Week Ending November 25, 2020

New England Examines Carbon Pricing Option, Lists Challenges

This Article Appears as Published in Foster Report No 3326
New England Examines Carbon Pricing Option, Lists Challenges

There is momentum among the financial sector, state policymakers and the public that climate change needs to be addressed, and that carbon pricing can gain bipartisan support in Congress, speakers said November 23 during the New England Energy Summit.

However, getting all parties on the same page for the regulations around carbon pricing and how to implement it will be difficult, they agreed. “The pathway we have to climb is incredibly steep” and includes figuring out what role natural gas will play in the region, said Paul Hibbard, principal at Analysis Group and a former chairman of the Massachusetts Department of Public Utilities (DPU).

New England states have renewable portfolio standards, decarbonization goals decades out and other targets for using more clean energy, so the end destination is known. What is not acceptable is “a random walk to compliance,” with states on their own paths and timelines, Hibbard said.

Carbon pricing is one economy-wide step that a lot of people agree should be used to bring all sectors into the discussion, since building energy use, electric vehicles and the future of fossil fuels needs to be tackled along with clean energy goals, said Melissa Hoffer, chief of the energy and environment bureau at the Massachusetts Attorney General’s office.

The broad nature of an economy-wide plan involves issues such as who will administer carbon pricing, where will the benefits go and worker transitions out of the fossil fuel sector while retaining gas-fired generation to be available to back up cleaner energy resources, Hoffer said.

Hoffer and Hibbard were two of the panelists at the summit, which was put together by the New England Power Generators Association (NEPGA), The Dupont Group consulting firm and White Birch Communications. Other panelists were Matthew Nelson, chairman of the Massachusetts DPU and Jen Benson, president of the Alliance for Business Leadership, with the panel moderated by Tom Rumsey, senior vice president at Competitive Power Ventures. Sen. Sheldon Whitehouse (D-R.I.) gave a keynote address before the panelists spoke.

Hoffer pointed out that the Commodity Futures Trading Commission (CFTC) and the Federal Reserve have issued reports highlighting the risks associated with climate change to investors and financial markets. The CFTC report, issued in September, notes how a price on carbon should be at a level that’s truly reflective of the risk involved with climate change. It is not something from an environmental group and “the tone of it is striking,” Hoffer said.

Others have commented on the massive migration of investment from fossil fuels to renewable resources and raised questions about the long-term viability of fossil fuel investments, Hoffer said. The financial pressure includes bankruptcies of oil and gas companies and growth in EV sales and cleaner energy resources “but we’re still very far behind where we need to be,” she said.

A similar message came from Whitehouse on the path toward legislation in Congress – that lawmakers are playing catch-up on climate change and addressing economic implications. As he has in other settings, such as a technical conference at FERC,  Whitehouse said carbon pricing legislation is “far from dead,” in Congress.

There are several bills in Congress on carbon pricing, with the most recent authored by Sen. Richard Durbin (D-Ill.), who is deputy minority leader, illustrating that it is not viewed as “some fringe idea.”

A challenge for those supporting carbon pricing is the “massive subsidy for fossil fuel” that exists in the current market, Whitehouse said, referring to a report from the International Monetary Fund that showed annual subsidies of $600 billion in the U.S. An obvious step to fix that imbalance is with a price on carbon, otherwise “we’re fighting an uphill battle” and working against free market principles, he said.

“We have some opportunities before us,” Whitehouse said, noting FERC efforts on carbon pricing, decarbonization plans at ISO New England and the Regional Greenhouse Gas Initiative (RGGI) that could expand geographically and possibly turn to include carbon pricing.

Once President-elect Joe Biden is in the White House, federal efforts will have a different perspective than under President Donald Trump, and a 50-50 split in the Senate – depending on the outcome of Georgia runoff elections – could give Vice President-elect Kamala Harris a tie-breaking vote to support Biden initiatives, Whitehouse said.

“We’re poised to do some really remarkable things,” Whitehouse said, commending NEPGA for a report on carbon pricing prepared by Analysis Group that shows a path to a brighter future.

If there is going to be progress on climate legislation in Congress, it is almost certain to have carbon pricing as an element, since Republican groups that have engaged in the climate change debate have landed on carbon pricing as a market-based approach that makes sense, Whitehouse said. “We should try for bipartisanship” because it would make any legislative change more durable. The outcome of the Georgia Senate elections and the stance of Sen. Mitch McConnell (R-Ky.) will be major factors on any action in the Senate, he said.

