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Making the case for carbon pricing in New York

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Making the case for carbon pricing in New York

New York’s State Energy Plan , self-proclaimed to include some of the nation’s most ambitious 2030 clean energy targets, has perhaps by necessity intensified the discussion of carbon prices in the wholesale power markets, possibly redefining their traditional role.

The Brattle Group on August 11 released a study on behalf of the New York Independent System Operator to evaluate how pricing carbon emissions could complement existing state climate goals.

The report analyzed the impacts of a $40/ton carbon charge in 2025, less than the expected $17/ton Regional Greenhouse Gas Initiative price,  which is consistent with the “social cost of carbon” already adopted by the New York Public Service Commission in its Clean Energy Standard Order.

In this blog, we go deeper into the details of the Brattle report, with additional insight from its lead author, Sam Newell.

In an event organized by NYISO and the New York State Department of Public Service in Albany, New York, in September, Newell discussed the report with stakeholders and market participants.

In discussing the approaches to implementing a carbon price, Newell said, “We’ve been talking about this stuff for years; this is not new. What is new is the idea to actually do it.”

True, New York is already participating in RGGI, but Newell said that RGGI prices are not reflective of the social cost of carbon.

Emissions allowance RGGI Dec 2017

“RGGI to me doesn’t feel designed as sort of the driver of decarbonization; it more is tracking the many states’ agreed upon goals. … It’s not going to give you the same price that we’re talking about in this context, corresponding to the social cost of carbon,” Newell said.

The proposed $40/ton carbon charge would, on average, increase wholesale energy prices paid by customers by $18.8/MWh (ranging from $16.70 to $20.10/MWh across zones), according to the report. These charges would be collected from fossil generation and imports.

Estimated customer cost impact of $40/ton carbon charge in 2025 ($/MWh)

Static analysis NYCA average
I. Increase in Wholesale Energy Prices 18.8
II. CO2 Revenue - (A) Allocate by Load Share -9.4
II. CO2 Revenue - (B) Allocate to Equalize Zonal Impact -9.4
III. Lower ZEC Prices -1.0
IV. Lower REC Prices -2.0
V. Increased TCC Value -0.3
Subtotal (A) 6.0
Subtotal (B) 6.0
Dynamic Analysis
VI. Adjustments to Static Analysis due to Entry of CCs -3.5
VII. Carbon Price-Induced Abatement -0.8
Total Net Change in Customer Costs (A) 1.7
Total Net Change in Customer Costs (B) 1.7
Source: The Brattle Group

So is the carbon charge, as proposed, the same as a carbon tax?

“The idea of a carbon charge is somewhat similar to that, but the idea is that it is fairly simple and it does not involve any tax authority,” Newell said.

More importantly, NYISO would return to customers all carbon charges to help offset adding a carbon price to the market. The form that will take, however, still remains an open discussion.

With a carbon price in place, Newell addressed the four ways a carbon charge could reduce emissions. Newell said during the meeting that this is the most uncertain part of the analysis as there are a number of assumptions.

“What we tried to do is give reasonable assumptions to give an indicator of what plausibly might the effects be,” Newell said.

The first impact of a carbon charge is the tilting of investments in renewables, specifically 2,000 MW of new wind and solar projects, resulting in an annual carbon reduction of 1 million tons.

Second, peaker plants and old steam units would be displaced by the lowest-emitting technologies, reducing carbon emissions by 500,000 tons/ year, assuming 700 MW of combined-cycle generators enter the market.

Third, price signals would incentivize load shifts from the most emitting hours of the day to the least emitting hours. This is the smallest contributor to carbon reductions.

Lastly, carbon prices would incentivize energy efficiency and conservation, reducing emissions by more than 1 million tons annually. The largest customers would see higher costs. Overall costs would not rise substantially, however, given the carbon refund. However, the higher nominal price or an alternative carbon refund could induce more efficiency and conservation.

There are more moving pieces to this study, but we have focused on the core price assumptions and the key drivers in carbon reduction here.

The bottom line is that this is a highly complex issue that would add a substantially higher carbon tax than RGGI. It also remains to be seen in what form the carbon tax revenue will be returned to consumers.