissions that results in atmospheric GHG concentrations that generate net benefits.

Even if baseline emissions rise to a level that justifies intervention in the future, that does not necessarily justify reducing emissions now. Humanity currently relies predominantly on carbon-based fuels for energy generation, and the costs of alternative sources of energy are in most cases relatively high. (If alternative sources of energy were less expensive, then it would make economic sense to adopt them.) Continued innovation will almost certainly result in lower emissions per unit of output in the future, so the costs of reducing a unit of GHG emissions in the future will be lower than they are today.

  1. When combining benefits and costs, the IWG used inappropriately low discount rates, giving the false impression that the benefits of reducing emissions are greater than the costs. At discount rates that reflect the opportunity cost of capital, the current costs of taking action to reduce GHG emissions now and in the near future are almost certainly greater than the benefits.

OMB guidelines state that, for the base case, “Constant-dollar benefit-cost analyses of proposed investments and regulations should report net present value and other outcomes determined using a real discount rate of 7%. This rate approximates the marginal pretax rate of return on an average investment in the private sector in recent years.”

Unfortunately, when discounting the benefits and costs associated with global warming, many analysts have used discount rates that do not reflect the opportunity cost of capital. For example, the IWG provided an estimate of the SCC at a 5% discount rate, but it is the highest rate given. In its guidance, the IWG emphasized the SCC calculated at a 3% discount rate. Its rationale for using the lower rate is that future benefits from avoiding climate change costs relate to future consumption, rather than investment. Policies to address climate change would affect both consumption and investment, but for the purposes of evaluation what matters is the effect on investment, since it is the effect of policies on investment decisions that will determine rates of innovation and hence economic growth, the ability to adapt to climate change, and future consumption. In other words, while future consumption is of primary concern, due to its relationship to human welfare, return on investment is the key factor determining future consumption. Thus, the appropriate discount rate is the rate of return on capital.

Changing the Assumptions

Changing the assumptions made in the IWG’s models can have a dramatic effect on estimates of the SCC. Anne Smith and Paul Bernstein of National Economic Research Associates ran the IAMs used by the IWG making four changes:

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

When all these changes were combined, the effect was to reduce the SCC by 97%, from $43 to about $1.30. Smith and Bernstein’s analysis did not change any assumptions regarding climate sensitivity or other relevant climate parameters that might have been misspecified in the IAMs used by the IWG. Kevin Dayaratna, Ross McKitrick and David Kreutzer assessed the effects of using more-recent empirical estimates of climate sensitivity to calculate updated SCC estimates using two of the IWG models. They found that, for one model, the average SCC fell by 30%–50% and for the other it fell by over 80%. Moreover, at a 7% discount rate, one of the models generated a negative SCC.

If all of the adjustments made by Smith and Bernstein were combined with those made by Dayaratna et al. it seems likely that the SCC would fall to well below $1. Indeed, given uncertainties in the various parameters used, it seems difficult to avoid the conclusion that for practical purposes the SCC is effectively $0.

What About Catastrophic Climate Change?

Some economists have objected that conventional measures of the SCC fail adequately to account for the possibility of catastrophic climate change. However, such criticisms are based on assumptions concerning the probability of catastrophe that have no empirical basis. A recent attempt to estimate the SCC by surveying experts to find out what they would be willing to pay to avert catastrophe is so riddled with defects as to be of no utility.

Caiazza Conclusions

As Mr. Morris notes “The question now is what value regulatory agencies should use for the SCC—if any—when evaluating rules that affect greenhouse gas emissions.” I do not believe that this proceeding is an appropriate place to determine the most appropriate single value of the SCC to use. However, it would be clearly appropriate to consider a SCC range not only because there are technically justifiable differences in the key input assumptions but also because the SCC value originally proposed for this program was based on the flawed Obama Administration IWG assumptions that did not follow OMB guidance on the use of discount rates.

