This episode of Resources Radio comes a day early, in celebration of International Podcast Day.
This week, host Daniel Raimi talks with Karen Palmer and Daniel Shawhan, two RFF researchers and experts on New York State’s energy plan. Palmer, Shawhan, and Raimi discuss the potential of a carbon price in New York State to affect emissions both within New York and regionally, electricity prices, and what role carbon pricing could play in achieving New York’s ambitious climate targets over the coming decades.
Listen to the Podcast
Top of the Stack
References and recommendations made during the podcast:
- Benefits and Costs of Power Plant Carbon Emissions Pricing in New York by Daniel Shawhan, Paul Picciano, and Karen Palmer
- The Engineering, Economic, and Environmental Electricity Simulation Tool (E4ST)
- The Biggest Little Farm
- Free Solo
- "Electricity Market Design," Oxford Review of Economic Policy, by Peter Crampton
The Full Transcript
Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. We usually release our episodes on Tuesdays, but today, Monday, September 30th, is International Podcast Day. To celebrate, we talk with RFF senior fellow, Karen Palmer and RFF fellow, Dan Shawhan. Along with RFF senior research assistant, Paul Pachino, Karen and Dan recently released a report called “Benefits and Costs of Power Plant Carbon Emissions Pricing In New York.”
I'll talk with Karen and Dan about this new work, which examines how a carbon price applied specifically to New York State's electricity sector would affect emissions inside and outside of the state, electricity prices for consumers, and much more. I'll also ask them about what role carbon pricing could play in achieving New York's ambitious climate targets over the next few decades. Stay with us.
Okay. Dan Shawhan and Karen Palmer, my friends and colleagues here at Resources for the Future, thank you so much for joining us today on Resources Radio.
Karen Palmer: Great.
Daniel Shawhan: Our pleasure.
Karen Palmer: Great to be here.
Daniel Raimi: Yeah. So, we're going to talk today about a paper that you have recently coauthored on a New York State carbon pricing policy. But before we get into that work, I want to ask both of you the same question that we ask all of our guests, which is, how did you get into this stuff in the first place? What motivated you to work on energy and environmental topics?
Karen Palmer: Great. Well, I grew up in Maine. And coming from Maine, it's pretty hard to escape the outdoors. So I guess the environment has always been a concern and Resources for the Future attracted me because it was an opportunity to use my economics tools to address environmental questions, which is something I hadn't done in grad school. But as for energy, I guess I'd say it's an inherited interest. My father's father was in the energy business, and the Palmer Fuel Company supplied both wood-based fuel for heating and cooking and gasoline for cars throughout the middle part of the last century. So I have diverse sources of energy in my blood, so to speak.
And ever since I've been at RFF, I've kind of worked on issues at the intersection of energy and the environment, particularly focused on the electricity sector. I think throughout my now very long career here, I've been fortunate to overlap with a lot of the major developments in that sector, including things like taking social costs into account and in planning for utilities, the restructuring of the electricity sector, which raised its own set of issues, an evolving focus on energy efficiency and the development of regional and national climate policy, as well as new topics like electrification. So I've been really fortunate to work throughout these developments with a bunch of great colleagues, including Dan Shawhan.
Daniel Raimi: Yeah. Great. Yeah. How about you Dan? How did you get into this?
Daniel Shawhan: Well, I've long been interested in trying to reduce human suffering as effectively as I can. I was initially interested in development assistance in parts of the world where there's a lot of poverty and other suffering. But then when I was around 20, I spent about a year and a half living with families in low income parts of the world. And I wasn't initially particularly interested in climate change, but I saw how vulnerable people around the world are to climate change.
I lived with farmers in Nepal, and a lot of them, for example, had to sell their land to buy food to survive when the crops failed. And that just leaves them in a terrible, dangerous situation where not only are they full of sorrow and fear, but also they're vulnerable to poverty and malnutrition and disease. Then I actually was a consultant to state governments, helping them to design their environmental policies and their electricity markets. And it seemed to me that some policies were much better choices than others. Some would be great and others would be actually counterproductive. And I saw a need for objective analysis. In my experience with policymakers, they're hungry for objective analysis policies, and it really can affect how they vote on policies.
Daniel Raimi: Yeah, that makes sense. And of course that's what we're trying to do here. So let's talk about one of those policy issues, which is carbon pricing in the power sector in New York state. So as many of our listeners will know, there are already a variety of policies that affect the electricity sector in the state of New York, as well as the neighbors of the state. So can you, Karen, give us a quick overview of what some of those existing policies are?
