Economic and environmental impacts of a proposed ‘Carbon adder' on New York’s energy market

Abstract

ABSTRACT The New York Independent System Operator (NYISO) has developed a carbon-pricing proposal to reduce carbon intensive electricity generation in anticipation of future clean energy goals in the state. The proposed measure is a so-called ‘carbon adder’ on CO2 emissions from the power sector that targets the social cost of carbon amidst existing overlapping policies. The carbon adder is set as the difference between the targeted social cost of carbon and the prevailing RGGI price for CO2 emission allowances. We investigate the economic and environmental impacts from the imposition of a carbon adder on New York’s power sector. Our analysis indicates that the carbon adder gives the ‘right’ price signal for New York’s power generation to turn into a greener one and is shown to be more cost-effective than clean energy standards. Requirements for permit price floors in the RGGI market induces carbon permit retirements across RGGI states leading to small reductions in region- and country-wide emissions levels.The proposed border carbon adjustments on electricity trade are shown to further mitigate emission leakage. Key policy insights NYISO’s proposed carbon adder provides strong incentives for decarbonization and renewable power generation in the New York region. The carbon adder is shown to be more cost-effective than New York's clean energy standard measures in achieving an equivalent level of emissions reductions. This is because the carbon adder targets energy carriers by their specific CO2 emissions while the clean energy standard implicitly targets energy carriers by their specific CO2 emissions while the clean energy standard implicitly provides a uniform subsidy to all clean energy carriers. The existing RGGI price floor mechanism assures that NYISO’s unilateral use of carbon adder is environmentally effective by generating overall emission reductions in the RGGI region in order to maintain the existing price floor. Border carbon adjustments on the embodied carbon of electricity imports to New York, and an emission containment reserve, which dynamically adjusts RGGI cap as a response to RGGI price change, will likely mitigate leakage further and improve competitiveness of the New York’s energy sector.