Where's the Plan? New York Points Its Nose Into the Wind and Follows with No Plan, No Budget, No Idea Where It's Going

Guest Post by Roger Caiazza of Pragmatic Environmentalist of New York.

The Citizen’s Budget Commission (CBC) new brief, Improving NYS Cap-and-Invest Design: Recommendations for Ambitious, Affordable, Market-Driven Emissions Reductions (CBC Report), finds that the New York Cap-and-Invest (NYCI) pre-proposal includes “some promising design choices” but has limitations.  The report recommends that “the State overhaul its pre-proposal design and fully explain the impacts”.  Based on my experience with market-based programs I agree with many of the findings of the report but believe that the CBC has misplaced faith in the effectiveness of market-based GHG emission reduction programs.

Overview

The Climate Act established a New York “Net Zero” target (85% reduction in GHG emissions and 15% offset of emissions) by 2050.  It includes an interim 2030 reduction target of a 40% reduction by 2030. Two targets address the electric sector: 70% of the electricity must come from renewable energy by 2030 and all electricity must be generated by “zero-emissions” resources by 2040.

The Climate Action Council (CAC) was responsible for preparing the Scoping Plan that outlined how to “achieve the State’s bold clean energy and climate agenda.” The Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants quantified the impact of the electrification strategies. 

That material was used to develop the Draft Scoping Plan outline of strategies.  After a year-long review, the Scoping Plan was finalized at the end of 2022.  Since then, the State has been trying to implement the Scoping Plan recommendations through regulations, proceedings, and legislation.  NYCI is one such implementation initiative.

Cap-and-Invest

The CAC’s Scoping Plan recommended a market-based economywide cap-and-invest program.  The program works by setting an annual cap on the amount of greenhouse gas pollution that is permitted to be emitted in New York:

“The declining cap ensures annual emissions are reduced, setting the state on a trajectory to meet our greenhouse gas emission reduction requirements of 40% by 2030, and at least 85% from 1990 levels by 2050, as mandated by the Climate Act.” 

In addition to the declining cap, it is supposed to limit potential costs to New Yorkers, invest proceeds in programs that drive emission reductions in an equitable manner, and maintain the competitiveness of New York businesses and industries.         

My experience with market-based emission reduction programs is from the compliance side.  I have tracked New York emissions trends for decades and used that experience to develop comments on the NYCI pre-proposal outline of issues.   My comments showed that New York’s impressive GHG emission reductions to date have come primarily from fuel switching in the electric sector.  That was spurred by lower costs of natural gas that made fuel switching from coal and oil to natural gas economic. 

There are very few opportunities for similar economic reductions.  In the future, existing sources of GHG emissions must be displaced by alternative zero-emissions resources.  New York’s experience in the effectiveness of Regional Greenhouse Gas Initiative auction revenues to reduce emissions has not been encouraging. 

According to Table 2 in Semi-Annual Status Report through December 31, 2022, the cumulative annual net greenhouse gas emission committed savings are 1,725,544 tons through the end of 2022.  That is 9.5% of the observed reduction of 16,196,531 tons since the three-year baseline before the start of RGGI in 2009.  The difficulty of future emission reductions and cost ineffectiveness of auction revenues will impact NYCI implementation.

There also are issues with the theory behind the NYCI approach.  A Practical Guide to the Economics of Carbon Pricing by Ross McKitrick is at odds with NYCI.  He explains that “First and foremost, carbon pricing only works in the absence of any other emission regulations”, but NYCI is in addition to the emission regulations proposed. This is particularly important because McKitrick is arguing that market-based programs should not be expected to provide reductions on an arbitrary schedule. 

He goes on to note “another important rule for creating a proper carbon-pricing system is to be as careful as possible in estimating the social cost of carbon”. He argues that “whatever the social cost of carbon is determined to be, the carbon price must be discounted below it by the marginal cost of public funds (MCPF) — that is, the economic cost of the government raising an additional dollar of tax, on top of what is already being raised”. NYCI does not recognize the importance of this aspect of carbon pricing. He concludes:

“There may be many reasons to recommend carbon pricing as climate policy, but if it is implemented without diligently abiding by the principles that make it work, it will not work as planned, and the harm to the Canadian economy could well outweigh the benefits created by reducing our country’s already negligible level of global CO2 emissions.” 

Substitute New York economy for Canada’s and I believe this describes the likely outcome for NYCI.

Danny Cullenward and David Victor’s book Making Climate Policy Work describe an unacknowledged NYCI problem.  There are political thresholds that limit how much money can be raised by NYCI before the electorate rebels, but investments must be sufficient to fund emission reduction projects to achieve the aspirational Climate Act schedule.  They note that the level of expenditures needed to implement the net-zero transition vastly exceeds the “funds that can be readily appropriated from market mechanisms”. 

