Market-based initiatives the best way to meet clean-power goals

New York has long been a leader when it comes to environmental stewardship, designating millions of acres of land as protected habitats and ushering in the first market-based regulatory program in the United States to reduce greenhouse gas emissions – the Regional Greenhouse Gas Initiative. Unsurprisingly, New York finds itself in a position to exceed the goals of the Environmental Protection Agency’s Clean Power Plan a decade ahead of schedule. That revelation, although encouraging, is not without caveat.

The EPA’s plan calls for New York to meet a mass-based goal (annual average carbon dioxide emissions in short tons) of 31,257,429 tons by the year 2030. That mass-based target better recognizes New York’s success in reducing emissions to date than the rate-based one proposed in the early stages of the EPA plan and is lower than the targets for 27 other states, including New Jersey, a former member state of the greenhouse gas reduction program.

Under the greenhouse gas initiative, New York’s base budget for 2015 is 34,348,101 tons, a cap that will decline by 2.5 percent each year from now until 2020. At that pace, New York’s emission level of 30,435,778 tons in 2020 will surpass the EPA’s goal by nearly 1 million tons, 10 years in advance.

Moreover, the EPA’s plan would see national power sector emissions of carbon dioxide decline by 32 percent, sulfur dioxide by 90 percent and nitrogen oxides by 72 percent below 2005 levels. Yet, in the participating RGGI states, carbon dioxide emissions already have been reduced by 40 percent since 2005 – the equivalent of taking 4.8 million passenger vehicles off the road – and New York’s power producers have reduced sulfur dioxide and nitrogen oxide by 94 and 78 percent, respectively, since 2000.   

The EPA’s emissions targets for New York’s power sector, therefore, are nothing new. Rather, it is the means by which other states go about meeting their own goals that will determine how New York is most affected by the Clean Power Plan.

Through the Regional Greenhouse Gas Initiative, the nine northeastern states engage in an auction process where affected emission sources (power producers) and other parties compete with one another to purchase carbon dioxide allowances. The core concept is that each emission source must hold enough allowances to cover its emissions, with an allowance equaling the right to produce one ton of emissions.

At the same time, auctioning allowances, rather than distributing them for free (as is the case in sulfur dioxide and nitrogen oxide emission cap and trade programs), allows states to raise revenues and invest them into programs that are intended to further reduce emissions. Also, the ability of non-emitting entities to compete in auctions under the greenhouse gas initiative means that allowances can be purchased and potentially retired or sold to power companies at substantial profit to the non-emitting entity, while shrinking the allowance pool and driving up prices.

A major cause for concern in the EPA’s plan is that the allowance auction method under the greenhouse gas initiative is only a suggested option for compliance by states who did not sign on to the original initiative. Instead, the EPA offers the direct allocation method as a means of compliance, an option that would put New York at a competitive disadvantage to other states. Power producers would have the option of relocating to jurisdictions where they could avoid the cost of buying allowances in an auction, instead receiving allowances for free where they do not have to compete with non-emitting entities seeking to purchase and retire allowances. Such a consequence would have dire effects on New York’s economy, considering that power producers employ over 10,000 New Yorkers and pay upwards of $600 million in taxes a year.

The best outcome for New York would be additional state participation in the greenhouse gas reduction initiative or similar market-based programs. Increased market participation would result in a more level playing field across states, and the EPA’s decision to include state-specific mass-based targets may make the Regional Greenhouse Gas Initiative a more attractive pathway for compliance than individual state options.

It also is important to view EPA’s plan in light of New York’s own energy goal of 50 percent renewable energy by 2030 – a target recently identified in the 2015 New York State Energy Plan. Investments under this goal should be based upon signals from the competitive markets.  

Since their inception 15 years ago, New York’s competitive energy markets have resulted in the integration of over 1,700 megawatts of wind generation and have realized $6.4 billion in fuel cost savings due to an increase in power producer fuel efficiency of 30 percent – an amount that exceeds national fuel efficiency gains by 300 percent.

Combining the power of competitive markets with the more than $792 million New York has received from allowance auction proceeds to date would help the state realize a 50 percent renewables goal. Currently, only a relatively small portion of those proceeds have been allocated for renewable energy, and only a minute $14.5 million has been earmarked to reduce greenhouse gas emissions directly at power plants, even though RGGI auction proceeds are intended to be used exactly for those purposes.

As New York seeks to further reduce emissions and rely more on renewable technologies, it is crucially important to preserve the diversity of fuel resources the state currently enjoys, including its existing hydroelectric and nuclear facilities. An overreliance on any one particular resource would be irresponsible for maintaining reliability and costly to consumers, to say the least.

Gavin Donohue is president and CEO of the Independent Power Producers of New York.