August 14, 2017

Brattle Economists: NYISO Carbon Charge Could Help Meet New York Decarbonization Goals More Cost-Effectively

A report authored by Brattle economists and prepared for the New York Independent System Operator (NYISO) finds that adding a carbon charge into the wholesale energy market could improve the state’s ability to meet its decarbonization goals cost-effectively. The study reveals that refunding collected carbon revenues back to customers results in minimal impact on customer electricity costs compared to current policies.

NYISO retained The Brattle Group to evaluate how pricing carbon emissions in NYISO’s generation commitment and dispatch could complement existing policies under New York’s State Energy Plan to help meet the state’s decarbonization goals more cost-effectively, with a particular focus on customer cost impacts. NYISO and the New York Department of Public Service plan to use this study as a starting point for discussions with stakeholders on whether and how New York State environmental policies may be pursued within the existing wholesale market structure.

“A carbon price would harmonize wholesale electricity markets with New York’s environmental goals by internalizing the cost of carbon emissions,” remarked Brattle Principal Sam Newell, a co-author of the study. “A carbon charge would provide price signals that find low-cost sources of carbon emission abatement in combination with the state’s Clean Energy Standard (CES) and other existing clean energy policies. New York has a special opportunity to do this because NYISO only covers the state, which reduces the need to coordinate with other states that have different environmental objectives.”

The Brattle team analyzed the effects of a $40/ton carbon charge in 2025, consistent with the “social cost of carbon” already adopted by the New York Public Service Commission in its CES Order, compared to a “base case” that included only existing policies. The impacts of a carbon charge on market participants’ behavior is difficult to fully predict, but the Brattle study modeled the following effects:

  • Changes in market prices for energy, Renewable Energy Credits (RECs), nuclear Zero-Emission Credits (ZECs), and capacity
  • Better investment signals for clean resources that generate where and when they displace the most carbon emissions
  • Increased energy efficiency and storage participation due to better signaling of avoided costs during hours with high emissions rates
  • Incremental investment in efficient gas-fired combined cycle capacity displacing higher-emitting peaking generation
Based on the assumptions made, the study found that the assumed market responses to a $40/ton carbon charge would provide incremental carbon dioxide (CO2) emissions savings of 2.6 million tons per year (8% of today’s emissions). These changes would lower the total economic costs of meeting New York’s emissions targets by approximately $120 million per year.

The study evaluates a key concern surrounding carbon pricing: the possibility that carbon prices would result in windfall gains for some generators and increased costs for customers. The study found that a $40/ton carbon charge would indeed raise wholesale energy prices substantially, by about $19/MWh, but that the net effect on customers is close to zero. Half of the wholesale price impact could be offset by returning carbon revenues to customers, and most of the remainder would be offset by reduced prices for RECs and ZECs and increased revenues on transmission congestion contracts (all due to higher wholesale energy prices), and by the dynamic effects of improved price signals for low-carbon investment. Sensitivity analyses show that the net impact on customer costs remains relatively small under a wide range of assumptions.
The study also examines options for border adjustments on import and export transactions to prevent “leakage” of carbon emissions by competitively disadvantaging internal resources relative to external ones.

The study, “Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals,” is authored by Brattle Principals Sam Newell, Jürgen Weiss, and Kathleen Spees, with Associates Roger Lueken and Pearl Donohoo-Vallett and Research Analyst Tony Lee. It is available for download on the NYISO website.

Associated Experts
Newell 090
Principal
+1.617.864.7900
Dr. Newell is an expert in electricity wholesale markets, the transmission system, and RTO rules. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Spees 13a
Principal
+1.617.864.7900
Dr. Kathleen Spees has expertise in wholesale electricity and environmental policy design and analysis. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Jurgen weiss0492
Principal
+1.617.864.7900
Dr. Weiss specializes in issues broadly motivated by climate change concerns, such as renewable energy, energy efficiency, energy storage, the interaction between electricity, gas and transportation, and carbon pricing. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Pearl donohoo vallet 14 new
Associate
Lueken 053
Associate
+1.202.955.5050