That observation and the conclusion that future New York emission reductions will come primarily from the deployment of alternative technologies means that emission reduction investments should be a priority for NYCI revenues. 

However, there are competing priorities for funds including investments to advance equity and climate justice, funding for programs to reduce costs for those least able to afford higher energy prices, and funding to develop the new technology necessary for the zero-emissions electric grid.

Comments on CBC Report

In this section I will address the CBC brief, Improving NYS Cap-and-Invest Design: Recommendations for Ambitious, Affordable, Market-Driven Emissions Reductions.   I have annotated the Executive Summary with my comments.  The introductory paragraphs outline the goals of the CBC Report:

The Citizens Budget Commission (CBC) has long advocated for New York State to establish an economy-wide carbon pricing system, a market-based policy to incentivize cost-effective greenhouse gas (GHG) emissions reductions. New York Cap-and-Invest (NYCI) has the potential to be such a program. However, to do so, NYCI must be well designed and implemented, or it risks shifting emissions out of state, causing unnecessary harm to the state’s economy, and/or unduly increasing New Yorkers’ cost of living.

CBC continues to strongly support New York implementing a cap-and-invest program. However, the State’s pre-proposal program design falls short by considering some questionable design choices and not presenting sufficient information to assess the range of effects, which may include significant fiscal and economic impacts on New York’s residents and businesses.

Therefore, the State should modify the proposal in rulemaking to ensure it balances emissions reductions with economic vitality, and present more comprehensive impact information. CBC identifies additional analysis that should be released prior to or along with the NYCI draft rules and recommends specific changes to the program design.

I do not think that the CBC understands the fundamental issues associated with GHG market-based emission reduction programs that I outlined above.   Their recommendations will improve the chances that NYCI will not be a failure, but I think it is a hopeless quest. I endorse their request for additional information.  The CBC Report describes two “fundamental flaws”:

First, the materials do not include estimates of the program’s full fiscal and economic impacts—how much residents and businesses will pay for the new emissions charges and how the new costs will affect jobs and economic growth. They also do not fully explain the methods and assumptions that yield the findings. Absent these, there is no way to know how well the proposed NYCI design would drive down emissions while preserving economic growth or whether it would shift emissions, residents, and/or jobs to other states.

I agree with the concern that the lack of cost estimates and documentation for methods and assumptions makes it impossible to determine whether this will work.

I am not sure whether the CBC Report authors fully understand the Cullenward and Victor argument that the funds needed to drive emissions are so large that it is unlikely the money will be sufficient and my observation that the record of past emission reductions is irrelevant going forward because fuel switching does not reduce emissions to zero.  The CBC Report implication that NYCI has a chance to force emission reductions sufficient to meet the Climate Act goals is my major issue with this report. 

The program as presented would levy a massive new charge, economically akin to a new tax—potentially reaching $12 billion annually by 2030—which will have significant impacts on consumers and the State’s economy. This new cost is in addition to costs already passed on to utility ratepayers to fund climate-related investments and Local Law 97 compliance costs that will be paid by large building owners in New York City. Excessive costs could unduly burden businesses and families and push some to leave, especially as New York State and its localities collect more taxes per person than any other state

I agree with the authors that NYCI is essentially a new tax and a large one at that.  Their concerns that NYCI is only one component of the many costs of Climate Act implementation is important and must be addressed because of the consequences they describe.

Second, since the State’s extremely ambitious 2030 emissions reduction target would drive too-costly emissions charges, the State proposes a NYCI design in which emissions reductions ultimately are uncertain. Meeting the 2030 target would have required producers to pay prohibitive costs for the right to emit, so instead of allowing the market to set the price, the State proposes to set a lower, artificially suppressed price for the right to emit GHGs, and then allow businesses to purchase emissions allowances at that lower price, beyond what the program’s emissions cap would otherwise permit, should they choose. Ultimately, this design does not let the State determine how much emissions are reduced and makes balancing environmental benefits with program affordability and economic growth harder.

In my opinion, this paragraph makes the right point but for the wrong reason.  The CBC Report subscribes to the market theory that higher prices will drive emissions down and does not recognize that there are other factors affecting the cost of allowances.  The CBC Report is appropriately concerned about the schedule.  All the market-based programs that I have followed had an initial period of high allowance prices due to the uncertainty of the program that will mask the theoretical link between market price and emission reductions. 

Based on my observations I believe the practicality of emission reductions must also be considered.  Affected source emissions must be displaced by alternative sources which NYCI advocates argue will be funded by the proceeds from the NYCI auctions. This means that there is a lag between the time proceeds are collected and invested to displace existing source emissions.  I suspect that the pace of emission reductions will also result in higher prices.  Given all these reasons NYCI is including provisions to limit prices that I think are appropriate.

