Carbon calculus: More states are adding carbon costs to utility planning guidelines
Colorado and Minnesota were two states that added carbon costs to planning guidelines. Now others are following suit
The Trump administration is abdicating Obama-era climate regulations, but a small — and growing — amount of states are taking matters into their own hands.
The weapon of choice? The federal social cost of carbon, developed by the former Obama administration’s interagency working group composed of federal scientists and economists.
The way it works is that it monetizes the net damages of carbon dioxide emissions, necessitating the cost to be expressed as a range of dollar values.
The latest state to use such a standard — or at least be in the center of a debate — is Minnesota. The state recently updated its cost of carbon standards, after determining that the previous estimate was too low, and used the federal social cost of carbon as the basis.
The New York Public Service Commission is another entity that affirmed the importance of the social cost of carbon through its zero-emission credits (ZECs) and other policy calculations. And Illinois lawmakers also incorporated the social cost of carbon in a ZEC calculation upheld by the state courts.
California is also considering using the cost of carbon as part of its comprehensive energy and climate programs. All told, the United States government utilized the social cost of carbon in more than 150 proposed and final regulatory measures, according to according to energy and environmental policy think tank Resources for the Future (RFF). And support gained momentum when Colorado became the first state to impose a regulatory requirement that utilities use it in resource planning.
But that momentum was lost when a presidential executive order disbanded the working group in March. President Donald Trump’s order also specified that the social cost of carbon is no longer governmental policy, wrote RFF Fellow Casey J. Wichman. Its rollbacks and guidance “indicate that the Trump administration is disengaging from scientific questions related to the benefits of emissions reductions.”
Still, that does not appear to be the case with some utilities. In the Minnesota proceeding, Nicholas Martin, the environmental policy manager for Xcel Energy noted the utility supports “bold action” on carbon reduction. In contrast to the Trump administration, Xcel “does not question” the science of climate change, the legitimacy of externality pricing, or even the social cost of carbon “when it is used for its intended purpose,” Martin said.
Even so, Martin reflected some doubt when he expressed concern over how the PUC would use the social cost of carbon.
“Its values may be fine for federal regulatory impact analysis but the question is what is reasonable and best available for resource planning,” he said.
Despite his qualms, it’s clear these suite of state actions reveal a trend where states are looking to price carbon and quantify social costs for decarbonization purposes.
What is the federal social cost of carbon?
The working group set a range of values for the global costs of CO2 emissions based on three assessment models and four sets of uncertain and interdependent factors, according to CarbonBrief, an environmental group that detailed the social cost of carbon’s development. The first is socioeconomic projections, such as population and economic growth. The second is environmental changes, such as sea level rise and extreme weather. The third involves climate impacts on the cost of living and wildlife habitat, to name a few examples.
Finally, the so-called the discount rate, or the present cost of long-term harms is the final factor. It is “one of the most contentious and consequential aspects” of the social cost of carbon, CarbonBrief reported.
The working group had asked the National Academies of Sciences to update the values within the methodology of the social cost of carbon. The National Academies made recommendations to do so, and keep the methodology as well, but they were never implemented. Now RFF is leading an initiative to do that.
The initiative would add up-to-date statistics on the socioeconomics of climate and capture relationships over time between emissions concentrations, global temperature changes, and sea-level rise. It would also better show links between climate change impacts and economic outcomes and “account for the relationship between economic growth and discount rates.”
Finally, it would establish a better understanding of intergenerational costs and benefits. With a higher discount rate, future money is valued less than present money and costs to future generations are valued less, resulting in a lower social cost of carbon, Wicher wrote.
Colorado's carbon calculus
In May of this year, the Colorado Public Utility Commission (PUC) ordered Xcel to use the social cost of carbon Energy Resource Plan (ERP) that would guide utility investments through 2024. The CPUC’s order was the first to require utilities to use the social cost of carbon in a utility planning process.
However, Xcel expressed concern over the divide between the state’s requirement and the executive order that came out in March. The utility also noted the variables within the social cost of carbon was inadequate for utility investment because its values range from $13/ton [of carbon emitted] to $129/ton in 2022,” argued Jack Ehle, Xcel’s director of environmental policy.
But clean energy and environmental advocates said the commission’s order clarified any doubt created by the order.
“The ruling explicitly states that Xcel is to use a $43/ton value in 2022 and escalate that to $69/ton in 2050,” said Erin Overturf, attorney at Western Resource Advocates. “Those are social cost of carbon values taken from the IWG’s Technical Support Document.”
The Colorado PUC’s decision noted the use of the social cost of carbon in New York and Illinois and specifically referenced the Minnesota proceeding that was underway at the time.
The decision in Colorado is “the clearest direction yet provided that the PUC can use its discretion to consider such costs,” the Colorado Solar Energy Industries Association (CISEIA) wrote.
Its construction could set a precedent for other commissions and, importantly, it is conclusive and specific about the discount rates to be used for Xcel’s ERP, COSEIA added.
The ruling was that Xcel’s proposed 6.78% rate “unfairly discounted the future cost of fossils.” But it affirmed Xcel's argument that different resources should not have different discount rates and ordered the utility to use three rates – 6.78%, 3%, and 0% – in its ERP.