Karen Palmer: Sure. So New York participates in the multi-state Regional Greenhouse Gas Initiative, which is also known as the RGGI program. It started about 10 years ago and collectively, there are nine states currently involved, soon it will be 10, and these States span geographically an area from Maine down to Maryland, skipping over Pennsylvania for now. What the program is about is imposing a declining cap on CO2 emissions from electricity generators. And the way that those reductions come about cost effectively is they employ a cap-and-trade program. What that does is it creates allowances that are denominated in tons of CO2 that are emitted from these generators and those that are distributed to the generators using an auction mechanism. And that provides each of the states with revenue to support other programs such as energy efficiency or the deployment of renewable technologies or perhaps offsetting electricity price increases that might come with a program.
With the New York State, most of the policies related to climate follow from the state's energy plan, the 2015 energy plan, which included a goal of reducing statewide CO2 emissions by 40 percent from 1990 levels by 2030, and having 50 percent of the electricity supplied by renewable generators within that time frame. So in addition to participating in the RGGI program, New York has adopted two other major policy initiatives that are intended to help meet these targets. And these include [a] renewable energy standard that requires the load serving entities, those utilities that sell electricity to customers, to purchase renewable energy credits in sufficient quantities to meet the renewable generation share obligation.
And also, a zero energy credit program that supports the continued operation of three upstate nuclear generating plants. It gives them sufficient wholesale revenue to remain financially solvent and therefore maintain that source of zero emitting generation. So these two, REC, renewable energy credit and ZEC policies, together, constitute New York's overarching clean energy standard that was adopted in 2016. Now, the proposed New York ISO carbon pricing policy would reinforce these goals and more fully internalize the social costs associated with carbon emissions into the electricity system operations and investment decisions.
Daniel Raimi: Great. That's really helpful. And the carbon pricing mechanism that you just mentioned, that is the thing that you two model in this study. And you use a tool, Dan, that you've developed called... I think it's been on the East Model, but there's a four in there.
Daniel Shawhan: That's right.
Daniel Raimi: So can you tell us briefly about the East Model and kind of how it works to analyze this problem?
Daniel Shawhan: Yeah, the East Model, which we sometimes say E4ST, and that stands for engineering economic and environmental electricity simulation tool, is the simulation model that we used for this study. The East Model predicts how the power system will operate, and which generators will retire and what generators will be built over the years and decades to come. It does this with a uniquely high degree of engineering detail. It's extremely computationally intensive, it's made possible only by recent advances in computational technology. It's also built for unusually comprehensive benefit-cost analysis of policies, or new infrastructure and other things. And it's pretty adaptable. And actually, folks who are interested in learning more about it can find more information about it at E4ST.org.
Daniel Raimi: Great. So for all of our modelers out there, you've got resources in Dan Shawhan here.
Daniel Shawhan: And Karen Palmer.
Daniel Raimi: And Karen Palmer, of course. So tell us... Now that we understand the tool that you're using, tell us about the carbon pricing policy that you analyze.
Daniel Shawhan: So yeah, the policy, in brief, is a price on the carbon dioxide emissions from the power plants in the State of New York—that price is proposed to be equal to the estimated social cost of carbon, and we assume that they would use a price of $55 in the year that we simulate, which is 2025. And also, the policy has special treatment of imports and exports to try to somewhat keep the policy from subsidizing, essentially, from promoting more generation, even dirty generation outside of New York.
Daniel Raimi: Great. That makes sense. And social cost of carbon, of course, that's a hugely important topic. We haven't done an episode yet on social cost of carbon, which is surprising. We really should and we will sometime soon, but people can certainly look up what the SCC is and what some of those numbers are. And as Karen mentioned, there are a variety of existing policies that are in play. So why is it interesting or important to look at the application of this new policy, this carbon price into the existing system?
Daniel Shawhan: New York is in a situation that may become increasingly common. It's already part of the multi-state region that Karen described, the RGGI region that has a shared cap-and-trade program on emissions, but it wants to do more. And so it's considering establishing a higher price on emissions than the one that's established by the cap-and-trade program. And so there are important questions that result from this situation. If New York starts charging a higher price on emissions, will that leave emissions unchanged? Because the region's emissions remain at the cap, at the shared cap, will it actually increase national emissions by making the RGGI states together rely more on imported power, or will it maybe decrease national emissions by making the region rely less on imported power?
