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The Cost of Carbon: How Will It Affect You?

As the world struggles to define climate change and what causes it, the New York Independent System Operator (NYISO) has submitted a proposal for introducing carbon pricing into the hourly market price of electricity in order to incentivize generators to invest in carbon reducing equipment or technologies. The proposal is ambitious as it is ground breaking for it is the first stab at having an independent system operator imbed the cost of carbon into the market place and incentivize generators by deducting the cost of their carbon output from their market payments. It is considered a more effective way to achieve carbon emissions reduction rather than issuing RECS (renewable energy credits) for financing of renewable and clean technologies because those instruments tend to act as a tax rather than a creator of true market change.

The basic premise is simple: The NYPSC will calculate a “social cost of carbon” which will be added on to the offer price of generators which produce electricity with carbon emissions. The higher price for these units will reduce the number of times they are dispatched. If the carbon emitting units are dispatched, the energy market clearing prices with the carbon adder would raise the market price that is paid by the load serving entities and would set the marginal price for all the generators dispatched for that day or time period. Unlike RECS which cause the load to bear the burden of the renewable goals, the carbon pricing mechanism spreads costs between the parties. Each generator has a cost of carbon allocated to it which is deducted from the LBMP with the carbon adder imbedded in it. If the generator wants to receive the higher payment, then they have to improve their carbon output by investing in cleaner technologies. Conversely, the residual created by this carbon charge to the supplier is returned to the load serving entities as a credit to the LBMP.

The Integrated Public Policy Task Force which drew up this proposal with the NYISO believes that this methodology will lead to the eventual reduction in price of Renewable Energy Credits and possibly the elimination of Zero Emissions Credits by putting the incentive and need for carbon reduction back to the entities that generate the electricity. It is taking the social cost of carbon that is paid by the load and returning it in part to the load when the market uses lower carbon emitting generating units. If the suppliers act to reduce the carbon emissions of their generating units, they receive a larger amount of the carbon charge and increase their profits. For nuclear units who are technically 100% zero emissions, the increased payments they receive from this carbon charge will hopefully eliminate completely the need for the subsidized ZEC payments.

There are other complexities to the final implementation of this proposal such as the need to effectively guard against leakage between state boarders and problems arising from power moving between State lines that has higher Carbon Output without a corresponding Carbon charge. Concerns that this charge may make New York based generators less competitive than out of state generators and concerns regarding the effect of previous legislation like the RGGI (Regional Greenhouse Gas Initiative) are real issues that are currently being worked on by the Task Force. But these factors do not diminish the main impetus of this proposal which seeks to change the market and make carbon reduction a permanent part of the electricity marketplace.