Minnesota’s proceeding over the social cost of carbon was slightly different. The state already used a carbon cost, but decided to update the value ranges, increasing it to a range of $9.05 to $43.06 per short ton of emissions by 2020. Previously, the range was $0.44 to $4.53 per short ton of emissions.
Minnesota administrative law judge LauraSue Schlatter recommended the PUC adopt the federal social cost of carbon standard, but in their oral ruling regulators indicated they would use it as a baseline when determining the value ranges instead.
The commission did not adopt the social cost of carbon but they adopted a sensitivity with "a range of numbers that is equivalent to its current values,” said J. Drake Hamilton, science policy director for Minnesota clean energy advocate Fresh Energy. Fresh Energy was among the petitioners that called for an updating of Minnesota’s statutory requirement.
“They increased the previous $4.50 per short ton upper value ten-fold to $43.06 per short ton,” Hamilton added.
Xcel advocated for a $42 per short ton high-end price. Great River Energy, Minnesota Power, and Otter Tail Power testified and filed jointly in the proceeding, and advocated for a high end $19 per short ton price.
The commission used the social cost of carbon “modeling from the [inter-agency working group], with minor modifications,” Stoel Rives Staff Attorney Andrew Moratzka wrote. The modifications included using 3% and 5% discount rates, but excluding the social cost of carbon’s 2.5% rate, and using a high-end year 2300 damage horizon, he added.
These values are “a significant increase from the current values” and will offer “a fresh look at the impact of the range of environmental costs,” he added.
Fresh Energy’s Hamilton argued the 2.5% discount rate and the social cost of carbon’s 95th percentile of the cost range should be included. “There is very low probability of extreme global damages but they would be very costly,” she said.
Xcel’s Martin said the utility supports “a reasonable estimate of climate damages” but it needs to be “practical for resource planning.” The concern is that resource planning “is not what the social cost of carbon was designed for.”
At the far ends of the social cost of carbon’s range of values “are tails that are improbable,” Martin said. The very high percentile values preference distant generations and create “a false precision that is an obstacle in resource planning.”
The commission may choose different policy judgments than those of the inter-agency working group, Martin said. Using the 95th and 5th percentiles of the social cost of carbon’s value range can result in unnecessary complications, he added. Xcel successfully proposed using the more moderate 25th and 75th percentiles.
Fresh Energy’s Hamilton said Xcel won that debate but the overall oral ruling would “make a difference in what resources utilities invest in.” Updated externalities costs in resource planning will lead to “a fairer comparison between the all-in costs of new fossil fuels and new renewables and much better market competition in Minnesota.”
The New York method
New York was among the first to use the social cost of carbon and is now taking one of the boldest turns.
The NYPSC unanimously approved ZECs to support the continued operation of three nuclear plants. It used the social cost of carbon, with other factors, to estimate the ZEC value. But that was only New York's first step toward valuing carbon.
NYISO CEO Bradley C. Jones recently testified to a U.S. House of Representatives committee that the NYISO had commissioned the Brattle Group “to find a method to incorporate the social cost of carbon into generation offers and reflect that cost in energy clearing prices.”
It would similar to a carbon charge. Generators “would incur a penalty based on their level of carbon emissions and the social cost attributed to carbon,” Jones said. “The penalties collected by the NYISO would then be returned to customers in some equitable manner.”
“That is another way to determine a market price that includes externalities,” Fresh Energy’s Hamilton said. “But Minnesota’s method might be more effective here because of our rigorous 15-year integrated resource planning.”
Burcin Unel, senior economist for Institute for Policy Integrity told Utility Dive the social cost of carbon was used in several of the calculations made by the NYPSC in its Track One Reforming the Energy Vision (REV) proceedings.
For the ZEC valuation, the NYPSC did not want to use a market price because there would be only three nuclear facilities bidding, Unel said. The commission used a 3% discount rate and the basic inter-agency working group methodology to determine its ZEC price.
For economists, a market approach for valuing externalities like carbon is the ideal but it is not politically feasible, Unel said.
“The carbon adder is NYISO’s attempt to do the same thing.”
With a social cost of carbon-based adder, “the generators’ bids reflect the external costs they impose on society,” she added. “It is technology neutral. Short-term, the price signal will impact the dispatch order. Long-term, it will drive investments that will more cost-effectively reduce carbon.”
However, the NYISO initiative is new and New York's utilities have yet to comment.
Canada has adopted the social cost of carbon, and they affirmed the rigor and reliability of the inter-agency working group's methodology, according to RFF’s Wichman. But some policymakers think a California effort to match the working group’s efforts could be the next step forward.
The California Air Resources Board (CARB) is required by statute to consider the social cost of carbon as part of its landmark cap and trade program, Unel said. The RFF initiative to use the National Acadamies’ recommendations to update the social cost of carbon has complicated the decision by CARB and California energy agencies and utility regulators. These agencies must decide whether to use the current social cost of carbon, wait for a revised one, or do something on their own.
IPI supports the RFF initiative but would also like to see California move ahead, Unel said. She doubts even a state with California’s resources could further clarify the social cost of carbon values. “The update needs to be based on science and economics and not politics,” she said. “But it needs to happen.