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Clearing the Air: Take on Tackling Carbon Emissions by Charging True Cost to Society

 

This article, written by Exelon’s Kathleen Barrón, senior vice president of federal regulatory affairs and wholesale market policy, will be published in the Environmental Law Institute’s publication Forum.

Recently, the Federal Energy Regulatory Commission and regional grid operators have considered how to address the effects of state clean energy policies on electricity markets. These actions have highlighted the challenges in reconciling state preferences for low-carbon generation with the least-cost dispatch system used in competitive markets.

Often states incentivize clean generation with technology-specific procurement requirements, which have increased the supply of preferred zero-carbon capacity. However, this approach can overlook opportunities to reduce emissions by switching from carbon-intensive sources to sources that emit less. An alternative is to price the cost of the unwanted pollution into the market and use the power of competition to find the most effective solution.

In a 2017 column, I provided a survey of state efforts to price carbon in the absence of federal action. As these efforts move forward and calls for federal action resume, an example worth examining more closely is the New York Independent System Operator’s​ effort to price carbon emissions directly in wholesale electricity markets.

Using both logic and innovation, NYISO has established the Integrating Public Policy Task Force to develop a straw proposal for how the state could accomplish this. The charge to NYISO is simple, elegant, and potentially revolutionary: harmonize the state’s ambitious energy and environmental public policies with wholesale markets. In other words, NYISO is evaluating whether and how competitive markets can support rather than impede New York’s ambitious clean-energy goals, including a 40 percent reduction in carbon dioxide emissions by 2030.

NYISO’s proposal is, on its face, quite simple: charge carbon-emitting generation resources their true costs of emissions, and dispatch generators according to their real marginal costs. The elements of the proposal are establishing a carbon price, integrating it into generation dispatch, and collecting the revenue and returning it to customers. However, there are important policy decisions underlying each step.

An initial decision is to settle on a value of avoided carbon emissions. In another proceeding establishing a clean-energy standard, the state already formulated the social cost of carbon, which provides NYISO with a clear statement of policymakers’ value of avoided emissions. Once the SCC is established, each individual generator would add it to their other costs of generation to calculate their energy bids. Higher-emitting resources would reflect higher costs, and zero-emitting resources would reflect lower costs, thus supporting New York’s goal of achieving lower emissions.

For example, if the SCC were $50 per ton, the unit-specific value for a coal plant would be approximately $40 per megawatt-hour. Thus, if its bid before the carbon adder were $20 per megawatt-hour, its bid would now be $60, and it would run and emit much less.

Importantly, unlike under other regulatory options, the coal plant would not be prevented from running if needed to preserve grid reliability; however, the true cost of doing so would be known and the plant would only be called on after less-polluting options were exhausted. This solution will reduce emissions over time and send an investment signal for cleaner generation. As a variable cost, a carbon adder integrates well with the current energy market framework. This is analogous with NYISO’s current practice of dispatching units that have paid a variable carbon cost via allowances under the multi-state northeastern Regional Greenhouse Gas Initiative.

A key difference from RGGI, however, is the need to address emissions leakage caused by import and export inequities with neighboring regions or control areas. Often short-handed as border mechanisms, these policies need to be established to ensure higher-emitting, out-of-state resources do not supplant in-state resources, leading to a shifting of generation and emissions to states with a lower assessed cost of carbon. This leakage would lead to an export, rather than reduction, of emissions. To prevent this, NYISO is evaluating several options to effectively charge imports the same carbon price faced by in-state generation and conversely, credit exported electricity.

Given the urgency of the climate challenge, we commend NYISO for undertaking this nation-leading effort to properly valuing generators’ environmental attributes and achieving New York’s carbon reduction goals. The climate can’t wait.

The author is grateful for the assistance of Kathy Robertson in developing this column.



 

 

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