I have been following the concept of carbon pricing for quite some time. While I agree that the theory that setting a carbon price could lead to the least-cost decarbonization, I also believe that there are a whole host of practical problems that mean it won’t work as suggested by the theory. One of the problems I have noted is that the actual costs of decarbonization are very large and that means a carbon price would also have to be high. In this post I try to estimate the carbon price needed to fund the CO2 reductions necessary to meet New York’s Climate Leadership and Community Protection Act (CLCPA) goal to eliminate fossil-fired generation by 2040.
I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003. During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting. I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs. This represents my opinion and not the opinion of any of my previous employers or any other company I have been associated with.
In a post at Watts Up With That, Carbon Pricing is a Practical Dead End, I noted that carbon pricing proponents have convinced themselves that somehow a carbon price is different than a tax but, in my experience working with affected sources, it is treated just like a tax simply because the affected sources have no options to cost-effectively reduce emissions. As a result, they just add the carbon price to their cost of doing business – just like a tax. As a result, the over-riding problem with carbon pricing is that it is a regressive tax raising the price to those least able to afford it. In that article, I described a number of other practical reasons that cap-and-invest carbon pricing, or any variation thereof, will not work as theorized: leakage, revenues over time, theory vs. reality, market signal inefficiency, control options, total costs of alternatives, and implementation logistics. In addition, The Regulatory Analysis Project (RAP) recently completed a study for Vermont, Economic Benefits and Energy Savings through Low-Cost Carbon Management, that raises additional relevant concerns about carbon pricing implementation.
In this post I will estimate a cost for decarbonizing the electric sector by 2040, project the CO2 emissions between the present and 2040 and calculate the carbon price needed to make those reductions.
The first step is to estimate how much electric capacity will be needed in 2040 so I can figure out how much additional wind and solar energy will be needed when fossil fuels are eliminated from New York’s electric generation fuel mix in 2040. Until I see a convincing argument otherwise, I believe that distributed solar, utility-scale solar, on-shore wind and off-shore wind will provide nearly all the additional energy needed to decarbonize New York’s electric generating sector. The Citizen’s Budget Commission not only provided a great summary of the CLCPA but also made estimates of the renewable capacity needed as shown in the Forecast of 2040 Capacity (MW) Resources to Meet CLCPA Goals table.
In 2019 New York electric sector CO2 emissions were 24,866,404 tons. In 2040 they are supposed to be zero. If the annual reduction is 1,184,115 tons this goal will be met. The sum of all the CO2 emitted with that annual reduction is 273,530,329 tons between now and 2040. If the carbon price is set so that the money obtained for the cumulative emissions is sufficient to pay for the $169.5 billion needed for the additional wind and solar capacity, then the carbon price would have to equal $619.54 per ton as shown in the Projected CO2 Emissions through 2040, Total Costs, and Revenues table.
This is an initial estimate of costs. The $169.5 billion capacity cost does not include the cost to provide storage when the intermittent solar and wind are unavailable, the cost to modify the transmission system to move the diffuse solar and wind where needed, or the cost to provide additoinal transmission support so that the grid can deliver power where needed. Nor does it include the cost to replace generation because the expected life-time of these renewable resources is on the order of 20 years. This is also an estimate of the costs only for power generation so the costs to electrify heating, cooking, and water heating needs and the transportation sector are not included. On the other hand, there should be some reduction of the costs for renewable generation development over time but the scale of that reduction likely is much lower than these unincluded costs.
I have previously stated that market signal inefficiency, the total costs of alternatives, and decreasing revenues over time were three practical reasons that carbon pricing is a practical dead end. This post quantifies these issues. This estimate only considered the installed costs of residential solar, utility-scale solar, on-shore wind and off-shore wind but estimates that the carbon price would have to be $681 per ton to provide enough money to build those facilities. This is an inefficient market signal because the Obama-era Interagency Working group social cost of carbon with a discount rate of 3% and considering global benefits is $50 in 2020 which is an order of magnitude less than the projected carbon price. Also note that in the Projected CO2 Emissions through 2040, Total Costs, and Revenues table the revenues go down significantly over time. Because the expected lifetime of the wind and solar resources is on the order of 20 years there will be a continuing need for funding these projects and there won’t be any carbon price revenues available.
My fundamental problem with the CLCPA is that it presumes that the target reductions mandated by the act are technically and financially feasible. No other jurisdiction remotely approaching the size of New York has reduced its emissions anywhere near the CLCPA targets so there are technical challenges. This analysis of carbon pricing feasibility projects enormous costs even without including storage and transmission requirements. Besides the fact that these costs are far above the purported negative externality cost in the social cost of carbon, they are so large that I cannot imagine a scenario where they would be willing accepted by the citizens of the State. Pielke’s Iron Law of Climate, “While people are often willing to pay some price for achieving climate objectives, that willingness has its limits”, surely will be the inevitable result of these programs.
Recently a federal district judge found that the Bureau of Land Management (BLM, sorry it was their acronym first) arbitrarily relied on an aggressively scaled-back social cost of greenhouse gases metric to justify a rollback of methane standards for oil and gas equipment. This post summarizes the decision, the reaction of the trade press, and a discussion on the background of the issue.
The General Accounting Office (GAO) published a report to Congressional requesters, Social Cost of Carbon: Identifying a Federal Entity to Address the National Academies’ Recommendations Could Strengthen Regulatory Analysis, that provides good background information on the current controversy regarding the valuation of greenhouse gas emission climate impacts used by Federal agencies. The Social Cost of Carbon (SCC) is the metric most commonly used and represents the long-term net economic damages associated with an incremental increase in carbon dioxide or other greenhouse gas emissions in a given year. In 2009, the Office of Management and Budget and the Council of Economic Advisers convened the Interagency Working Group on Social Cost of Carbon (IWG) to develop government-wide estimates of the social cost of carbon for federal agencies to use in conducting regulatory cost-benefit impact analyses for rulemaking. The IWG issued updates to the Technical Support Document that included revised estimates of the social cost of carbon in 2013, minor technical corrections in 2015, and enhanced discussion of uncertainties around the estimates in 2016.
In 2016, the BLM promulgated a rule to reduce waste of natural gas from venting, flaring, and leaks during oil and natural gas production activities on onshore Federal and Indian leases. The benefits out-weighed the costs primarily because the social cost of methane, same idea as the social cost of carbon, IWG values showed benefits. On March 28, 2017, President Trump issued Executive Order 13783, “Promoting Energy Independence and Economic Growth,” directing the BLM to review the 2016 rule and, if appropriate, to publish proposed and final rules suspending, revising, or rescinding it. An interim SCC value was prepared as part of the Executive Order The BLM reviewed the 2016 rule and determined that it would have imposed costs exceeding its benefits based on the interim SCC values and on September 28, 2018 rescinded the rule after determining that it would have imposed costs exceeding its benefits.
