New York State Value of Carbon Guidance

Guest post by Roger Caiazza

On October 29, 2020 the New York State Department of Environmental Conservation (DEC) released “Establishing a Value of Carbon, Guidelines for Use by State Agencies, Guidelines for State Agencies” for public review and comment.  This post summarizes this latest chapter in New York’s entry in the race to be the most virtuous climate action government in the United States, if not the world.

According to the DEC’s website:

“The Climate Leadership and Community Protection Act of 2019 requires that the Department, in consultation with the New York State Energy Research and Development Authority, establish a value of carbon for use by State agencies. The Draft Value of Carbon Guidance provides values for carbon dioxide, methane, and nitrous oxide for use by State agencies along with recommended guidelines for the use of these and other values by State entities.”

Three documents are available: Draft Value of Carbon Guidance [PDF], Appendix: Social Cost Values [PDF], and Supporting Memo from New York State Energy Research and Development Authority (NYSERDA) and Resources for the Future (RFF) [PDF].

Background

On July 18, 2019 New York Governor Andrew Cuomo signed the Climate Leadership and Community Protection Act (CLCPA), which establishes targets for decreasing greenhouse gas emissions, increasing renewable electricity production, and improving energy efficiency.  It was described as the most ambitious and comprehensive climate and clean energy legislation in the country when Cuomo signed the legislation.  I have summarized the schedule, implementation components, and provide links to the legislation itself at CLCPA Summary Implementation Requirements.

In section §75-0113, Value of Carbon the law states that the “social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions” and that “As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero.”  The law states that DEC “shall consider prior or existing estimates of the social cost of carbon issued or adopted by the federal government, appropriate international bodies, or other appropriate and reputable scientific organizations.”

This guidance document establishes the value as required by the law.  It started with a stakeholder process where the DEC went through the motion of asking for public input.  On July 24, 2020 the Value of Carbon webinar outlined several approaches for establishing a value on carbon.  They explained (recording here) that the guidance will “provide background on the value of carbon and specific considerations for State agencies; serve as an additional tool to aid decision-making; consider a range of discount rates, including zero; and discuss how to value non-CO2 greenhouse gases.”  They also noted that they did not intend that this would be used as a carbon price to impose fees.

New York Value of Carbon

The guidance document recommends a procedure for using a damages-based value of carbon along with a general review of the marginal abatement cost approach. According to the Executive Summary “The current guidance is focused on the damages-based value as a tool to aid state agencies as they begin to regularly consider greenhouse gas emissions and climate change in their decision-making. In some decision-making contexts, particularly those that have a history of valuing carbon, alternative approaches may be more appropriate.”

Two approaches are discussed in detail in the supporting memo and the guidance document.  The first approach is the damages approach exemplified by the Social Cost of Carbon (SCC) which is the present-day value of projected future net damages from emitting a ton of CO2 today.  The supporting memo gives an overview of the methodology and the specifics of the New York application.  I am not going to discuss details of the methodology.  In brief the SCC has been calculated using models that follow four steps.  In all cases the projections are made out to 2300.  Future emissions are predicted using factors such as economic growth and population.  Responses to climate change, such as temperature increase and sea level rise, are modeled.  The economic impact on aspects of the economy, such as energy use, health, and agriculture, are projected from these climatic changes.  Finally, the future damages are converted into their present-day value using discounting and add them up to determine total damages.  I am not a fan of this approach but I am not going to discuss the inherent problems of the SCC either.  See the posts by Willis Eschenbach for that here, here and here or my own work here and here.

The second approach is “based on marginal GHG abatement costs”. In this approach, the marginal cost measures the cost to reduce a ton of greenhouse gas and is used to develop a Marginal Abatement Cost Curve which is “a succinct and straightforward tool for presenting carbon emissions abatement options relative to a baseline (typically a business-as-usual pathway)”. This curve “permits an easy to read visualization of various mitigation options or measures organized by a single, understandable metric: economic cost of emissions abatement”.  For each control option, a block with width equal to the amount of potential reductions and height equal to marginal cost of the option is prepared.  In its recent review of the federal IWG social cost of carbon, the U.S. Government Accountability Office referred to the marginal abatement cost as a type of “target-consistent approach” to valuing emissions, which reflects the fact that this approach establishes a value that depends in part on the relevant emission reduction target.

The guidance document has chosen to apply the damages-based value of carbon approach to “provide accessible and practical assistance to State agencies and authorities where it is useful and appropriate”.  I don’t think this is surprising given the wider use of the approach but I think it would be a mistake to neglect the other one.  I think that the emphasis on the value of carbon for use by the agencies and authorities is a mistake.  Instead the value of carbon in the decision making of the Climate Action Council should be the priority.  The 22-member Council, supported by seven advisory panels and two working groups with over 120 people, is required to develop a “scoping plan outlining the recommendations for attaining the statewide greenhouse gas emissions limits” necessary to meet the law’s schedule to meet its targets.  Given that the CLCPA has specific reduction targets relative to a 1990 baseline, then the marginal abatement cost method should be an integral part of the scoping plan.  This guidance should provide the basis for that approach.

