Dive Brief:

• The New York Independent Systems Operator (ISO) on Monday released a carbon pricing straw proposal, aimed at getting wholesale energy markets to reflect the state's aggressive decarbonization goals. Other states are working on their proposals.
• The proposal would subject all suppliers inside the market to carbon charges, while rules would be developed to ensure imports and exports compete fairly as well.
• New York is targeting an 80% reduction in carbon dioxide emissions by 2050, and has been considering placing a price on the emissions associated with electricity generation. A Brattle report last year concluded a  $40/ton carbon charge would have a "relatively small" impact on customer costs. 

Dive Insight:

The proposal is only focused on the process of incorporating the cost of carbon emissions into the wholesale electricity market, NYISO explained. Setting the price would be another process altogether, it said.

Under the proposal, "all internal suppliers would be subject to carbon charges equal to the product of their point-of-production carbon emissions and the applicable per-unit carbon price." Internal suppliers, including self-scheduled resources, would report emissions of their supply fleet.

The ISO would determine the carbon price depending on whether internal physical suppliers are covered by the Regional Greenhouse Gas Initiative. Suppliers covered by the regional trading market would be charged a carbon price equal to the Gross Social Cost of Carbon, minus the most recently posted quarterly carbon allowance price.

The expectation is that energy suppliers will embed the carbon price into their offers, while they would continue to receive the full locational based marginal pricing (LBMP) and will be debited their carbon charges during settlement.

The proposal envisions low-emitting resources in the state, including efficient fossil units, renewables, hydropower and nuclear generators, benefiting from higher net revenues. 

"Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, it would raise the energy market clearing price whenever carbon emitting resources are on the margin," the straw proposal says. "All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions."

The ISO is also working on a system to deal with imports and exports, because if it only places a carbon price on internal resources, they will be disadvantaged in the market. 

"Imports would increase, potentially up to the transmission limit, and exports would decrease," the proposal predicts. "Production would shift to resources outside of New York that would not otherwise generate— resources that are costlier and likely higher-emitting. Such distortions would undermine the state’s energy, environmental and economic objectives."

To tackle that issue, the proposal applies carbon charges to "external transactions" so they compete fairly with internal resources. Imports would earn the LBMP without the carbon effect, at the relevant border, the ISO proposal says. Exports would buy energy at the LBMP without the carbon effect. Those rules would apply to all external transactions, the ISO said, with no unit-specific or portfolio-specific exceptions for existing or new clean energy resources.

The New York grid operator has been considering a carbon price for years.​ The grid operator planned to integrate a price on carbon into its market dispatch within three years of the 2017 Brattle report, NYISO CEO Bradley Jones told federal lawmakers last year.