The GAO report was prepared to explain the differences between the IWG values and the interim values. It found “Although both the prior and current estimates were calculated using the same economic models, two key assumptions used to calculate the current estimates were changed: using (1) domestic rather than global climate change damages (see table) and (2) different discount rates (3 and 7 percent rather than 2.5, 3, and 5 percent). As a result, the current federal estimates, based on domestic climate damages, are about 7 times lower than the prior federal estimates that were based on global damages (when both prior and current estimates are expressed in 2018 US dollars and calculated using a 3 percent discount rate).”
The litigation in question only focused on the adequacy of the Rescission, and not the 2016 Rule itself. In this regard, Judge Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of CA found “that the rulemaking process resulting in the Rescission was wholly inadequate”. I am only going to focus on one aspect of the decision – the cost benefit calculation. The Court analyzed whether BLM acted in an arbitrary and capricious manner in using a new model, the “interim domestic” social cost of methane, for its analysis in enacting the Rescission, instead of using the previous social cost of methane model that was developed and used for the 2016 rule.
Trade Press Reaction
The environmental trade press discussed the flaws Rogers used for her decision. Bloomberg Law said the judge “rebuked the Bureau of Land Management for eliminating Obama-era restrictions on releases of the potent greenhouse gas from oil and gas infrastructure on public and tribal lands” and that “Her opinion included a detailed assault on how the land agency used a metric called the social cost of methane, calling the approach ‘riddled with flaws’”. The Hill quoted parts of the decision: “In its haste, BLM ignored its statutory mandate under the Mineral Leasing Act, repeatedly failed to justify numerous reversals in policy positions previously taken, and failed to consider scientific findings and institutions relied upon by both prior Republican and Democratic administrations” and “In its zeal, BLM simply engineered a process to ensure a preordained conclusion” In the decision’s conclusion she said: “Where a court has found such widespread violations, the court must fulfill its duties in striking the defectively promulgated rule.” Energy & Cleantech Counsel discussed the implications of the rejection of BLM’s redefinition of the social cost of methane on other rules.
The environmental activist trade press, not surprisingly, thought the decision was good. One headline crows: Court Slaps Down Trump Administration’s Rollback Of Methane Rule and another article states “Since the first day they came into office, the Trump administration has sought and failed to undermine the Methane Waste Prevention Rule at every turn – in Congress, through the regulatory process, and in the courts. Today’s ruling shows their efforts are illegal, and provides for the reinstatement of common sense protections that are in the best interest of the American public,” said EDF senior attorney Rosalie Winn.”
Decision Rationale Discussion
In the Costs Exceeded Benefits section of the decision there is a sub-section giving the Court’s background description. For this discussion, the following is the relevant text, absent footnotes and the legal references:
“In 2016, to estimate the benefits of reducing methane emissions, BLM drew upon the conclusions of an Interagency Working Group (“IWG”) founded under the Administration of George W. Bush. The IWG was specifically organized to develop a single, harmonized value for greenhouse gas emissions for federal agencies to use in their regulatory impact analyses for rulemaking under Executive Order 12866. The IWG’s approach, known as the social cost of greenhouse gases, estimates the present value of the damages caused from each additional ton of greenhouse gas emitted at a point in time, or conversely, the present value of the benefits from reducing a ton of greenhouse gas emissions. As the IWG stated in 2015, these damages must be considered globally “because emissions of most greenhouse gases contribute to damages around the world and the world’s economies are now highly interconnected.” This approach was developed over several years through robust scientific and peer-reviewed analyses and public processes, and represents the best available science on this issue. (Notably, federal agencies have relied on the IWG’s valuation of the impacts of greenhouse gas emissions in rulemaking since 2009, and courts have upheld this approach.”
Firstly, a clarification note. This paragraph refers to the social cost of greenhouse gases rather than the social cost of carbon. Carbon dioxide is not the only greenhouse gas and this regulation specifically addressed methane. The IWG ”Addendum Valuing Methane and Nitrous Oxide Emission Changes in Regulatory Benefit-Cost Analysis” argues that using directly calculated societal cost values for methane and other non-CO2 greenhouse gases rather than global warming potential values (i.e. converting them to CO2 equivalents) is more appropriate.
The simplistic argument that the social cost of greenhouse gases must be considered globally because it is a global problem overlooks the fact that the rationale for the IWG work was to evaluate costs and benefits of regulations in the United States. The Federal requirements for these analyses all call for assessments based on national, not global impact. See, for example, discussion by Gayer and Viscusi.
The paragraph notes “This approach was developed over several years through robust scientific and peer-reviewed analyses and public processes, and represents the best available science on this issue”. While this sounds impressive and scientific the reality is different. In 2016, when the IWG was preparing their analyses, they noted that “new estimates of the social cost of non-CO2 GHG emissions have been developed in the scientific literature, and a recent study by Marten et al. (2015) provided the first set of published estimates for the social cost of CH4 and N2O emissions that are consistent with the methodology and modeling assumptions underlying the IWG SC-CO2 estimates”.
During the earlier iteration of the IWG work the US Environmental Protection Agency (EPA) realized that a social cost of gases other than CO2 were needed and found that there was a “paucity of peer-reviewed estimates of the social cost of non-CO2 gases in the literature”. In response the EPA National Center for Environmental Economics developed estimates of the social cost of methane and nitrous oxide consistent with the methodology and modeling assumptions underlying the IWG SCC estimates. Their work was published in two papers: Marten, A.L., and S.C. Newbold. 2012. Estimating the social cost of non-CO2 GHG emissions: methane and nitrous oxide Energy Policy 51: 957-972 (paywalled) and Marten, A.L., Kopits, E.A., Griffiths, C.W., Newbold, S.C., and A. Wolverton. 2015. Incremental CH4 and N2O Mitigation Benefits Consistent with the U.S. Government’s SC-CO2 Estimates. Climate Policy. 15(2): 272-298 (published online, 2014). (Paywalled)
I suspect that I am not the only one suspicious when an agency prepares a study that forms the basis of the regulatory metric proposed by other agencies. I question the independence of the results in that approach. Ultimately, the work and findings of agency work go through political appointees before they are released and there is no question that process motivates particular outcomes. In anticipation of such cynicism the Addendum states:
“The methodology and estimates described in this addendum have undergone multiple stages of peer review and their use in regulatory analysis has been subject to public comment. With regard to peer review, the study by Marten et al. (2015) was subjected to a standard double-blind peer review process prior to journal publication. In addition, the application of these estimates to federal regulatory analysis was designated as Influential Scientific Information (ISI), and its external peer review was added to the EPA Peer Review Agenda for Fiscal Year 2015 in November 2014. The public was invited to provide comment on the peer review plan, though EPA did not receive any comments. The external peer reviewers agreed with EPA’s interpretation of Marten et al.’s estimates; generally found the estimates to be consistent with the approach taken in the IWG SC-CO2 estimates; and concurred with the limitations of the GWP approach, finding directly modeled estimates to be more appropriate. All documents pertaining to the external peer review, including a white paper summarizing the methodology, the charge questions, and each reviewer’s full response is available on the EPA Science Inventory website.”