The analysis by Mr. Morris concludes that “it seems difficult to avoid the conclusion that for practical purposes the SCC is effectively $0.” Therefore, I recommend that this initiative determine what SCC value represents a breakeven point for implementing this program. It is only possible for policy makers to appropriately implement this initiative if they understand there is a reasonable and justifiable range of potential costs of carbon on society. The basic rationale of this policy hinges on the SCC value used and it is unfair to determine its viability based on the use of a single value.

Carbon Price SCC Value Recommendation

I recommend that the carbon pricing initiative consider a range of SCC values including the proposed value in the Brattle Report entitled Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, the values included in the Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal, and because Climate Change, Catastrophe, Regulation and the Social Cost of Carbon concludes that “it seems difficult to avoid the conclusion that for practical purposes the SCC is effectively $0” that the breakeven point be calculated where the calculated value of the social cost of carbon benefit out-weighs the costs of a price on carbon.

Page 22 Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals Section V. Market Design Issues with a Carbon Charge, A. Establishing the Appropriate Carbon Price and Adjustments Over Time:

The first option is to set the carbon charge at the value New York ascribes to carbon abatement. The New York NYPSC has adopted using the SCC as estimated by the U.S. Interagency Working Group on the Social Cost of Carbon. The SCC serves an estimate of the damages associated with an incremental increase in carbon emissions. Specifically, the NYPSC has tied ZEC payments to the SCC, starting at $43/ton CO2 today and rising to $65/ton by 2029.

Page 44 Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal in section 3.4.1. Estimating Forgone Domestic Climate Benefits

Table 3-7 presents the average domestic SC-CO2 estimate across all the model runs for each discount rate for the years 2015 to 2050. As with the global SC-CO2 estimates, the domestic SC-CO2 increases over time because future emissions are expected to produce larger incremental damages as physical and economic systems become more stressed in response to greater climatic change, and because GDP is growing over time and many damage categories are modeled as proportional to gross GDP. For emissions occurring in the year 2030, the two domestic SC-CO2 estimates are $1 and $7 per metric ton of CO2 emissions (2011$), using a 7 and 3 percent discount rate, respectively.

For emissions occurring in the year 2015, the two domestic SC-CO2 estimates are $1 and $5 per metric ton of CO2 emissions (2011$), using a 7 and 3 percent discount rate, respectively.

My Comments on New York Proposal to Incorporate Carbon Pricing in Wholesale Markets 2

New York’s energy planning process continues its efforts to meet the aggressive goals of a remodeled energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. I have not been able to let that go by without throwing in my two cents so this post describes my second submittal in the formal proceeding. I have been submitting my comments because I am convinced that all these efforts will cost extraordinary amounts of money but will have no discernable impact on global warming or any of the purported effects.

As part of the release of Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals (hereinafter the “Brattle Report”) there was an introduction authored by Brad Jones, President & CEO of the New York Independent System Operator (NYISO) and John Rhodes, Chief Executive Officer of the New York State Department of Public Service (DPS). The introduction described the rationale for the report:

In this regard, the NYISO began a project through its stakeholder process in the fall of 2016 to examine the potential for using carbon pricing within wholesale markets to further New York’s energy goals. Initially, The Brattle Group was retained by the NYISO to evaluate conceptual market design options for integrating the social cost of carbon, a widely recognized regulatory standard, into competitive wholesale energy markets administered by the NYISO. That analysis explored how carbon pricing can align wholesale markets with state energy policies and looked at several factors, including the effect on customer costs and emissions reductions.

The Executive Summary of the Brattle Report notes that “Harmonizing state goals and the operation of wholesale electricity markets could leverage market forces to more efficiently meet both state goals and traditional electric system goals of providing affordable, reliable supply.” This statement makes for a nice slogan, but the reality is different. In this post I show that there are barely enough electric sector emissions available to meet the 2030 goal and nowhere near enough for the 2050 goal. Because the proposed carbon price is on only one sector of the economy, the theory that increasing the price of carbon will drive the market to less carbon intensive alternatives fails. Instead, driving up the price of electricity makes the conversion to electric based residential heating and transportation more difficult. I consider these fatal flaws to the proposed initiative.