Also, might it decrease emissions by causing the states in the region to issue fewer emission allowances? And finally, how much will it increase the total cost of the electricity supply, nationally and in New York? These are some, I think, important questions that we try to answer in this case—this case that's very important in its own right, but it's also an extremely important case study and precedent for the other states and countries that may find themselves in a similar situation.
Daniel Raimi: Right. That's really helpful. Because as we know, there are a variety of these cap-and-trade programs that exist, often covering multiple jurisdictions. So what happens when one country or state within that bigger overarching system imposes new policies? So what do you find? What are some of the headline results?
Daniel Shawhan: As I mentioned, we estimate the year 2025, assuming that the policy goes into place about four or five years before that. And in all the cases that we've simulated, we find that the proposed New York policy would reduce New York and national emissions, according to the modeling results. Why? Well, it's because the New York policy increases ... It increases non-emitting generation in New York, more solar than wind, but both. And it increases them by more than it decreases generation in the rest of the RGGI states.
So it actually decreases the reliance of the RGGI states together on imported power, and that means decreased generation outside of the RGGI states and decreased emissions outside of the RGGI states. So nationally, the effect is successful reduction in emissions under all of the cases that we've simulated. The overall net benefits that we estimate, counting basically all of the relatively direct effects on consumers and producers of electricity and the environment and so on, that is people's health and effects of the environment on people, counting all of that, we get net benefits of between 100 million and $700 million in the year 2025. So that's sort of a one year snapshot of the net benefits. In terms of the pocketbook effects on electricity users, in New York, we get a pocketbook effect equivalent to between 0.1 percent and 1.1 percent of the retail electricity rate.
Daniel Raimi: So pretty small, I think we can say.
Daniel Shawhan: Considered pretty small, it seems, by folks in New York. But actually, nationally, in one of our two main cases, there's actually a benefit to electricity users. And that's because the policy causes New York to increase its electricity supply and that reduces the electricity prices outside of New York. We include the effects on not just CO2, but also the emissions of methane and sulfur dioxide and nitrogen oxides, and we use our air pollution model to estimate the effects of those sulfur dioxide and nitrogen oxide emission effects on people's health. And we value those effects. The reductions in those emissions constitute about 10 percent of the total environmental benefits.
Daniel Raimi: Thank you Dan. That's really helpful. So if we think about what emissions reductions occur as a result of this $55 per ton CO2 price, can you put it maybe in percentage terms for us? What's the range of estimates that you come up with for the time period that you're interested in?
Karen Palmer: Right. So again, we're focused on 2025. And in our analysis, we considered the impacts of the New York policy under two different scenarios about renewables costs. One is sort of a moderate case and one is a high case. And our findings, with respect to percentage reduction in emissions from the electricity sector, depending on which case, but they range between 6 percent, which would be for the high renewables cost case to 22 percent, which is the percentage we find for the low renewables cost case. So it's a pretty substantial reduction.
Daniel Raimi: So next question is kind of a question that economists often wrestle with, which is, when we look at... I shouldn't say we, because I am not a PhD economist, I need to remind listeners of that. So when economists analyze multiple policies that might be overlapping, they're kind of addressing the same problem, in this case, carbon dioxide emissions. Sometimes they find that those policies interact in ways that reduce the effectiveness and can lead to sort of perverse outcomes or unexpected outcomes.
Can you explain how these policies, the carbon pricing that you're focused on, and RGGI, can you talk a little bit about how they interact in the results that you find and how that interaction affects emissions, not just in New York, but also in other RGGI states and maybe even outside RGGI states? Dan spoke to this a little bit, but I'm hoping you can expand.
Karen Palmer: Sure, sure. So one of the features of the RGGI program is they have periodic program reviews where they look at how effective the program has been in recent times and then adjust parameters of the program agreed to among the various states. So the most recent review happened in 2016 to 2017 and as part of that review, RGGI introduced a new feature that's known as the emissions containment reserve or affectionately the ECR.
So what the way it works is that it reduces the number of allowances that are sold in the auction if the price falls to or below a specified level. So, this idea of taking allowances out of the market, potentially, if costs are low, or putting them in if costs end up being high is not new. RGGI's always had a price floor below which no allowances are sold. And for many years, the RGGI program was at that price for effectively not selling some of the allowances in the program.