I had no idea that the EPA Science Inventory website existed so I looked up this reference. According to the peer review plan: a contractor picked three reviewers, the public, including scientific or professional societies was not asked to nominate peer reviewers, no public nominations were allowed through the Peer Review Agenda, the Agency did not provide significant and relevant public comments to the peer reviewers before they conducted their review, the review was not a public panel, and public comments were not allowed at the panel review. The fact that no comments were received from the public suggests that this was not well publicized and I am annoyed that the papers are paywalled when my tax dollars paid for the work. Having to pay for the privilege to review their work is not inclusive.
EPA asked the three external reviewers recommended by a contractor to provide comments: Karen Fisher-Vanden, Professor of Environmental and Resource Economics, Director, Institute for Sustainable Agricultural, Food, and Environmental Science (SAFES), and Co-Director, Program on Coupled Human and Earth Systems (PCHES) at Penn State College of Agricultural Sciences; John Reilly, Senior Lecturer, Sloan School of Management and Co-Director, MIT Joint Program on the Science and Policy of Global Change at the Massachusetts Institute of Technology; and Steven Rose, Energy and Environmental Analysis Research Group, Electric Power Research Institute. All three are well-qualified to review the work but I have this nagging concern that the reviewers from academia would be reluctant to provide negative feedback lest it affect review of future funding.
The request for peer review focused on the mechanics of vetting the Addendum. The Science Inventory includes a peer review report that describes the process. EPA developed a white paper, Valuing Methane Emissions Changes in Regulatory Benefit-Cost Analysis, that described the problem, the two different approaches for estimating societal valuation of impacts, the limitations of the global warming potential approach (GWP), and then developed its estimate of the direct estimation social costs. The reviewers were asked seven questions about the white paper and the primary Marten et al. reference. The peer review report includes the responses from the three reviewers and concludes with a summary and response description:
“EPA recently conducted a peer review of the application of the Marten et al. (2014) non-CO2 social cost estimates in regulatory impact analysis (RIA). Three reviewers considered seven charge questions that covered issues related to the EPA’s interpretation of the estimates, the consistency of the estimates with the social cost of carbo estimates used in RIAs, EPA’s characterization of the limits of the alternative GWP approach to approximate the social cost of non-CO2 GHGs, and the appropriateness of using the Marten et al. estimates in RIAs. The reviewers agreed with EPA’s interpretation of Marten et al.’s estimates; generally found the estimates to be consistent with the social cost of carbon estimates; and concurred with the limitations of the global warming potential approach, finding directly modeled estimates to be more appropriate.”
Judge Rogers claimed that the approach used was “developed over several years through robust scientific and peer-reviewed analyses and public processes”. I do not accept that the social cost of methane developed by one group, published in two papers, and peer-reviewed by three people is robust science.
If you are interested in the social cost of GHG emissions metric, the peer review report is a worthwhile read. It explains the metric and problems well and the comments from the experts indicate that there are significant issues that need to be resolved.
When judges make decisions based on the “science”, the results generally reflect more their biases than the science itself. The opinion by Judge Rogers reversed the recission because it “failed to consider scientific findings and institutions relied upon by both prior Republican and Democratic administrations” and “In its zeal, BLM simply engineered a process to ensure a preordained conclusion.” Based on a review of the specific scientific findings used to develop the social cost of methane the same conclusions could be said for the metric developed by the IWG.
The bigger problem in my opinion, is an inappropriate reliance on peer review in the regulatory process. Peer review focuses on the veracity of a specific scientific problem. Even if the validity of the analysis is not subject to the value judgements of the use of certain parameters and assumptions, peer review does not address the needs of the public affected by the regulation.
The social cost of greenhouse gas emissions is a particularly important metric for any emission reduction program related to global warming. Although there have been some attempts to describe the parameter and how it is used, the thing that is missing is an explanation of the impacts of the input parameters for the layman. Consider the choice whether the benefits should be considered globally or nationally. While climate change is a global problem, I am sure the public generally does not understand that the money that they have to spend for emission reductions provide minimal direct benefits to themselves or their families because most of the benefits are elsewhere on the globe. I am positive that they don’t understand that the calculations of the benefits extend out 300 years and that the majority of expected benefits occur in the later years. Surely there is a limit to how much they would be willing to pay for such a low payback on their investments?
In the summer of 2019 Governor Cuomo and the New York State Legislature passed the Climate Leadership and Community Protection Act (Climate Act) and this summer the implementation process is in full swing. I have written a series of posts on the feasibility, implications and consequences of this aspect of the law based on evaluation of data, but those posts are generally technically oriented. A key component in this process is the Value of Carbon or Social Cost of Carbon which is supposed to place a price on emissions of greenhouse gases (GHG) relative to climate change impacts Because the concept is complicated and important for the implementation and justification of the Climate Act and I have prepared this is a non-technical summary to explain to those outside the bubble of this process what this means.
I am a retired electric utility meteorologist with nearly 40-years experience analyzing the effects of meteorology on electric operations. I believe that gives me a relatively unique background to consider the potential effects of energy policies related to doing “something” about climate change. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
This post addresses section § 75-0113 in the law. In that section the Climate Act explicitly mandates how the value of carbon will be determined:
No later than one year after the effective date of this article, the department, in consultation with the New York state energy research and development authority, shall establish a social cost of carbon for use by state agencies, expressed in terms of dollars per ton of carbon dioxide equivalent.
The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions. As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero.
In developing the social cost of carbon, the department shall consider prior or existing estimates of the social cost of carbon issued or adopted by the federal government, appropriate international bodies, or other appropriate and reputable scientific organizations.
Value of Carbon
The law states that “The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions”. The Social Cost of Carbon (SCC) is the present-day value of projected future net damages from emitting a ton of CO2 today. The idea is that New York will calculate the dollar-value of the Climate Act’s effect on climate change due to changes in greenhouse gas emissions.
What that means to the public is when the costs of the control strategies proposed to meet the Climate Act targets are announced they will be compared to the benefits calculated using this metric, and, presumably will show that the benefits out-weigh the costs. For example, a recent report contains this paragraph:
“NYSERDA estimates that the proposed Tier 1 procurements, as set out in Section II.c.1 below, – from 2021 to 2026 – would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer). Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.”
The net benefit of $7.7 billion is certainly impressive, however, it is important to understand how the value was calculated in order to determine whether the alleged benefits are valid. In the following I will interpret specific statements in the Climate Act.
According to the Climate Act: “As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero”. The department referred to is the New York State Department of Environmental Conservation.
