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Carbon Pricing to Facilitate NYISO’s Clean Energy Transition

A recent study by the Analysis Group found that implementing a carbon pricing model is the most effective and powerful way to combat global warming and reduce air pollution. Back in June of this year, New York Governor Andrew Cuomo implemented the new Climate Leadership and Community Protection Act (CLCPA), requiring 70% of electricity consumed in New York to be produced from eligible renewable resources by 2030. By 2040, the law requires that all electricity be produced from zero-emission resources. In order to achieve these goals, extensive changes will need to be made to the New York Independent System Operator’s (NYISO) competitive market structures. Carbon pricing will facilitate NY’s clean-energy transition in a faster, reliable, and more cost-effective way.

Under NYISO’s proposal, the social cost of carbon emissions would be incorporated into the state’s wholesale energy markets. The carbon price is in dollars per ton of carbon dioxide emitted. The New York State Department of Environmental Conservation (DEC), in consultation with New York State Energy Research & Development Authority (NYSERDA), will establish the social cost of carbon for use by state agencies. The development of a state social cost of carbon must be established no later than one year after the CLCPA takes effect. According to the EPA, the social cost of carbon for 2020 is estimated at $42 per ton of CO2. Suppliers would pay the assigned social cost for the carbon they emit into the atmosphere. Suppliers then would add the additional carbon charges in their offers to the power market, incorporating the carbon price in the price formation. Suppliers would receive a credit to substantially offset the impact of carbon pricing, because consumers would see a portion of the carbon charges collected from generators returned to them. About half of the revenue collected from suppliers would go back to consumers, while the rest would go to low carbon or carbon free resources like wind, solar, and hydro.  

The goal of carbon pricing is to lower emissions from existing generators and encourage investment in efficient generation, battery storage, and low-carbon technologies. A carbon price in wholesale markets will reduce the cost of Renewable Energy Credits (RECs) and Zero Emission Credits (ZECs), because facilities that are eligible for these subsidies will generate greater revenue from the NYISO’s energy markets. Further analysis of NYISO’s carbon pricing suggest the cost of ZECs could be eliminated without affecting the economic interest of the nuclear facilities currently benefiting. According to the October Analysis Group report, a carbon price could deliver savings to consumers of between $280-$850 million from 2022 to 2040.

With time, a carbon price will help New York transition to clean energy generation. Last year, 41% of in-state generation predominately came from natural gas-burning power plants. By 2030 a drop from 2.4% to 7.8% could be expected in statewide gas use. NYC could see a drop in natural gas use up to 9.75%.  This drop in natural gas use coincides with the statewide goal of reducing energy consumption by 185 trillion British thermal units (BTUs) from the state’s 2025 forecast through energy efficiency improvements.

 The Resources for the Future (RFF), a nonprofit research group, concluded that a $63 per ton of CO2 in 2025 could reduce overall emissions between 6% and 22% and increase clean energy generation by 64%. Under this scenario, zonal average wholesale prices may increase by $0.02/kWh to $0.024/kWh, with the largest effects in New York City. This would represent a 50-75 percent increase in NYISO wholesale energy prices.  

The Analysis Group explored NYISO’s carbon pricing proposal and found that carbon pricing could help the state reach its climate goals in a more timely and effective way. Further analysis must be done on the proposal to explore the potential economic impacts on transmission owners, suppliers, consumers, and the environment. The proposal will need to be approved by NYISO stakeholders, NYISO’s board of directors, and the Federal Energy Regulatory Commission. If New York state supports the proposal, carbon pricing would be implemented in the NYISO markets no earlier than the second quarter of 2021.