New York considers carbon pricing for state's energy market
New York state is considering the introduction of a state-established carbon price into the New York Independent System Operator (NYISO)'s electricity markets. The New York State Department of Public Service and NYISO have outlined a stakeholder process to explore charging utility companies in line with the amount of carbon emitted by power plants supplying the power. The revenues NYISO would gain from the introduction of a "carbon adder" would be used elsewhere, such as to support state clean energy programmes.

Imagine what would happen if the utilities buying the electricity to power our homes and businesses had to pay more for it depending on how much carbon pollution the power plants supplying the power pumped into the atmosphere? A report issued today for the state of New York takes a look at how such a "carbon adder" might work, providing insights for the rest of the country as well.

Given the magnitude of the challenge represented by climate change, policymakers need to assemble as many effective tools in their climate toolbox as possible if we’re going to efficiently cut carbon at the pace scientists say is necessary. With that in mind, the New York Independent System Operator (NYISO) today released a report authored by the Brattle Group that provides guidance on how New York could potentially integrate a state-established carbon price into NYISO’s electricity markets.

An accompanying cover letter, co-signed by New York State Department of Public Service (DPS) CEO John Rhodes (who also chairs the state’s Public Service Commission) and NYISO CEO Brad Jones, outlines an inclusive and transparent stakeholder process (kicking off on September 6th) to further explore this promising new mechanism. Just as important, it proposes significant framing principles on how any such mechanism—if ultimately adopted and implemented—could better harmonize NYISO’s wholesale markets with New York State’s many successful clean energy and climate initiatives. New York also would be the first state to implement this method for putting a cost on carbon pollution.

While we are still sifting through the 70-plus page report, and will certainly offer more extensive perspectives later, this blog provides a first take on some of the most important overarching themes from NRDC’s viewpoint.

The concept of a carbon adder is laudable and worth exploring. And it has clear potential to cut carbon pollution—but only if the state and NYISO get the design right, and in the process avoid some important legal and policy pitfalls.

What the heck is a carbon adder, anyway?

Identifying and incorporating the cost of carbon pollution into electricity generation can be an important tool in efficiently cutting carbon emissions; policies like the Northeast and Mid-Atlantic states’ Regional Greenhouse Gas Initiative (RGGI) (which is on the cusp of a major decision on what that program will look like post-2020; more on that here) and California’s Cap and Trade program are emblematic examples. As with the nine-state RGGI, which includes New York, a carbon adder would lead to power plant carbon reductions. But they work differently: RGGI sets an enforceable/binding cap on total carbon emissions, while a carbon adder puts a price on each ton of carbon. Importantly, done right, they can work in concert.

Here’s how a carbon adder would work. Let’s say a natural gas generator offers to sell electricity in the NYISO power market for $20/megawatt-hour (MWh). The average amount of carbon emitted per megawatt-hour is one-half of a ton for many gas plants, so if New York set a $40 per ton carbon price, that half-ton of pollution would cost $20. The generator would add that $20 to its offer price, resulting in a total offer of $40 to produce one megawatt of electricity for one hour. NYISO, the entity that dispatches electricity to utilities, selects the cheapest generation options first, which under an adder would increasingly be those with no or low carbon pollution. NYISO accepts offers, ranked by cost from lowest to highest, as needed to satisfy total demand.

If the generation from the gas plant in the example above were selected, the plant owner would receive the market clearing energy price (highest price during a specific period) minus the cost of the carbon adder. The carbon adder revenues would go elsewhere, such as to support state clean energy programs.

Why implement a carbon adder?

A carbon adder is a technology-neutral and transparent mechanism to differentiate between power plants based on their specific carbon pollution profiles. In that way it helps to incorporate the cost and environmental impacts of carbon pollution into electricity markets. It also can capture the locational difference in value of cleaner technologies. As NYISO’s most recent Power Trends report demonstrates, downstate New York has a much dirtier energy supply mix than upstate.