The first SCC basis possibility would be “based on marginal GHG abatement costs”. In this application, the marginal cost measures the cost to reduce a ton of greenhouse gas. Presumably the goal is to develop a Marginal Abatement Cost Curve which is “a succinct and straightforward tool for presenting carbon emissions abatement options relative to a baseline (typically a business-as-usual pathway)”. This curve “permits an easy to read visualization of various mitigation options or measures organized by a single, understandable metric: economic cost of emissions abatement”. For each control option, a block with width equal to the amount of potential reductions and height equal to marginal cost of the option is prepared. An example, based on the widely cited 2007 McKinsey & Company study and reproduced for the King County Strategic Climate Action Plan, is shown below combining various measures from different sectors. Note that if there are sufficient savings from the energy efficiency measure, consider residential lighting in this example, then those benefits out-weigh the costs and the marginal abatement cost is negative.
The second Climate Act carbon value alternative is “the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere and that refers to the SCC.
In order to estimate the SCC impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts. The future projected global economic damage is then converted to present value. Finally, the future damage is allocated to present day emissions on a per ton basis to get the SCC value. The SCC is already used in New York to, for example, determine the value of “zero emission credits” which is a subsidy to generating nuclear facilities.
There are value-judgement choices in each step of the SCC calculation process. As shown below different choices in only two of the many parameters lead to an Obama-era SCC value of $50 in 2020 vs. the current SCC value of $7 in 2020. Needless to say the difference of over seven times in this value has an impact on cost benefit calculations.
To this point New York has used the Obama Administration’s SCC values developed by the Interagency Working Group on the Social Cost of Carbon (IWG). In 2017, President Trump signed Executive Order 13783 which, among other actions, disbanded the IWG and stated that the estimates generated by the Interagency Working Group were not representative of government policy. Currently Federal projects use SCC estimates based on the same approach as the IWG that differ in two aspects: the only damages that were considered were those in the United States and different values were used to convert to present costs.
Figure 1: Prior and Current Federal Estimates of the Social Cost of Carbon Dioxide in 2018 U.S. Dollars, 2020-2050 from the recent GAO report show that changing just those two variables results in very different damage estimates. As shown in the table below, at the common 3% discount rate, the prior federal estimate and the one currently used in New York was $50 but the current federal estimate is only $7.
Prior and Current Federal Estimates of the Social Cost of Carbon, per Metric Ton, at a 3 Percent Discount Rate in 2018 U.S. Dollars
Year of emissions
Prior estimates (based on global climate change damages)
Current estimates (based on domestic climate change damages)
Source: GAO analysis of data from the Interagency Working Group on Social Cost of Greenhouse Gases, EPA, and the United States Gross Domestic Product Price Index from the U.S. Department of Commerce, Bureau of Economic Analysis. | GAO-20-254
Consider whether New York should address global impacts, nation-wide impacts, or for the sake of argument, just the benefits that would accrue to New Yorkers if their emissions are reduced. There is no doubt that because there are global impacts that looking at global impacts should be considered but what value is that to a New Yorker already on the edge of energy poverty. If the cost of energy goes up significantly, and other jurisdictions that tried to implement less ambitious GHG emissions reductions programs has seen significant increases, then those New Yorkers least able to afford energy increases will be hit hard. Therefore, I think it is entirely appropriate to provide New Yorkers with benefits based on all three geographical coverages.
Another little recognized aspect of the SCC calculation methodology is that the costs are calculated far into the future. Proponents argue that because most of the warming caused by carbon dioxide emissions persists for many years, changes in carbon dioxide emissions today may affect economic outcomes for centuries to come. The GAO report notes: “To create a social cost of carbon estimate for emissions occurring in a given year, models use discounting to convert the projected monetized climate damages into a present value. This process involves reducing the damages in each future year by a percentage known as the discount rate”. As the graphs show, a higher discount rate reduces future values to a greater degree than applying a lower discount rate. If we use a higher discount rate, then we are weighting today’s costs as more important than impacts hundreds of years in the future. The emotional alternative is worded as leaving the world a better place for our grand-children by using a low discount rate. Note that the Climate Act specifies using a discount rate of zero that will surely show very high social costs of carbon. But remember that the impacts of climate change will become more evident much further in the future than our direct descendants so choosing a low discount rate that considers future impacts and current costs as equally significant not only means that our grandchildren will have to pay high prices now but won’t even see the benefits.
There is another aspect to paying now for potential damages far in the future. The money spent today is not available to spend on projects that could alleviate future damages. For example, if sea-level rise is a concern, then spending money today emulating the Dutch experience keeping the ocean out of their land would make more sense. Similar arguments for many of the damages included due to climate change can also be made but are routinely ignored by proponents of a high SCC value.
Finally, I want to point out that the SCC, as proposed for use in the Climate Act, has two basic flaws. In general, there is no consideration of benefits of GHG emissions and, particular to our situation, it does not consider NY’s actions relative to the world’s actions. The effect of the two items is related.
In most environmental impact assessments, a primary consideration is the direct consequence of the action. In this case, if New York reduces its GHG emissions how will global warming be affected. Prior to the passage of the Climate Act I calculated the potential change. If the Climate Act were to stop emitting 218.1 million metric tons (1990 emissions) the projected global temperature rise would be reduced approximately 0.0032°C by the year 2050 and 0.0067°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000-foot increase in elevation above sea level. The projected temperature difference is the same as going down 27 inches. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300-mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south two thirds of a mile.
Another aspect of environmental impact assessment is a discussion of trade-offs. However, the social cost of carbon does not consider any of the benefits of carbon dioxide. The “CO2 fertilization effect” — the fact that rising emissions are making plants grow better, is not considered. The satellite data show that “there has been roughly a 14 per cent increase in the amount of green vegetation on the planet since 1982, that this has happened in all ecosystems, but especially in arid tropical areas, and that it is in large part due to man-made carbon dioxide emissions”. More importantly, Alex Epstein in the Moral Case for Fossil Fuels makes a compelling case for using fossil fuels use because: “the cheap, plentiful, reliable energy we get from fossil fuels and other forms of cheap, plentiful, reliable energy combined with human ingenuity, gives us the ability to transform the world around us into a place that is far safer from any health hazards (man-made or natural), far safer from any climate change (man-made or natural), and far richer in resources now and in the future.”
The International Energy Agency claimed that world population without access to electricity fell below 1 billion in 2017. In order to reduce that number further, improve access to more electricity, and reap the benefits of abundant, reliable of energy, developing countries are building fossil-fired power plants. According to the China Electricity Council, about 29.9 gigawatts of new coal power capacity was added in 2019 and a further 46 GW of coal-fired power plants are under construction. If you assume that the new coal plants are super-critical units with an efficiency of 44% and have a capacity factor of 80%, all the reductions provided by the Climate Act will be replaced by the added 2019 Chinese capacity in just over three years or less than an year and a quarter if the 2019 capacity and the units under construction are combined. If construction of all coal plants elsewhere were included, then the time to subsume New York reductions would be even less.
