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Carbon Pricing in Wholesale Energy Markets: Frequently Asked Questions


Carbon Pricing in Wholesale Energy Markets: Frequently Asked Questions

September 24, 2018

Carbon pricing involves incorporating the social cost of carbon dioxide (CO2) emissions into wholesale electricity markets.

As currently being considered through an open and transparent stakeholder process, carbon pricing would better align NYISO’s wholesale energy markets with New York State environmental objectives by embedding a cost per ton of CO2 emissions in the sale of wholesale power, creating a price signal for existing generators to minimize their CO2 emissions through upgrades and efficiency improvements.

What is the social cost of carbon?

The social cost of carbon is an estimate of the monetized damages to global society associated with carbon dioxide (CO2) emissions. It was derived by the U.S. Environmental Protection Agency in conjunction with a federal task force, and is intended to include changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change.  The intent of the social cost of carbon is to allow policymakers to incorporate the social benefits of reducing CO2 emissions into any cost-benefit analyses of policy actions. It was used by the New York State Public Service Commission in evaluating the costs and benefits associated with the Clean Energy Standard (CES), which provides out-of-market incentive payments designed to offset CO2 emissions through increased renewable energy production.

Why is the NYISO looking at ways to incorporate the social cost of carbon emissions into its markets?

Incorporating the social cost of carbon directly into NYISO’s competitive wholesale markets has the potential to create greater incentives for emissions reductions from fossil fuel-based generators, while strengthening investment signals for carbon-free generation thereby reducing the need for out-of-market subsidies. A key consideration for carbon pricing is the extent to which it will enable broader emissions reductions than the CES approach by animating market responses to lower emissions from existing generators or attract new, more efficient generation to replace older, higher-emitting generators. Carbon pricing potentially provides state policymakers with added flexibility to pursue greater environmental benefits through ongoing initiatives, or to adjust those initiatives to meet current goals at lower cost to ratepayers.

Is “carbon pricing” the same as a “carbon tax?”

No. Unlike a tax, a key concept under carbon pricing is that customers are directly credited the carbon costs collected from carbon emitting electricity resources through the NYISO’s existing markets settlement process. Put simply, the NYISO is attempting to align its competitive wholesale markets with state policy in an effort to improve the economic efficiency by which the state achieves its goals.

Won’t pricing CO2 emissions in the NYISO’s markets increase energy costs?

An initial study by The Brattle Group estimated that the bill impact to consumers associated with carbon pricing ranges from a savings of 1% to a cost increase of 2%. Based on several months of stakeholder discussions that have refined the concept, the NYISO, with the help of the Brattle Group, issued a second analysis that suggests, in the long term, carbon pricing would capture incremental reductions in CO2 emissions without imposing additional costs on consumers as markets respond to carbon price signals. This largely stems from reduced out-of-market subsidies through the state’s Clean Energy Standard as well as investment in new, more efficient generation that replaced older, less efficient generation.

Has anyone ever successfully designed a market to reflect CO2 emissions costs before?

The concept of “carbon pricing” is not new, but the NYISO is the first ISO to attempt to integrate the full social cost of carbon directly into its Energy market. New York State is part of the Regional Greenhouse Gas Initiative (RGGI), a multi-state collaborative that requires CO2 emitting generators to procure CO2 emissions allowances. The initiative has been very successful because generators see a price signal and invest accordingly, but the cost of allowances does not reflect the full social cost of carbon. The NYISO’s carbon pricing concept would build upon the experiences gained in RGGI to reflect the full social cost of carbon in the wholesale energy market, more closely aligning price signals in the energy market with New York State’s more aggressive emissions reduction goals.

If RGGI has been successful, why do we need carbon pricing in the NYISO markets?

While RGGI is one possible tool the state has available to address CO2 emissions, New York is one of nine states participating in the RGGI initiative. The NYISO’s initiative would better align price signals in its markets with New York State’s more aggressive emissions goals, as set forth in the State Energy Plan, without disrupting the regional effectiveness of the RGGI program.

How does the carbon pricing approach that the NYISO is considering support the state’s emissions reduction and renewable energy goals detailed in the Clean Energy Standard (CES)?

A market-based approach to pricing CO2 emissions will leverage the success of wholesale energy markets to develop the widest possible set of low cost, innovative carbon abatement measures. The state’s CES goals include generating 50% of the electricity consumed in the state from eligible renewable resources and reducing economy-wide CO2 emissions 40% by 2030. The primary tool to achieve these goals under the CES is to procure Renewable Energy Credits (RECs) and Zero Emission Credits (ZECs) from eligible resources as a means to attract and retain generating facilities with little to no carbon emissions. The NYISO’s carbon pricing concept would operate in conjunction with CES, RGGI and other existing state public policy programs. Analysis indicates that the carbon pricing concept will benefit consumers by reducing the cost of RECs and ZECs while also stimulating dynamic market responses. For instance, carbon pricing will incentivize a reduction of greenhouse gas emissions from existing fossil fuel generators by providing a price signal for investment in upgraded or new fossil fuel generators to replace energy production from older, less efficient fossil fuel units.

What happens to RECs and ZECs if the social cost of CO2 is priced into competitive wholesale electric markets?

Analysis of the NYISO’s carbon pricing concept shows that introducing a carbon adder into wholesale markets will reduce the cost of RECs and ZECs as facilities eligible for these subsidies are able to realize greater revenues from the NYISO’s energy markets. In fact, the analysis concludes that the cost of ZECs could ultimately be eliminated without jeopardizing the economic viability of the nuclear facilities currently receiving those payments.

Will carbon pricing weaken the competitive position of New York based on generators relative to those in neighboring regions? How does carbon pricing address emissions from out-of-state suppliers?

How to treat energy imports and exports to avoid “leakage” of emissions, where emissions are effectively shifted from New York-based resources to out-of-state resources rather than reduced, is a key issue under consideration by the NYISO and its stakeholders. While this issue is not addressed by RGGI or the Clean Energy Standard, the NYISO’s concept incorporates “border adjustments” to account for emissions associated with imports and exports, effectively neutralizing the effect of the carbon adder for these transactions so that power flows across borders can be maintained as needed to support regional reliability. The details of this type of approach will be worked out through extensive stakeholder discussions to ensure that New York-based generation is not placed at a competitive disadvantage relative to generators in neighboring regions.

For more information on carbon pricing, read:

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We are an independent, not-for-profit corporation responsible for operating NY’s electricity grid. We administer wholesale electricity markets, conduct planning for the state’s long-term needs, and advance our technological infrastructure.

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