Importantly, without regard to NYCI, the State already has acknowledged that it will not meet 2030 renewable electricity generation goals. This sharpens the point that NYCI’s design should not be constrained by the requirement to meet current interim goals.

I agree that the schedule is problematic.  It is not clear whether CBC understands the ramifications of the NYCI allowance reduction trajectory.  The only practical compliance option for affected sources on the Climate Act schedule is to limit operations and this leads to unintended consequences.  For example, if fuel suppliers do not have sufficient allowances, they will stop selling gasoline, creating an artificial energy shortage.  NYCI’s design must not be constrained by the current interim goals.

Reducing New York’s GHG emissions is very important; it should be done wisely by carefully balancing trade-offs to avoid damaging the State’s economy and competitiveness, and ensuring emissions are actually lowered, not just relocated out of state.

I agree that NYCI should not damage the State’s economy and competitiveness.  Those tradeoffs should keep in mind that New York’s GHG emissions are less than half a percent of global emissions and global emissions have been increasing by more than a half a percent per year for a long time.  Insisting on strict adherence to an arbitrary reduction schedule that will have a minimal effect on global emissions is not in the best interests of New York.

The CBC Report makes some reasonable recommendations that I endorse.  They argue that New York should:

• Conduct and publicly release, before or with the draft rules, a more robust assessment of NYCI’s potential fiscal and economic impacts that details:

  • The portion of the cost borne by businesses with a direct compliance obligation and how much is passed on to other businesses and households;

• NYCI’s costs and their impacts on various types of businesses;

• NYCI’s impact on the economy overall, specific sectors, and by location;

  • NYCI’s impacts on households, by income and geography

I agree and would expand on this to insist on documented comprehensive numbers.  The Hochul Administration has previously provided misleading numbers that compare costs relative to alleged benefits and only cover certain cost components.  New Yorkers deserve to know the costs of all components of the entire Climate Act transition including NYCI.

• Recalibrate the 2030 emissions reduction goal to be ambitious but feasible, so New York can leverage market-driven, cost-effective emissions reductions that are balanced with economic growth; and

  • Consider switching to the conventional emissions accounting methodology;

I agree with both these recommendations.  Note the suggestion to switch to conventional emissions accounting is necessary to link NYCI to similar programs in other jurisdictions.

• Proceed with rulemaking only when comprehensive assessments are public and based on recalibrated targets; and

  • Periodically evaluate and adjust the program based on experience.

I agree with both these recommendations.

Furthermore, the State should present a detailed plan to use the program’s revenue—which could exceed $30 billion over the next 5 years. Ideally, this would be part of a comprehensive State plan, incorporating the other available funds that will support the transition away from carbon-emitting energy sources.

This is a good point.  There has been very little planning for the Climate Act implementation.  Given the breadth of the proposed changes to the energy system this is unacceptable.  A comprehensive proof of concept that shows that they have enough money available to make the reductions necessary is a rational approach.

However, the State should modify several parameters to improve the pre-proposal. These include:

• Permitting banking of allowances from the start, instead of after the first compliance period;

• Allowing limited use of rigorously verified offsets; and

• Modifying design elements to facilitate linkage with other systems and broaden coverage.

All these recommendations are appropriate.

Lastly, to address concerns about local health impacts, the Department of Environmental Conservation could consider regulating co-pollutants separately from NYCI, rather than including firm-specific emissions caps or limitations on emissions trading, as these could have unintended effects on program compliance costs.

I agree with this too.

Conclusion

I agree with many of the findings of the CBC Report.  It is unacceptable that the Hochul Administration has not been forthcoming on the costs of Climate Act implementation.  

NYCI will add an immediate direct cost to all New Yorkers, so the documentation recommendations are appropriate.  The CBC Report recognizes that the emission reduction schedule is important and that it could have ramifications relative to NYCI. 

I think that they underestimate the potential for disastrous impacts.   I applaud the CBC for supporting necessary parameters for any market-based program that have somehow become debatable.  If the allowance trading, banking, and site-specific limitations up for consideration are incorporated then the program would have no link whatsoever to previous programs. 

I do have one significant difference in opinion. Unlike the CBC Report I do not think that any GHG emissions reduction market-based programs like NYCI are likely to succeed.  The differences between emission control options and the inclusion of a zero-emissions target are too different from previous market-based programs to expect that past performance is any indication of future success.

The most important finding of my work and the CBC analysis is that we agree that the Hochul Administration rollout of NYCI has been incomplete.  Given the potential cost ramifications, we think a comprehensive State plan describing expected revenues relative to projected emission reduction costs is needed to determine if this approach is feasible.

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Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York.  This post represents his opinion alone and not the opinion of his previous employers or any other company with which he has been associated. Roger has followed the Climate Leadership & Community Protection Act (Climate Act) since it was first proposed, submitted comments on the Climate Act implementation plan, and has written over 450 articles about New York’s net-zero transition.