Up until this point the State of New York has thus far relied on a single value of the SCC. While that may be necessary for use in calculating credits for emissions reductions, elsewhere, and particularly in the case of claimed benefits relative to the costs of the program, it is more appropriate to consider a range of values because of the massive uncertainties associated with this metric.
The comments on the SCC prepared by Dr. Richard Tol in a Minnesota Public Utilities Commission hearing on that state’s use of the SCC provide a technical discussion of potential problems with the SCC. Dr. Tol is Professor of the Economics of Climate Change at Vrije Universiteit Amsterdam and a Professor of Economics at the University of Sussex and has direct experience estimating the social cost of carbon. He concludes: “In sum, the causal chain from carbon dioxide emission to social cost of carbon is long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”
According to the National Academies, the present value of damages reflects society’s willingness to trade value in the future for value today. The Climate Act mandates that the carbon value consider a zero discount rate that means that value in the future equals value today. However, the fact that New York’s potential emission reductions will be subsumed by increases elsewhere means that the valuation arguments are theoretical and that in practice New York reductions are only symbolic.
The calculation and use of the SCC is complicated and subject to mis-interpretation. Such is the case with NYSERDA’s claim noted earlier that “these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects”. In response to my question about the calculation of lifetime benefits, Dr. Tol explained that the SCC should not be compared to lifetime savings or costs. Therefore, the $7.7 billion net benefit claim is incorrect.
In conclusion, New Yorkers should be aware of the back story of the social cost of carbon benefits claimed to date for Climate Act projects when compared to the costs. The costs to implement the Climate Act will be real changes to ratepayer bills. The benefits claimed are based on numerous value judgements, ignoring world-wide emission increases that will subsume New York’s reductions, and, if lifetime benefits are claimed, are much higher than appropriate. For all intents and purposes, today’s costs for the Climate Act will provide negligible benefits to those paying the bills.
I was prompted to prepare this post while reading the White Paper on Clean Energy Standard Procurements to Implement New York’s Climate Leadership and Community Protection Act (white paper) prepared by the New York Department of Public Service (DPS) and the New York State Energy Research and Development Authority (NYSERDA) because that document claims a “net benefit of around $7.7 billion” over the lifetime of projects they believe are required to meet the goal that 70% of electric energy will be produced by renewable energy by 2030 (70 by 30). Although I have written about the approach used by the State before I believe it is necessary to re-iterate my concerns in the current context.
I am a retired electric utility meteorologist with nearly 40-years experience analyzing the effects of meteorology on electric operations. I believe that gives me a relatively unique background to consider the potential quantitative effects of energy policies based on doing something about climate change. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
In the summer of 2019 the Governor Cuomo and the New York State Legislature passed the Climate Leadership and Community Protection Act (Climate Act) which was described as the most ambitious and comprehensive climate and clean energy legislation in the country when Cuomo signed the legislation.
The legislation includes not only the 70 by 30 requirement but also a mandate to eliminate all fossil fuel use in the electricity sector by 2040. I have written a series of posts on the feasibility, implications and consequences of this aspect of the law based on evaluation of data.
Unfortunately, the politicians that passed the Climate Act never bothered to figure out how it could be done. Among problems to resolve are development of a plan for renewable resources and an implementation plan to pay for those resources. The DPS has a mandate to establish a program whereby jurisdictional load serving entities (today’s jargon for what used to be called the electric utilities) secure renewable energy resources to serve the 70 by 30 target. The white paper explains how they propose to do this. It includes the following:
Description of the key provisions in the Climate Act relating to the 70 by 30, including the role of jurisdictional LSEs and the definition of renewable energy systems;
Projection of the quantity of renewable energy that must be deployed to achieve 70 by 30;
Establishes average annual procurement targets for different tiers in the existing procurement process;
Proposal for a new tier for the procurement process; and
Cost and benefit analysis.
The following quote from the cost and benefit analysis sparked my interest:
“NYSERDA estimates that the proposed Tier 1 procurements, as set out in Section II.c.1 below, – from 2021 to 2026 – would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer). Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.”
This post will show the fallacies in this benefit claim.
Social Cost of Carbon
It is New York State policy to calculate benefits of greenhouse gas emission reductions using the Social Cost of Carbon (SCC). The SCC is the present-day value of projected future net damages from emitting a ton of CO2 today. In order to estimate the impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts. The projected global economic damage is then discounted to the present value. Finally, the future damage is allocated to present day emissions on a per ton basis to get the SCC value.
I have previously argued that there are several technical reasons that the single value the State of New York has thus far relied on should not be used exclusively. It is more appropriate to consider a range of values because of the massive uncertainties associated with this metric. The comments on the SCC prepared by Dr. Richard Tol in a Minnesota Public Utilities Commission hearing on that state’s use of the SCC better explain potential problems with the SCC.
Dr. Tol is Professor of the Economics of Climate Change at Vrije Universiteit Amsterdam and a Professor of Economics at the University of Sussex and has direct experience estimating the social cost of carbon. In his testimony, Tol explains that there are differences between SCC and traditional damages cost methodologies: “The causal chain for the social cost of carbon is rather long, complex and contingent. In this way it is different from the traditional damages cost methodology for a pollutant like mercury or lead.” He uses a couple of examples to explain that the many interactions between purported changes to the environment from a changed in the greenhouse effect due to a ton of CO2 depend upon assumptions every step of the way which makes it “rather difficult to the climate effects of CO2 emissions.” He concludes: “In sum, the causal chain from carbon dioxide emission to social cost of carbon is long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”
My biggest concern is that tweaking any one of many inputs to the SCC calculation radically change the results. New York uses the SCC values developed by the Obama administration. In 2017, President Trump signed Executive Order 13783 which modified two aspects of the calculation: only considering damages occurring within the United States and employing discount rates of 3 percent and 7 percent for the use of this parameter in regulatory policy. The Obama values used global damage numbers and discount rates of 2.5 percent, 3 percent, and 5 percent. The difference between those two assumptions results in a SCC for domestic economic impacts at a 7 percent discount rate would be $2.20 in the year 2050, while the SCC for global economic impacts at a 2.5 percent discount rate would be $100.62. These changes reflect economic and policy judgements without advising the public what is happening. When the costs hit the consumers, someone is going to have a lot of explaining to do.
Despite these issues, New York State uses the SCC without conditions to claim benefits from their proposed investments. The white paper states “Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.” NYSERDA regularly calculates benefits based on the lifetime of their projects. This is a different approach than that used in air pollution control regulation cost reduction calculations. In the Environmental Protection Agency’s Reasonably Available Control Technology rule when you calculate the cost effectiveness of a control program, the cost of the control system is divided by the annual emissions reduction to get the dollars per ton reduced. There is no consideration of lifetimes.
