Imagine what would happen if the utilities buying the electricity to power our homes and businesses had to pay more for it depending on how much carbon pollution the power plants supplying the power pumped into the atmosphere? A report issued today for the state of New York takes a look at how such a "carbon adder" might work, providing insights for the rest of the country as well.

Given the magnitude of the challenge represented by climate change, policymakers need to assemble as many effective tools in their climate toolbox as possible if we’re going to efficiently cut carbon at the pace scientists say is necessary. With that in mind, the New York Independent System Operator (NYISO) today released a report authored by the Brattle Group that provides guidance on how New York could potentially integrate a state-established carbon price into NYISO’s electricity markets.

An accompanying cover letter, co-signed by New York State Department of Public Service (DPS) CEO John Rhodes (who also chairs the state’s Public Service Commission) and NYISO CEO Brad Jones, outlines an inclusive and transparent stakeholder process (kicking off on September 6th) to further explore this promising new mechanism. Just as important, it proposes significant framing principles on how any such mechanism—if ultimately adopted and implemented—could better harmonize NYISO’s wholesale markets with New York State’s many successful clean energy and climate initiatives. New York also would be the first state to implement this method for putting a cost on carbon pollution.

While we are still sifting through the 70-plus page report, and will certainly offer more extensive perspectives later, this blog provides a first take on some of the most important overarching themes from NRDC’s viewpoint.

The concept of a carbon adder is laudable and worth exploring. And it has clear potential to cut carbon pollution—but only if the state and NYISO get the design right, and in the process avoid some important legal and policy pitfalls.

What the heck is a carbon adder, anyway?

Identifying and incorporating the cost of carbon pollution into electricity generation can be an important tool in efficiently cutting carbon emissions; policies like the Northeast and Mid-Atlantic states’ Regional Greenhouse Gas Initiative (RGGI) (which is on the cusp of a major decision on what that program will look like post-2020; more on that here) and California’s Cap and Trade program are emblematic examples. As with the nine-state RGGI, which includes New York, a carbon adder would lead to power plant carbon reductions. But they work differently: RGGI sets an enforceable/binding cap on total carbon emissions, while a carbon adder puts a price on each ton of carbon. Importantly, done right, they can work in concert.

Here’s how a carbon adder would work. Let’s say a natural gas generator offers to sell electricity in the NYISO power market for $20/megawatt-hour (MWh). The average amount of carbon emitted per megawatt-hour is one-half of a ton for many gas plants, so if New York set a $40 per ton carbon price, that half-ton of pollution would cost $20. The generator would add that $20 to its offer price, resulting in a total offer of $40 to produce one megawatt of electricity for one hour. NYISO, the entity that dispatches electricity to utilities, selects the cheapest generation options first, which under an adder would increasingly be those with no or low carbon pollution. NYISO accepts offers, ranked by cost from lowest to highest, as needed to satisfy total demand.

If the generation from the gas plant in the example above were selected, the plant owner would receive the market clearing energy price (highest price during a specific period) minus the cost of the carbon adder. The carbon adder revenues would go elsewhere, such as to support state clean energy programs.

Why implement a carbon adder?

A carbon adder is a technology-neutral and transparent mechanism to differentiate between power plants based on their specific carbon pollution profiles. In that way it helps to incorporate the cost and environmental impacts of carbon pollution into electricity markets. It also can capture the locational difference in value of cleaner technologies. As NYISO’s most recent Power Trends report demonstrates, downstate New York has a much dirtier energy supply mix than upstate.

Source: NYISO Power Trends 2017

The benefits of an adder must be clear

It will be critically important for the state to figure out how much carbon could be cut with an adder. While a “price” is a helpful tool, it does not by definition ensure an enforceable “limit/cap” on carbon pollution. The Brattle Group’s analysis will help inform discussion of this issue.

Another important question is what to do with the additional revenue from an adder. Here we can learn from other programs. For example, independent economic analysis of the RGGI program, as well as assessments by New York and the other RGGI states, show that using carbon revenues to fund energy efficiency and clean technology can lead to energy bill savings for customers. New York State should consider similar activities, especially to boost state efficiency initiatives that would pay rich dividends for consumers and the environment.

Significant questions

Moving forward with a carbon adder will require a number of implementation and design decisions, such as its price level, how the revenues are spent, and how the adder would interact with other state and regional policies. But the most fundamental and critical legal issue to be answered is: who decides?

NRDC agrees that it is critical for NYISO to look to New York State to decide all substantive policy and design matters. As the joint DPS-NYISO cover letter to the report notes, NYISO should consider state public policy goals, as designed and determined by New York under authority reserved to it by the Federal Power Act (FPA). NYISO must make clear that a decision to implement the adder stems from the benefits of reflecting and harmonizing New York’s public policy in its federally regulated markets, while complementing other New York clean energy policies.

Vesting the State of New York with all substantive policy and legal authority over the carbon adder is important because the state, not NYISO, is ultimately responsible to voters, who have demanded action on climate change. NYISO, in turn, could play an important role through effective consideration (and incorporation into wholesale electricity markets) of those state climate goals.

The need to protect New York’s legal authority

Placing a state entity in charge of substantive policy decisions for the carbon adder also will help stave off legal challenges to it. As federal courts have said, the FPA “is a paragon of cooperative federalism” and “state and federal efforts exist within a complementary administrative framework.” A framework in which New York makes the policy choice to rely on clean generation resources and determines a carbon value that will implement that choice, and in which FERC then approves NYISO rules considering New York’s choice by incorporating the state-determined carbon value into its wholesale market design, is fully consistent with this system of cooperative federalism. New York would be acting within its reserved authority over generation resource decisions, while FERC acts within its authority to ensure that wholesale power markets consider the state’s policy choice in a just and reasonable manner.

How does a carbon adder interact with other state policies?

Like proposed carbon pricing at the federal level (discussed here), a carbon adder, which would be a state policy in this instance, is one tool in a larger toolbox that should work in conjunction with—not replace—other state and federal policies to combat climate change.

For example, an adder could (and should!) support New York’s Clean Energy Standard (CES), which requires that 50 percent of the electricity consumed in the state come from renewable sources like wind and solar by 2030. While increasing renewable energy helps reduce carbon pollution, other environmental impacts unrelated to carbon are also built into the standard’s technology-based goal for cleaner renewable options. (For example, no electricity generated by low carbon nuclear energy “counts” toward the CES because it is neither clean nor renewable.)

A carbon adder could work seamlessly with the CES, which awards renewable energy credits (RECs) for energy generated from renewable resources. Renewable project developers would factor in their expected higher electricity market revenues as a result of the carbon adder into their REC offer prices. The REC price would then reflect the difference, above the carbon price, needed to achieve desired levels of renewables construction (the result: lower REC prices under a carbon adder than without one).

Next steps

Designing and implementing a carbon adder raises a complex set of questions, and NRDC will be actively engaged in the forthcoming stakeholder process to inform answers to those key questions. But as one of the first states in the U.S. to explore such an approach in earnest, NYISO and New York State are to be commended for breaking new ground, and showing leadership and foresight that could benefit all New Yorkers and provide a model to the nation.