And in addition, it's had something known as a cost containment reserve, which is a high price at which a limited number of additional allowances are introduced, but essentially to buffer against the program getting too expensive. Though the recent addition was a price step at $6, beginning in 2021, at which up to 10 percent of the RGGI allowances are withdrawn from the market if the price falls to that level. And if it fell below that, all 10 percent would be withdrawn.
That trigger price of $6 rises at 7 percent per year every year after 2021. Well, what does this mean? Well, it means, essentially, that the supply of allowances in RGGI is dependent upon the price. So companion policies to RGGI such as a state renewable portfolio standard, or an additional carbon price like New York is considering, can have greater environmental potency because those policies reduce the demand for RGGI allowances and not only reduce the price, but also could result in some environmental benefit.
So in our analysis, we focus on 2025, and we find that in fact, the emission containment reserve provision is triggered even without New York's carbon pricing policies, so in our baseline scenario. But when the New York carbon pricing is imposed, demand for RGGI allowances falls even further. So, that does reduce the number of allowances auctioned off by RGGI. So, it not only reduces emissions in New York, but it reduces emissions in the broader RGGI region. Sort of speaking to that zone in between the whole nation that Dan addressed and New York, there are emissions reductions within RGGI as well.
Daniel Raimi: All right. So let's look forward a little bit and think about some recent policy changes that have taken place in New York. You mentioned earlier when describing this project, that you were looking at a set of existing policies as of, I believe, 2016. But there have been new developments, of course, in New York and earlier this summer, the state passed a new law that aims to reduce power sector carbon dioxide emissions to zero by the year 2040, and reduce emissions economy-wide across not just electricity but transportation, industrial sector, et cetera, by 85 percent by 2050, so really ambitious goals. Do you think the new policies that have been more recently enacted would lead to any big changes in your findings from the study you've done?
Karen Palmer: So, I guess I'd like to suggest that we reframe the question a little bit.
Daniel Raimi: Sure.
Karen Palmer: So the new law that you're referring to, which is known as the Climate, Leadership and Community Protection Act, New York enacted, the governor signed it into law in July. It does articulate some really ambitious goals and also suggests a few specific mechanisms. Focusing on the electricity sector for a minute, they added offshore wind, greater solar generation and some targets with respect to additional storage that could contribute to meeting that goal. But it doesn't really spell out the policies that are going to be used to make sure that those goals are met, particularly goals in the electricity sector.
So, the way we like to think about our work within this new fresh context is that pricing carbon could be part of a policy approach to get to those goals. Our analysis suggests that if a carbon price of $55 in 2025 could lead to a share of clean energy rising to as high as 64 percent of total New York generation, so that would mean generation, not only by renewables but also by nuclear plants. And that's well on the way to the, essentially, 88 percent requirement by 2030, which is 70 percent renewables plus the hydro, plus the generation from upstate nuclear plants.
So it doesn't get us all the way there, but it suggests that pricing carbon in New York electricity markets has really helped to advance the adoption of clean energy. A higher carbon price, probably some other companion policies or maybe both are going to be necessary to hit these goals, but the mechanism is one that I think the state should really consider.
Daniel Raimi: Great. That's really helpful. And when you have reached out to policymakers in New York or others who are sort of interested in this space, what reactions have you gotten from the work that you've done? Do you see carbon price as something that is feasible to meet some of the new goals that we're talking about? Where do things stand at the moment?
Daniel Shawhan: We've gotten a lot of interest in New York. Actually, they've been reaching out to us. Well, the folks in New York are starting to grapple with how to implement their new ambitious clean electricity goals. And they seem to consider a CO2 charge or possibly a new New York CO2 cap-and-trade program to be an option worth considering for meeting those goals. The appeal of the carbon pricing option for meeting their clean energy goals, I think, is increased by the fact that there's concern that if they continue to instead subsidize renewables and nuclear, or you could say compensate renewables and nuclear for being non-emitting, that the Federal Energy Regulatory Commission will impose a sort of penalty, potentially very large penalty on New York for doing that.
Essentially those payments for being non-emitting are considered to be out of market mechanisms by some commissioners in the Federal Energy Regulatory Commission. However, if New York instead adopted a price on CO2, that might very well be considered a market mechanism that's within the market and therefore something that doesn't justify a penalty. So that's a potential large advantage of using CO2 pricing. Also, interestingly, the electric industry in New York seems to mostly favor the idea of switching to a carbon emission price rather than continuing the payments for renewables and nuclear.