If you are interested in the cost of the Climate Act, you need to know the annual reductions possible from technologies implemented to reduce emissions. The Climate Act specifies reductions from 1990 annual emissions so the apples to apples comparison is the annual reduction. On the other hand, in a NYSERDA energy efficiency program, the avoided energy saved by the efficiency program equates to money saved. It seems reasonable to count the total savings to the ratepayer.
When it comes to the SCC, I believed that it was inappropriate to consider lifetime savings but could not find anything specific in the literature to validate my belief. I contacted Dr. Tol and asked the following question:
There is a current proceeding where NYSERDA is claiming that their investments are cost-effective but they use life-time benefits. I concede that the ratepayer cost-benefit calculation should consider the life-time avoided costs of energy and can see how that reasoning might also apply to the social cost of carbon. However, in the following definition, SCC is the present-day value of projected future net damages from emitting a ton of CO2 today, I can interpret that to mean that you shouldn’t include the lifetime of the reduction. Am I reading too much into that?
His response explains that the use of life-time savings or costs is inappropriate:
Apples with apples.
The Social Cost of Carbon of 2020 is indeed the net present benefit of reducing carbon dioxide emissions by one tonne in 2020.
It should be compared to the costs of reducing emissions in 2020.
The SCC should not be compared to life-time savings or life-time costs (unless the project life is one year).
Dr. Richard S.J. Tol MAE
Department of Economics, Room 281, Jubilee Building
University of Sussex, Falmer, Brighton BN1 9SL, UK
I am convinced that the majority of New York State ratepayers are unaware of the ramifications of the Climate Act and even if they know about it, it is unlikely that they know how the state calculates its claims that the costs will be out-weighed by the benefits. In this instance, the quotation: “there are three kinds of falsehoods, lies, damned lies and statistics” could be modified to “there are three kinds of falsehoods, lies, damned lies and climate benefit estimates”.
This post explains that the SCC is a weak tool for climate policy. I am most concerned that the SCC values are not robust because small changes in any of the large number of assumptions give contradictory results. When used in policy making, like the Climate Act, the values chosen are politically expedient rather scientifically based. The costs of the Climate Act will be enormous and I believe it is incumbent upon its advocates to explain their analyses and use of the SCC.
However, this post also shows that even if you accept the SCC as a valid approach and use the values chosen by New York, then the cost benefits claimed by NYSERDA, in general, and the white paper, in particular, are flawed because they rely on life-time benefits. Today’s SCC is the net present benefit of reducing carbon dioxide emissions by one ton this year. The SCC should not be compared to life-time savings or life-time costs. As a result, the claim that the “procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects” is wrong.
I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003. During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting. I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs. I have followed the New York State Independent System Operator (NYISO) carbon pricing initiative since its inception and my work on that program is the primary basis for this summary. I am retired now and these comments represent my personal opinions only.
Health impact link
According to the letter:
Our most vulnerable populations, such as seniors and low-income communities of color, are already disproportionately affected by climate-influenced health issues and face the most exposure to dirty air due to their proximity to fossil fuel power plants. Now, these underlying respiratory issues have allowed COVID to impact these very people with pre-existing health conditions the hardest, showing just how important reducing pollution and improving air quality are to protecting public health, especially in times of crisis. In addition to protecting public health and addressing the disastrous and irrevocable effects of climate change, we also need solutions to reboot New York’s economy in the aftermath of COVID with more than 1.9 million New Yorkers having to file for unemployment insurance claims, according to the state Labor Department.
I believe the claim that there is a link between air pollution and COVID is based on a nationwide study from Harvard T.H. Chan School of Public Health that claims that people with COVID-19 who live in U.S. regions with high levels of air pollution are more likely to die from the disease than people who live in less polluted areas. However, the paper was not peer-reviewed and the initial claim that people in areas with high levels of pollution are 15% more likely to die was clarified on April 24: “We have revised our finding as that an increase of 1 μg/m3 in PM2.5 is associated with an 8% increase in the COVID-19 death rate.” I recently looked at PM2.5 data in New York City and found that the latest available three-year average (2016-2018) at the Botanical Garden site in New York City is 8.1 µg/m3 which represents a 38% decrease since 2005-2007 and is 85% lower than the average of the last three years of Chinese PM2.5 annual average data. If the Harvard health impact effects model is correct it should show significant differences in mortality between China and New York City. Until then I am unimpressed.
The letter makes the claim that NYISO’s carbon policy will be efficient:
The attendant goals of the CLCPA are more important than ever as we begin the process of preparing for a post-COVID-19 economic recovery. NYISO’s carbon pricing plan advances these objectives by providing New York with an essential tool to restart the economy and build it back cleaner and stronger than ever. Pricing the social cost of carbon within New York’s electricity markets will align our environmental and public health interests––while simultaneously jump-starting the economy at a very timely moment.
In tandem with New York’s broad CLCPA implementation, NYISO’s carbon pricing proposal will support investments in green jobs and accelerate the build-out of renewable energy infrastructure, putting thousands back to work while safeguarding the health of our environment. At a time when the state has limited resources, carbon pricing offers a consistent mechanism to incentivize carbon-free energy production and clean energy job creation and business growth. Leveraging the power of markets, NYISO’s carbon pricing proposal ensures the most efficient utilization of public resources to achieve the CLCPA goals.
In my previous post on Carbon Free New York I showed that New York’s investments are anything but efficient. Historical results show that making investments at a cost per ton less than the social cost of carbon metric that is supposed to estimate the future damage cost impacts of a ton of CO2 emitted today is difficult even when the tax proceeds are directly invested. According to the letter, the NYISO carbon pricing proposal will “charge those who produce carbon-intensive electricity and reward those who produce carbon-free electricity”. In other words, reductions in carbon-intensive electricity will occur indirectly. Moreover, rewarding the coalition members for their carbon-free electricity is another term for a windfall profit on top of all the other subsidies they already receive.
The letter justifies the need for bold leadership by making the following claim:
New York accounts for one out of every 230 tons of energy-related carbon dioxide (CO2) emitted anywhere in the world. With the CLCPA’s mandate to achieve carbon-free electricity by 2040, 70 percent renewable generation by 2030 and a net-zero carbon economy by 2050, incorporating the social cost of carbon into New York’s energy markets is the most efficient and affordable approach to reaching these goals, while protecting public health and rebuilding the state’s green economy. This is a moment for bold leadership.
