New York's Clean Energy Standard is a key step toward pricing carbon pollution fairly

The CES lays out one of the country’s first clean energy plans that relies on sound economic valuation of generators’ clean energy attributes

Editor's note: The following is a guest post from Denise Grab a senior attorney and Dr. Burcin Unel, a senior economist at the Institute for Policy Integrity at New York University School of Law, which filed party comments in the New York Public Service Commission’s Clean Energy Standard proceeding. If you or one of your colleagues is interested in submitting a viewpoint article, please review these guidelines

New York State’s new Clean Energy Standard (CES) has drawn plenty of attention for trying to prop up otherwise-faltering nuclear plants. But what it’s actually doing is far more significant.

The CES, recently approved by the New York Public Service Commission, aims to help meet the state’s goals of using renewable energy sources for half its electricity by 2030 and reducing greenhouse gas emissions by 80 percent by 2050. To help get there, the CES lays out one of the country’s first clean energy plans that relies on sound economic valuation of generators’ clean energy attributes. This isn’t a nuclear plant bailout; it’s an embrace of economic principles.

The part of the order that breaks the most new ground is the Zero-Emissions Credit (ZEC) program for nuclear energy resources. The ZEC instructs utilities and other load-serving entities to compensate nuclear plants based directly on the value of the carbon-free attributes of their generation.

In designing plans to meet the state’s clean energy target, the Commission determined that nuclear plants would need to play a key role. Initially, Commission Staff had proposed welfare-style payments to nuclear plants, based upon how much money each plant needed to stay afloat. The final ZEC pricing approach instead takes a major step toward valuing the carbon-free attributes of a generation source based upon the benefits it actually provides.

In particular, the ZEC payments will be calculated based upon the Social Cost of Carbon. As the Commission recognizes, the Social Cost of Carbon is the best available estimate of the marginal external damage of carbon emissions. So by basing the ZEC formula on the Social Cost of Carbon, the payments reflect the benefits that nuclear plants provide by avoiding carbon emissions that would have come from a dirtier generator. The Commission’s decision to price ZECs using the Social Cost of Carbon draws on comments that we submitted, which were later echoed by nuclear advocates and other groups.

Economics tells us that in order to maximize social welfare, regulators must make sure that the market properly accounts for all externalities, like pollution, that might otherwise escape valuation in a transaction. Failing to fully value all attributes of energy resources, including externalities, puts a thumb on the scales in favor of an otherwise undesirable technology, which reduces net benefits to society. By failing to account fully for carbon pollution, for example, many regulators tip the scales in favor of dirtier energy sources, letting polluters pass the costs of their carbon emissions onto the public.

Ideally, an economy-wide carbon price would require dirty generators to pay for the full cost of each ton of carbon they emit. However, no economy-wide carbon price exists, and even states that have carbon pricing do not account for the full cost of carbon effects. The federal government’s Social Cost of Carbon estimate is currently $36 per ton of carbon emitted. But the most recent Regional Greenhouse Gas Initiative (RGGI) auction priced carbon allowances at $4.53 per ton. This means that in RGGI-member states like New York, polluting generators are paying only a small fraction of the actual cost of their carbon emissions and are, therefore, able to compete on unequal footing with cleaner generators.

When existing policies do not fully account for the cost of carbon pollution, additional subsidies for non-emitting resources, such as ZECs, can help to balance the scales. The new ZEC system is designed to make up the difference between the RGGI price and the Social Cost of Carbon, so that zero-emitting and carbon-releasing resources will compete on a level playing field.

Because carbon emissions are currently priced far too low under RGGI, the ZEC pricing approach will result in significant payments to New York’s nuclear generators, $965 million during the first two years of the program. But these payments will reflect the value these generators provide to the public through avoided carbon emissions, rather than just serving as life support to a struggling industry.

Not only is this ZEC approach economically preferable to the initial proposal, it also offers potential legal benefits. Under the Supreme Court’s recent decision in Hughes v. Talen Energy Marketing LLC, state energy policy may be preempted by the Federal Power Act if it interferes with the Federal Energy Regulatory Commission’s authority over the wholesale rate. Hughes suggests a safe harbor for state policy that encourages “production of new or clean generation through measures untethered to a generator’s wholesale market participation.” Because the ZEC system directly values the carbon attributes of the generators in question and operates independently of the wholesale markets, the final decision is on sturdier legal ground than the initial proposal.

New York has made a key move toward properly using economic valuation to guide energy decision making. However, there is still a long road ahead. CES distinguishes between nuclear generators and other types of carbon-free generators and—so far—only uses the Social Cost of Carbon approach to value the clean energy attributes of nuclear resources. Ideally, the state will choose to value the clean energy attributes of all resources based on the Social Cost of Carbon. Hopefully more progress is on the way.

Filed Under: Regulation & Policy