Daniel Raimi: Great. Do you have a sense of why the generators in New York might prefer a pricing mechanism over the standards that are currently in place?
Daniel Shawhan: I think that for the emitting generators, it would be better for their profits, because it would raise the price of electricity, whereas the payments to renewables and nuclear don't. And we've taken that into account in our analysis. So those total net benefit numbers that I mentioned earlier, those take into account the effect on industry profits and the effect on consumers and so on. And on government revenue as well.
Daniel Raimi: Yes. Government revenue, always important. So speaking of government revenue, that makes me think of another question, which is, what happens to the revenue from this new carbon price that would be, or potentially could be implemented? How does it get sort of recycled for the government or maybe for the generators, or where does that money flow?
Karen Palmer: Right. These revenues from the carbon charge are kept within the electricity sector that's operated by the New York system operator. And what happens to those revenues, essentially, is they're shipped back to the utilities that sell power to customers. So essentially, helping to... While they have impacts on the wholesale prices, that mechanism of dealing with the revenues helps to offset any price impact on the consumers, and that's one of the reasons what we find fairly small price impacts for retail prices of electricity.
Daniel Raimi: Great. Well, Dan and Karen, thank you so much for talking to us about this new work that you've been putting together. It's really fascinating. The policy implications are really clear and really engaging. So I want to ask you now, both of you, about what you've been reading or watching or listening to lately, our top of the stack question. So what's on the top of your literal or metaphorical reading stack? I'll leave it to you to decide who wants to answer first.
Karen Palmer: Sure. I'm happy to take that first. So your question got me thinking about a couple of movies, and they're not in the energy space at all, but they are kind of in the outdoor environment nature space. So I want to recommend two movies that are both about humans interacting with nature, but in two very different ways. And the first is a documentary I saw this past spring about sustainable agriculture. The title of the film is The Biggest Little Farm, and it portrays the saga of a family that starts an organic farm by converting an old farm North of Los Angeles into a farm that has livestock, fruits and vegetables. And you see a lot about the vulnerabilities of farms and also the resilience of sustainable farms to weather. And there's a lot of interesting lessons about integrated pest management and virtues of crop diversity, the role of ground cover. It's just a very inspiring story.
The second movie about humans interacting with nature that I want to recommend is Free Solo, which is about the planning and execution of a free ascent, without ropes harnesses or clips, by Alex Honnold of El Capitan's 900 meter rock face in Yosemite National Park. As the mother of a 20 year old who likes to climb, but mostly not in this harsh way, it was hard to watch at times, pretty dramatic, but it provides a great picture of working with nature and sort of overcoming the challenges that it can pose. So it's great movie.
Daniel Raimi: Yeah, I saw that movie in the theaters and it was just stunning. Totally amazing. Beautiful cinematography, and then the stuff that this guy is doing on the mountain is just unbelievable.
Karen Palmer: Yeah, a lot of study about every little movement. It's pretty amazing.
Daniel Raimi: Yeah. How about you Dan? What's on the top of your stack?
Karen Palmer: Well, actually, first, that farm film reminds me of something a friend of mine who helps farmers in New York State says, she says; “How do you make a small fortune in farming?" And the answer is, you start with a large one.
Daniel Raimi: Nice.
Daniel Shawhan: I have been learning about electricity markets for the last 22 years or so, ever since my first job out of college, and helping design them and that sort of thing over these years. And I encountered what I think is a very nice summary of how electricity markets work today, especially the one the sort of restructured electricity markets. It's a journal paper, but it's easy to read, and it's called “Electricity Market Design.” It's by Peter Crampton, and it's actually freely available. And I think you can probably put a link to it on the Resources Radio webpage.
Daniel Raimi: Yes, we will. Great. So yeah, Peter Crampton, not to be confused, of course, with the other Peter. Well, with Peter Frampton. Right? Electricity comes alive maybe. We'll figure the title of that paper. Okay, dad joke. Sorry, I've got to stop with the dad jokes. Well, Dan and Karen, thank you again so much for joining us on Resources Radio and telling us about your research and your interests, and I really enjoyed it.
Karen Palmer: Thanks.
Daniel Shawhan: Thank you.
Karen Palmer: Yeah, that's great.
Daniel Raimi: You've been listening to Resources Radio. If you have a minute, we'd really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent nonprofit research institution in Washington, D.C. Our mission is to improve environmental, energy and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org.
The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Elizabeth Wason, with music by me, Daniel Raimi. Join us next week for another episode.