Frankly, that number caught my attention because it seemed like a bigger fraction that I expected. I checked out the data and found that the number was reasonable -my estimates were that New York has an even bigger contribution. However, there is more to the story. The New York State Energy Development Authority (NYSERDA) Greenhouse Gas Inventory 1990-2016 report contains a detailed inventory of historical greenhouse gas emission data from 1990-2016 for New York State’s energy and non-energy sectors. I found global energy sector CO2 emissions data for 1990 to 2019 at the International Energy Agency (IEA). In the New York Energy-Related CO2 Emissions Relative to the World’s CO2 Emissions table I combined NYSERDA data and IEA for common years to estimate how New York emissions were accounted for since 1990. The NYSERDA summary lists energy-related GHG emissions that include CH4 and N2O. In order to directly compare with the IEA CO2 data, I assumed that the fraction of CO2 in the total GHG emissions would equal the average of the 2015 and 2016 data I had on hand. EIA lists their data in Gt and NYSERDA in MMt. I list the EIA data for two categories, advanced economies and the rest of the world and then total them and covert to MMt. The NYS tons out of every global ton simply is the Global total divided by the NYS total. In 2016 this methodology predicts that in 2016 New York accounted for one out of every 191 tons of energy-related CO2 emitted anywhere in the world. Close enough to the letter’s number for this application.
There are two aspects of the trend of the energy-related CO2 emissions numbers that have to be addressed. Between 1990 and 2016 NYS emissions dropped 17%, global advanced economies emissions increased 3%, global rest of the world economies emissions increased 124%, and global total energy-related CO2 emissions increased 57%. Clearly world-wide emissions are increasing because many countries are using more energy. While some may decry that, the fact is that World Bank World Development Indicators over this time frame show that the world has become healthier and wealthier. The World Development Indicators table lists selected parameters. The world mortality rate, for children under five dropped from 93.2 to 38.6 (per 1,000 live births) between 1990 and 2018. The life expectancy at birth increased from 58.1 to 61.2 total years between 1990 and 2018. The world’s PM2.5 mean annual exposure dropped 1.1 (µg/m3) between 1990 and 2017. Finally, the world’s gross domestic product increased from $8.8 billion to $31 billion.
The trend in New York State emission sources is another aspect of note. Table A-1. GHG Emissions by Sector, in Patterns and Trends – New York State Energy Profiles: 2002-2016, lists emission reductions from 1990 to 2016. Overall GHG emissions have dropped 18.5%, 37.9 MMt. Four sectors have reduced emissions: the residential sector is down 9.8% or 3.4 MMt, the commercial sector is down 22.2% or 5.9 MMt, the industrial sector is down 48.9% or 9.8 MMt and electric generation is down 56% or 35.3 MMt. On the other hand, transportation has increased 24.2% or 14.4 MMt and imported electricity has increased 120% albeit only 2.1 MMt.
The letter claims “this is a time for bold leadership”. I believe that the industrial emissions have gone down because manufacturing in New York is shutting down and in my previous post on this coalition I explained that electric sector emissions have gone down mainly because of fuel switching to natural gas. State “leadership” had nothing to do with historical reductions and it can be argued relative to natural gas that they occurred despite Cuomo’s “leadership”. Natural gas became the cheaper fuel alternative because of fracking technological improvements but the State has banned that technology.
I believe that there is a tendency for those who do not have a strong case to argue louder. In my first post I charitably argued that the coalition just did not understand carbon pricing. The hyperbole and exaggerations in this letter suggest that they are aware that the case for a carbon pricing scheme in a single sector in a limited area is tenuous at best, despite the attractiveness of the theory. This letter raises the ante and invokes a tenuous link between the real problem of COVID-19 and the NYISO carbon pricing proposal.
The fact is that New York State is in trouble because of the economic consequences of the COVID-19 response and it is not clear we can afford the cost of this program. The proposed carbon pricing scheme increases the cost of electricity by incorporating the social cost of carbon. Generators who emit carbon dioxide will pay that cost and those revenues are supposed to be returned to consumers. However, the carbon price will increase the prices paid to the members of the Carbon Free New York coalition and that money will not be returned to the consumer. It is supposed to “support investments in green jobs and accelerate the build-out of renewable energy infrastructure, putting thousands back to work while safeguarding the health of our environment”. Cynic that I am, I doubt that much of the additional profits made by the coalition will actually be invested as they claim.
My work has shown that carbon pricing proposals have practical limitations and that if you want to reduce emissions direct investments are more effective. Nothing in the letter or on the Carbon Free New York website prove otherwise.
I have to give credit to the supporters for NYISO carbon pricing proposal. They are pulling out all the stops. The latest is a coalition of like-minding organizations named “Carbon Free New York” who believe “implementing the NYISO carbon pricing proposal in a timely and efficient manner and incorporating the cost of carbon into the electricity sector, New York will align its wholesale electricity markets with its public policy objectives to decarbonize the electricity sector as set forth in the Climate Leadership Community Protection Act (CLCPA)”. I seriously doubt that any of these organizations really understand the ramifications of carbon pricing.
I first became involved with pollution trading programs nearly 30 years ago and have been involved in the Regional Greenhouse Gas Initiative (RGGI) carbon pricing program since it was being developed in 2003. During that time, I analyzed effects of these programs on operations and was responsible for compliance planning and reporting. I write about the issues related to the energy and environmental interface from the viewpoint of staff people who have to deal with implementing these programs. I have followed the New York State Independent System Operator (NYISO) carbon pricing initiative since its inception and my work on that program is the primary basis for this summary.
In a post at Watts Up With That, Carbon Pricing is a Practical Dead End, I noted that carbon pricing proponents have convinced themselves that somehow this is different than a tax but, in my experience working with affected sources, it is treated just like a tax. As a result, the over-riding problem with carbon pricing is that it is a regressive tax. In that article, I described a number of other practical reasons that cap-and-invest carbon pricing or any variation thereof will not work as theorized: leakage, revenues over time, theory vs. reality, market signal inefficiency, control options, total costs of alternatives, and implementation logistics. In addition, The Regulatory Analysis Project (RAP) recently completed a study for Vermont, Economic Benefits and Energy Savings through Low-Cost Carbon Management, that raises additional relevant concerns about carbon pricing implementation.
Because the primary focus of Carbon Free New York is the NYISO carbon pricing initiative I think it is appropriate to consider the cost-effectiveness of New York’s carbon reduction investments to date. The Social Cost of Carbon (SCC) is supposed to represent the future cost impact to society of a ton of CO2 emitted today. Therefore, it is entirely fair to use it as a metric to determine if the investments made from carbon pricing income are cost effectively reducing CO2. I believe that the NYISO will base their carbon pricing on a $50 global social cost of carbon at a 3% discount rate so that is the cost benefit effectiveness threshold metric I will use.
The fundamental assumption for any carbon pricing program is that the proceeds can be invested effectively. However, the observed results for New York’s experience in RGGI suggests that this may not be the case. 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. The NYSERDA RGGI Status Report Table 2 – Ranked Cost Benefit Ratio Data table lists all the programs in the NYSERDA report ranked by the annual cost benefit ratio with just that parameter. It lists 19 programs with associated CO2 reduction benefits and another 18 programs with no claimed CO2 reductions. None of the 19 programs with CO2 reduction benefits meets the $50 SCC metric for cost effective investments. Clearly the 18 programs with no claimed reductions would not be able to meet the metric either.