The Reforming the Energy Vision (REV) state energy goals in 2030 are a 40% reduction in Greenhouse Gas (GHG) emissions from 1990 levels and a 50% renewable generation. In 2050 the goal is an 80% Reduction in GHG emissions from 1990 levels. The NYSERDA Patterns and Trends document notes that the 1990 Carbon Dioxide equivalent (CO2e, standing in for GHG) emissions were 235.8 million metric tons so the 2030 goal is 141.5 million metric tons or a 94.3 million ton reduction. In 2050 the goal is 47.2 million metric tons which is a 188.7 million metric ton reduction.

Figure 1 shows the trends in New York State CO2e emissions, energy (TBtu) and CO2e intensity which is the emissions divided by the energy. Note that the energy used in New York rose until 2005 and has since started to drop while the pattern of CO2e has ebbed and flowed more but has also dropped since 2005. The question is whether pricing carbon in the electric sector can affect these trends to meet the state goals. In order to do that we have to look at what drove the trends.Figure 1 NYS CO2e, Energy and CO2e Intensity

In order to reduce GHG emissions there are three direct approaches:

  1. Replace energy sources that generate GHGs with ones that don’t
  2. Energy efficiency – use energy more effectively
  3. Energy conservation – use less energy

In addition there are a couple of indirect ways: reduce the population and reduce the gross state product or economic growth. I mention those two methods to point out that neither approach is politically palatable as an approach to reduce GHG emissions and that historically the gross state product has increased and population has stayed relatively constant.

The NYSERDA Patterns and Trends document contains the energy and emissions data by sector needed to evaluate the causes of the observed reductions. Figures 2 and 3 show the trend of primary energy consumption by the residential, commercial, industrial, transportation and electric energy production sectors by total energy use (TBtu) and % of total. Residential has bounced around but is effectively the same since 1080 and the commercial sector trended up but has trended down to roughly the same levels as 1990. Given the growth in the economy it appears it appears to me that investments in conservation and efficiency have produced some results. The most notable decrease has been the industrial sector, down over 200 TBtu since 1980. While efficiency and conservation have helped with that it is more likely a result of the decline of the industrial sector in New York. Transportation energy use has grown consistently since the mid-80’s. The electricity sector grew until approximately 2005 and has since dropped. It does not appear on the basis of historic trends that energy conservation and energy efficiency will be major factors for compliance with the emissions goals.

Fig. 2 Trend NYS Primarary Consumption of Energy (TBtu) by SectorFig 3 Trend NYS Primarary Consumption of Energy (%) by Sector

That leaves carbon emission reductions to make the majority of the reductions necessary. Figures 4 and 5 show the trend of GHG emissions by the residential, commercial, industrial, transportation and electric energy production sectors and % of total. Note that these are emissions from fuel combustion only so the totals are not the same as shown before. The emissions trends for residential, commercial, industrial and transportation sectors are similar to the energy trends. Residential and commercial are roughly the same, industrial is down, and transportation is up. Electricity sector emissions are down more than the total energy. This is the only sector the proposed price on carbon will affect.

Fig 4 NYS CO2e Emissions (million metric ton) by Sector TrendFig 5 NYS CO2e Emissions by % Sector Trend

Because the electric generation sector is the only sector that will be affected by the proposed carbon price we need to evaluate the sources of electricity generated in New York. Figure 6 shows the percentage of electricity provided by different sources: coal, natural gas, petroleum (residual oil and distillate), hydro, nuclear, imports, other (landfill gas & biomass), wind and solar. Coal and petroleum have gone down significantly since 1990. Natural gas has increased significantly as has imports. After Nine Mile Point unit 2 came on-line nuclear has stayed about the same as has hydro. In the past few years enough solar and wind have come on line to appear on the chart. Figure 7 shows the total energy provided by the same categories. Clearly the biggest changes have been the reduction of coal and petroleum fuel use and increase of natural gas and imports.