There is another aspect of the guidance document that is discomforting.  The guidance explicitly says that “It is not the intention of the Department that this guidance be interpreted as establishing a requirement on any public or private entity”.  The New York Independent System Operator (NYISO) has been lobbying for its carbon pricing initiative for a couple of years and that initiative explicitly proposes to use the New York Value of Carbon value to set its price.  No matter how many disclaimers DEC includes in the guidance, the fact is that it will likely be used to set a carbon price.

DEC’s draft guidance recommends the use of the U.S. Interagency Working Group’s (IWG) damages-based value of carbon, also referred to as the social cost of carbon dioxide, methane, and nitrous oxide. The available materials includes an appendix with different social cost values in 2020 dollars per metric ton of emissions (adjusted for inflation) based on different discount rates from 2020 to 2050. The DEC “specifically recommends that State entities provide an assessment based on a range of discount rates from 1 to 3 percent to represent the range of potential impacts to society or alternatively, using only a central value that is estimated at the 2 or 2.5 percent discount rate”.  In the supporting memo NYSERDA suggests that DEC “treat the current IWG “central” SCC estimate (at $53 per metric ton of CO2 in 2020) as a lower bound for damages, consider adopting a higher central SCC value for use by NYS agencies, and develop guidance on when to use a range of SCC values in analysis”. 

The discount rate is defined in the guidance as “a reduction (or “discount”) in value each year as a future cost or benefit is adjusted for comparison with a current cost or benefit; a higher rate places a higher value on the present”.   The supporting memo definition states:

“The choice of the discount rate used to calculate the value of carbon has a large influence on the estimate, with a higher discount rate resulting in a lower value. The CLCPA directs consideration of a range of appropriate discount rates, including a rate of zero. Though no consensus exists on what approach or rate to use for discounting uncertain climate impacts over long time horizons, multiple lines of research as well as large-scale surveys of economists suggest support for using long-run discount rates below 3 percent, likely closer to 2 percent. In NYSERDA’s view, it is appropriate that the discount rate used in estimating value of GHG reductions using the marginal damages approach ultimately incorporate both empirical data and public interest value judgments.”

In my opinion there are two discount rate issues. NYSERDA and DEC on one hand argue that the IWG work represents the “science” but when they want to justify the CLCPA target costs then they ignore the IWG work and choose a value that supports higher impact costs.  In this case the IWG central estimate that is supposed to represent a single value did not give the answer they wanted so they suggest the 2 or 2.5 percent discount rate rather than IWG 3% recommended rate. 

There is an even more egregious issue associated with the choice of the discount rate.  All the supporting arguments focus on the appropriate discount rate from the standpoint of developed countries.  On one hand, the higher damages that justify the lower discount rates are primarily driven by the impacts to the world’s poor who cannot develop resilient adaptation measures.  On the other hand, the best way to mitigate those impacts is for the economies of the poor countries to develop the wealth needed for resiliency measures which results in a higher discount rate. NYSERDA’s recommendation for a lower discount rate cavalierly dismisses their aspirations for a better future.

The guidance document specifically seeks public input on “whether the central value should be set at the 2 or 2.5 discount rate”. They note that “this range translates into a 2020 value of carbon dioxide of $53-421 per ton, with a central value of $79-125 per ton; a 2020 value of methane of $1,527-6,578 per ton, with a central value of $2,036-2,782 per ton; and a value of nitrous oxide of $19,084-140,766 per ton, with a central value of $27,989-44,727 per ton”. The full set of values for 2020-2050 is provided in the separate Appendix tables.  Note that for CO2 the recommendation raises the 2020 value from $53 per ton to $79-125 per ton.

The guidance also includes recommendations for assessing other greenhouse gases and public health impacts.  DEC recently closed its comment period for the 1990 greenhouse gas inventory which has to be completed per the CLCPA schedule this year.  The guidance document recommends social costs for methane and nitrous oxides rather than using a global warming potential approach.  I agree that it is the appropriate approach but it also means that the DEC proposed inventory has to be modified to provide the methane and nitrous oxides tons not the global warming potential equivalent tons. 

Conclusion

The premise of New York’s Climate Leadership and Community Protection Act (CLCPA) is that “Climate change is adversely affecting economic well-being, public health, natural resources, and the environment of New York” and that is only a matter of political will to implement “a goal of the state of New York to reduce greenhouse gas emissions from all anthropogenic sources 100% over 1990 levels by the year 2050”.  The State’s utilities have allowed themselves to get sucked down into this drain on the economy for this futile virtue-signaling disaster simply because they depend on a rate-making process that is entirely co-opted by the Cuomo Administration.  Frankly the threat of recrimination from the Administration is so palpable that I doubt that anyone with career ambitions in any state agency dares say anything suggesting that the CLCPA goals and schedule are unrealistic lest they be accused of CLCPA defeatism.

Against that backdrop the only thing left is to comment and hope that someone, somewhere realizes the inherent problems of not only this guidance but the legislation itself .   If you have any interest in carbon pricing and, especially if you are from New York, I encourage you to comment.  Comments can be submitted until 5 p.m. Friday, November 27, 2020 to Jason Pandich, NYSDEC Office of Climate Change, 625 Broadway, Albany, NY 12233-1030, (518) 402-8448, E-mail:   climateact@dec.ny.gov. Include “Comments on the Value of Carbon” in the subject line of the email.

Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York.  This represents his opinion and not the opinion of any of his previous employers or any other company with which he has been associated.