RGGI supporters who claim it is successful point to emission reductions of 40 to 50%. However, when I looked at the changes in generation mix 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 beginning of the program. 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. There is no evidence that any affected source in RGGI installed add-on controls to reduce their CO2 emissions. The only other 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. Because the cost adder of the RGGI carbon price was relatively small I do not believe that any affected source installed an efficiency project as part of its RGGI compliance strategy.
As a result, the only reductions from RGGI that can be traced to the program are the reductions that result from direct investments of the RGGI auction proceeds. Information necessary to evaluate the performance of the RGGI investments is provided in the RGGI annual Investments of Proceeds update. In order to determine reduction efficiency, I had to sum the values in the previous reports because the most recent report only reported lifetime benefits. In order to account for future emission reductions against historical levels the annual reduction parameter must be used. The Accumulated Annual Regional Greenhouse Gas Initiative Benefits table lists the sum of the annual avoided CO2 emissions generated by the RGGI investments from three previous reports. The total of the annual reductions is 2,818,775 tons while the difference between the baseline of 2006 to 2008 compared to 2017 emissions is 59,508,436 tons. The RGGI investments are only directly responsible for less than 5% of the total observed reductions!
While I do not dispute that the theory of a comprehensive, global carbon pricing may be a great mechanism for reducing GHG emissions, advocates for the programs overlook logistical and practical concerns when plans for limited area, one-sector pricing schemes are proposed. Trying to force fit this global theory into just the New York electricity market is an extraordinarily difficult problem. As proposed, the NYISO carbon pricing proposal will likely result in power leakage where energy and emissions are not reduced but simply shift emissions associated with power production out of the state within the inter-connected electric grid.
Advocates for carbon pricing schemes also assume that the investments from the proceeds are worthwhile, but I have found that is not the case. The indirect price signal appears to be too weak to cause meaningful reductions. Investment decisions also matter. The Regulatory Analysis Project (RAP) study: Economic Benefits and Energy Savings through Low-Cost Carbon Management notes that “Many advocates of carbon pricing begin with the proposition that the main point is to charge for carbon emissions “appropriately” and that carbon reductions will surely follow in the most efficient manner. While carbon pricing is a useful tool in the fight against climate change, there is now substantial experience to suggest that wise use of the resulting carbon revenues is equally important, or even more important, if the goal is to actually reduce emissions at the lowest reasonable cost.”
The NYISO letter to the editor describes how their carbon pricing initiative will work:
The state sets the carbon price, a certain amount per ton of CO2 being emitted.
Carbon-emitting power plants pay for the carbon they release into the atmosphere.
About half of the revenue goes to low-carbon or carbon-free resources like wind, solar and hydro.
The rest would be distributed back to consumers.
The NYISO has a fancy web page lauding their proposal that includes links to primary references describing their initiative, a link to a video describing how it will work and a scrolling list of supporters of the program.
I have been following this initiative since it was first proposed and have written ten posts specifically addressing aspects of the proposal. I suggest reading my last post for a summary of my rationale to oppose the proposal. More recently as part of my comments (01/23/2020) on the New York State Department of Public Service Resource Adequacy Proceeding I responded to comments that suggested that it should be implemented. This post summarizes those comments.
I have been involved in New York’s current carbon pricing program, the Regional Greenhouse Gas Initiative (RGGI), program process since its inception. I believe that supporters of the NYISO carbon pricing initiative have not considered the RGGI results or practical limitations of the initiative. When those factors are considered I have serious doubts that it will be efficient or cheaper than other alternatives. My comments will address each aspect of the NYISO letter.
According to the plan, the state will set the carbon price. All indications are that the carbon price will be set to equal the Social Cost of Carbon (SCC). That value is supposed to represent the future cost impact to society of a ton of CO2 emitted today. I addressed specific issues with the SCC in this context here and here. Despite those problems the State will likely go ahead and use it. I believe New York will use a carbon price of $50 which is the global social cost of carbon at a 3% discount rate.
As an aside, there is a fundamental question underlying the State’s initiatives. If the cost per ton removed of any reduction program exceed the SCC value, then it exceeds the expected societal costs of the emissions. The question that has to be resolved is whether the State should invest in programs that do not meet this effectiveness threshold. If the costs exceed the projected cost of the impacts, then what is the point?
The NYISO proposal would change the existing generator payment methodology by adding the carbon price as a function of generator’s hourly CO2 emissions so that each generator pays that price to the NYISO. For a renewable generator there are no emissions so there is no carbon payment. For a natural gas fired turbine that emits CO2 the hourly payment to NYISO would equal the tons emitted multiplied by the SCC value of ~$50 per ton. It is important to understand that adding the cost of carbon not only costs consumers the cost of the carbon payment but also the cost for higher wholesale electricity.
The costs of this carbon pricing initiative are significant. The average number of tons of CO2 emitted in New York in 2015 and 2016 was 32,106,042 tons so the carbon price at $50 per ton is $1.605 billion. I did a static calculation using 2015 and 2016 load and marginal emission rate data to estimate the effect of the carbon charge on wholesale electricity that 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. As discussed below some of the carbon price revenues will be returned to customers. However, the increase in costs due to the change in market clearing price will not.
There are two other carbon price complications. Leakage refers to the situation when a pollution reduction policy simply moves the pollution around rather than actually reducing it. Ideally the best carbon pricing approach would apply to the entire globe and all energy sectors. The NYISO carbon pricing initiative proposes to price just the New York electricity market. The electric grid is inter-connected and obtaining emissions from outside New York is problematic in the first place. Secondly the proposal will likely result in locational leakage when New York costs increase so energy production and emissions are not reduced but simply shift emission location out of the state.
The NYISO letter says that “About half of the revenue goes to low-carbon or carbon-free resources like wind, solar and hydro.”, and “The rest would be distributed back to consumers.” I am not sure how to interpret those statements. I think they are saying that all the carbon price money collected will be returned to consumers and the increases in net revenues due to higher wholesale prices is going to low-carbon and carbon-free resources. Even though I don’t think NYISO has been particularly forth-coming acknowledging the wholesale price component revenues I will be charitable and assume that my interpretation is correct.
I could go on but I think the summary from the Regulatory Assistance Project analysis for the State of Vermont is good. It that found “we conclude that an attempt to reduce Vermont’s carbon emissions based on carbon pricing alone will cost more, and deliver less, than a program of carbon reductions that is based on practical public policies—policies that attack the main sources of carbon pollution through tailored, cost-effective programs geared to Vermont’s families, businesses, and physical conditions.”
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.
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.
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. 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.
 In the interest of full disclosure, I should note that I own RGGI allowances that I purchased in an auction.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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?
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.
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.