The role of major technology companies in the Silicon Valley also has to change, as they did not include climate legislation or clean energy in a recent report on policy priorities, Whitehouse said. If major corporations like Google, Apple and Amazon remain AWOL on climate policy discussions, there will be less pressure in Congress for legislation, he stated.

As the threat of climate change becomes more real and the investment community takes notice, there is a distinct change in public sentiment to address it, Whitehouse said.

Addressing questions, Whitehouse acknowledged opposition to carbon pricing among some Democrats, based on issues around environmental justice. “I don’t fault anyone for being skeptical” of the benefits from carbon pricing when minority groups and low-income households have borne the brunt of environmental harm in the past, he said.

However, distributing the benefits of a price on carbon can be done in a way that ensures the nation is not harming those who have been left out in the past. “We’re capable of meeting that standard,” Whitehouse said.

The benefits of carbon pricing were embraced by most of the panelists, who noted that FERC’s recent policy statement is designed to consider any proposal from an ISO or regional transmission organization. The impetus for a price on carbon is less about the electricity sector and more about bringing other parts of the economy along on a clean energy path, Hibbard said. Carbon pricing is one of the best tools for an economy-wide measure, said Benson.

Political barriers to carbon pricing are obvious, but Hibbard took solace in the comments of Whitehouse that they are not insurmountable. Carbon pricing does not have to be an “either/or” exercise, since it can co-exist with state-specific policies, RGGI and other measures to move New England states along the clean energy path, he said.

The role of natural gas will be debated in state decarbonization policies, said Hoffer.

Any carbon pricing analysis of costs to consumers should show that a “no action” alternative would harm civilization that is seeing widespread humanitarian crises in hurricanes, floods, wildfires and other severe weather events, Hoffer said, referring to the examination under the National Environmental Policy Act. A price on carbon compared with the cost of the harm to human health from doing nothing would make carbon pricing look like a bargain, she said. “The no action alternative is not something we can choose,” she asserted.

The rapid changes in technologies such as renewable natural gas, hydrogen, offshore wind power, and electrification in the building and transportation sectors make it difficult to forecast anything beyond five or 10 years, Hibbard said. But since states are setting goals for 2030 and 2050, Analysis Group examined a carbon pricing plan at the request of NEPGA.

The report looks out 15 years and concludes that state mandates can achieve decarbonization goals imperfectly and at costs higher than what can be reached through efficient carbon pricing. It concludes that a price in the range of $25 to $35/short ton of CO2 in 2025, rising to $55 to $70/short ton of CO2 in 2030 and 2035 would enable a successful market transition for the region.

Those prices are lower than the estimated social cost of carbon over that time frame, but they allow for market transitions that include high electrification and a continuous decline in the power system’s carbon emission intensity, Hibbard said. A carbon price that rises to about $50/short ton of CO2 or higher would be beneficial in overcoming some of the market distortions like the minimum offer price rules imposed by FERC, he said.

Natural gas-fired generation does not change that much in terms of total capacity in the region, but the use would significantly decline to meet state policy goals and support wind and solar power project additions, according to the report.

The large reduction in GHG emissions from electrification minimizes the emissions from fossil fuel generation resources, which would be used primarily to meet ramping requirements of a cleaner power system, Analysis Group said in the report.

Since nearly any discussion within New England is bound to carry include dissenting voices, the skepticism on carbon pricing was provided by Matthew Nelson, chairman of the Massachusetts DPU. Nelson does not believe consumers will embrace higher prices for carbon-intense energy when costs for cleaner energy resources are going down.

“It’s an elegant economic solution,” Nelson said of carbon pricing, but there are dangers if the price on carbon is not set at the right level. States in ISO New England want to avoid including a carbon price and then still relying on out-of-market contracts to procure the needed power supplies if market signals are not sufficient, he said.

State sovereignty issues also could come into play, since the governors and policy plans among New England states can differ in their views on carbon pricing and market mechanisms, Nelson said.

Nelson said he wants the public to have confidence that ISO New England can help states reach their decarbonization goals. Working together on a regional market is not easy, but providing ISO New England with the tools needed will make transmission planning and other elements a one-time design fix, he said.

“Fixing this market will be hell, but our hell will come with much cleaner air,” Nelson joked.

By Tom Tiernan ttiernan@fosterreport.com

 

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