Fig 6 NYS Electric Generation by % Fuel TypeFig 7 NYS Electric Generation by Fuel Type (GWh)

In order to determine how much the carbon pricing program can directly affect CO2e emissions we need to look at the electric sector emissions relative to emissions from the rest of New York State. Figure 8 shows the trends and Table 1 NYS Trend of CO2 by electric sector and rest of state shows the data. Statewide coal and electric sector oil have gone down 55 million metric tons but since 1990 natural gas has gone up. It can be argued that for the most part the major decreases in coal and oil were the result of changes in the relative cost of fuel and had nothing to do with New York State policy. Moreover, the State has drafted regulations to eliminate the use of coal so carbon pricing will have no effect on those emission and there are only 3.9 million metric tons of reduction available anyway. With respect to electric sector emissions, no further oil use reductions are expected because the current levels represent the minimum emissions necessary to maintain oil as a backup and emergency use fuel. That leaves natural gas emissions.

Fig 8 NYS Trend of CO2 by electric sector and rest of state

Overall, the total emissions in 2015 are only down 18% to 169.5 million metric tons and the 2030 target is 141.5 million metric tons so further reductions of 28 million metric tons are necessary. Putting a price on electric sector carbon could, in theory, reduce the total sector emissions of 29.2 million metric tons. However, the primary way to reduce emissions from the other sectors is to replace fuel combustion with electricity. The unintended consequence of the carbon price then will be to increase the price of electricity making those conversions less attractive.

On one hand carbon pricing is touted as a market-based solution to carbon reductions. However, that only works when the tax is applied to the entire economy. The proposed New York carbon pricing approach is only for the electric generation sector, so market intervention will be required to subsidize the electrification conversions necessary to meet the targets if only because the proposal increases the cost of electricity making conversions less attractive. As soon as that happens the elegant market-based solution devolves into special interest lobbying at the expense of the general public.

Already labor unions, community groups, environmental organizations, faith communities, and environmental justice advocates are supporting just such a carbon tax scheme. While the New York State Climate and Community Protection Act (CCPA) (S.8005 / A.10342) covers all sectors it specifically proposes to not only return the revenues to ratepayers but also includes subsidies to renewable energy sources in general and targeted subsidies as well and worker and community support.

While the intent of carbon pricing to harmonize state goals and the operation of wholesale electricity markets to leverage market forces to more efficiently meet both state goals and traditional electric system goals of providing affordable, reliable supply makes for a nice slogan the reality is different. There are barely enough electric sector emissions available to meet the 2030 goal and nowhere near enough for the 2050 goal. Because the proposed carbon price is on only one sector of the economy, the theory that increasing the price of carbon will drive the market to less carbon intensive alternatives fails. Instead, it drives up the price of electricity which makes the conversion to electric-based residential heating and transportation more difficult.

My Comments on the New York Proposal to Incorporate Carbon Pricing in Wholesale Markets 1

New York’s energy planning process continues its efforts to meet the aggressive goals of a remodeled energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. I have not been able to let that go by without throwing in my two cents so this post describes my first submittal in the formal proceeding. I have been submitting my comments because I am convinced that all these efforts will cost extraordinary amounts of money but will have no discernable impact on global warming or any of the purported effects. My comments are submitted as a private retired citizen. They do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

I am motivated to submit these comments to make the point that the majority of New York State ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I doubt that if they understood the SCC as the basis for this initiative that they would favor its implementation as proposed. Therefore, I recommend that the carbon pricing initiative consider a range of SCC values including the proposed value and the values included in the Regulatory Impact Analysis for the Review of the Clean Power Plan: Proposal.

The SCC is the present day value of projected future net damages from emitting a ton of CO2 today. In order to estimate the impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts. The projected global economic damage is then discounted to present value. Finally, the future damage is allocated to present day emissions on a per ton basis to get the SCC value.

Because of the huge uncertainties of the SCC providing a range of values is appropriate. The SCC future net damages includes impacts out 300 years. 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 in 1917. In addition, 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.”

