NYISO Carbon Pricing Letter to the Editor

Kevin Lanahan, Vice-President of External Affairs and Corporate Communications for the New York Independent System Operator (NYISO) had a letter to the editor of the Syracuse Post Standard published advocating their carbon pricing initiative.  I submitted a brief letter in response but was limited to 250 words.  This post expands on my concerns with carbon pricing in general and the NYISO carbon pricing initiative in particular.

Background

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.

Price Setting

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?

CO2 Payments

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.

Revenue Distribution

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.

Conclusion

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.”