The current value of the SCC proposed for use in this initiative was developed by the US Interagency Working Group (IWG). There are three technical reasons that the single value the IWG developed and proposed for use in this initiative should not be used exclusively: global benefits, discount rates and equilibrium climate sensitivity.

The IWG SCC value considers global benefits and impacts not just New York State benefits impacts. In other words New Yorkers are being asked to pay today for some estimated far future impact elsewhere. Given that the State has limited resources to provide benefits to New Yorkers today is reason enough to consider a range of the SCC for a program that could increase costs to ratepayers. The EPA RIA for the revised Clean Power Plan includes a domestic rather than international social cost of carbon value. Putting aside for the moment the question whether a New York only policy should only consider benefits to New Yorkers, it nonetheless seems obvious that the policy should at least limit benefits to the United States in any calculation on the value of the program to New Yorkers.

The IWG SCC value did not follow Office of Management Budget Circular A-4 guidance that states that regulatory analyses “should provide estimates of net benefits using both 3 percent and 7 percent.” The 7 percent rate is intended to represent the average before-tax rate of return to private capital in the U.S. economy. The 3 percent rate is intended to reflect the rate at which society discounts future consumption, which is particularly relevant if a regulation is expected to affect private consumption directly. The EPA RIA for the revised Clean Power Plan follows this guidance by presenting estimates based on both 3 and 7 percent discount rates in the main analysis.

Equilibrium climate sensitivity (ECS) is the expected change in temperature when the atmospheric CO2 concentration doubles. The costs of this warming are dominated by the higher possible values of the ECS. The ultimate problem is that the IWG did not use the most recent values of the ECS for the value that the price of carbon initiative proposes to use. On July 23, 2015, Patrick Michaels presented relevant testimony to the House Committee on Natural Resources.  Excerpts:

“In May 2013, the Interagency Working Group produced an updated SCC value by incorporating revisions to the underlying three Integrated Assessment Models (IAMs) used by the IWG in its initial 2010 SCC determination. But, at that time, the IWG did not update the equilibrium climate sensitivity (ECS) employed in the IAMs. This was not done, despite there having been, since January 1, 2011, at least 14 new studies and 20 experiments (involving more than 45 researchers) examining the ECS, each lowering the best estimate and tightening the error distribution about that estimate. Instead, the IWG wrote in its 2013 report: “It does not revisit other interagency modeling decisions (e.g., with regard to the discount rate, reference case socioeconomic and emission scenarios, or equilibrium climate sensitivity).”

“Clearly, the IWG’s assessment of the low end of the probability density function that best describes the current level of scientific understanding of the climate sensitivity is incorrect and indefensible. But even more influential in the SCC determination is the upper bound (i.e., 95th percentile) of the ECS probability distribution. Apart from not even being consistent with the AR4, now, more than five years hence, the scientific literature tells a completely different story. And this is very significant and important difference because the high end of the ECS distribution has a large impact on the SCC determination—a fact frequently commented on by the IWG2010.”

Dr. Judith Curry has prepared a table of different values of the ECS that illustrates the relative impacts of the indefensible cherry picking of a value that suited the agenda of the IWG rather than a more recent value.

Curry Equilibrium Climate Sensitivity

Because the extreme values are a key driver of the ECS, the 95th percentile values are of most interest. Refer back to the Michaels testimony above to see that the IWG had lower values available to it for years but chose not to use them. There is another nuance to this table that is important to me personally as a meteorologist with over 40 years of experience with modeling and monitoring. The last two rows in this table are estimates based on monitoring and not modeling so, in my opinion, are more likely to be correct.

The SCC is the fundamental rationale of the NY carbon pricing program. When the time comes to decide whether to implement the carbon pricing initiative it is important for decision makers to be aware of the changes in the value of the program possible by tweaking two parameters in the calculation of the SCC. The uncertainties with the methodology and the three technical reasons support my recommendation to include the SCC values from the EPA RIA for the revised Clean Power Plan so a range of potential benefits is provided.