Is Carbon Pricing the Key to a Clean Energy Future? I surely hope not.

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Richard Brooks

Senior Consultant Reliable Energy Analytics LLC

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Successful developer of Energy Industry B2B and Cyber security standards at NAESB (www.naesb.org) since 1995; ANSI Meritorious Service Award Recipient;...

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Dec 7, 2019 1:15 am GMT
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I must admit, I'm not grasping how carbon pricing of electricity will incentivize and accelerate growth in renewable resources, so I tried to make it personal using an analogy that I can relate to. Here is my understanding of how the carbon tax on electricity would work using a gasoline carbon tax analogy- I welcome all comments/corrections.

Let's go ahead an place a carbon tax on something we all know well and can easily relate to; suppose gasoline for our automobiles were to receive a carbon tax of $1.00 per gallon across the nation. Instead of paying $2.65 like I do today in the Northeast, I would be paying $3.65 per gallon to cover the carbon tax. This additional dollar, I'm told, will incentivize me and my neighbors to replace our gas guzzlers with electric vehicles until all of the gas guzzlers are extinct and there are no more harmful emissions from cars. To make this deal appealing to me the government will offer to pay me back $.20 cents from my $1.00 tax payment to encourage me to buy the electric vehicle and replace my gas guzzler. The other $.80 would go toward incentives to other parties to encourage the addition of more electric vehicles to the roadway, like charging stations and greater production of electric vehicles by manufacturers. So I, as the consumer, will have to pay the carbon tax during my fill-up of $1.00/gallon of which $.20 is returned to me so that I can buy an electric vehicle, even though my gas guzzler may still have another 5 years of useful life remaining. What should I do? Do I replace my car with an EV and lose whatever good years are remaining on the vehicle or do I keep my vehicle and pay the additional $1.00 carbon tax per gallon until it's time to replace the vehicle with an EV. Many factors come into play with this gasoline carbon tax scenario and each one of us would have to make our own decisions based on personal finances and other factors.

Unlike the gasoline carbon tax I describe above, where each individual decides for themselves how to deal with the higher cost of gasoline, a carbon tax on electricity doesn't afford us the opportunity to decide. We all must pay the carbon tax on electricity, until such time that all of the fossil generators go away. That could be a very long time given our dependence on reliable electricity and, as of today, we are totally dependent on fossil generators for 24x365 reliable energy supply. We are required to pay this electricity carbon tax, even if we do all the right things, like buy an electric vehicle and buy only from renewable energy resources - we still pay the electricity carbon tax while fossil generators remain operational and until such time they are all replaced by cleaner generators. Personally, I would prefer a solution that gives me, the consumer more say over how my money will be spent to achieve a greener planet and a carbon tax on electricity prevents me from having the freedom to decide.

[Update 12/23/2019: Here is another insightful look at the problems with carbon pricing from the UC Berkeley Energy Institute: Suggested citation: Fowlie, Meredith. “The Trouble with Carbon Pricing.” Energy Institute Blog, UC Berkeley, April 29, 2019, https://energyathaas.wordpress.com/2019/04/29/the-trouble-with-carbon-pricing/ ]

Is Carbon Pricing the Key to a Clean Energy Future? I surely hope not.

The New York Independent System Operator (NYISO) has proposed incorporating the social cost of carbon into the wholesale price of electricity. According

Source: www.powermag.com

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Matt Chester on Dec 6, 2019 10:00 pm GMT

To make this deal appealing to me the government will offer to pay me back $.20 cents from my $1.00 tax payment to encourage me to buy the electric vehicle and replace my gas guzzler.

To play contrarian here, Dick, I'd say that this direct application of the tax and refund is oversimplified in your analogy. When we're talking carbon taxes that result in a refund back to citizens, the reason most homes come out ahead is because the people who are getting hit hardest with the carbon tax are those people (or, more accurately, corporations) who are emitting the most. A majority of the taxes collected are coming from these large emitters. Of course a portion of that increase in the cost of doing business is passed on to the common citizen through higher product prices, but overall the high emitters are absorbing more of these carbon tax impacts and the distribution of a refund to all citizens will more often than not be greater than the impact that family felt from increased prices. So saying it's the equivalent of someone getting charged $1.00 extra for gas and then getting $0.20 back I don't think fully captures the actual end result.

Bob Meinetz on Dec 7, 2019 2:12 am GMT

Richard, with a revenue-neutral carbon tax you can actually make money each month. Here's how it works:

1) A tax is added to the purchase of each CO2-equivalent unit of fossil fuel entering a state.
2) After administrative costs are subtracted, collected money is divided at the end of each month equally. A check is sent to each taxpayer.
3) If you use less fossil fuel than the state average, you make money.

Yeah, everyone has to participate, no one can "opt out". But we'll never opt out of climate change either, unless we all do it together.

Richard Brooks on Dec 7, 2019 5:39 pm GMT

Thank you Bob and Matt for this clarification. So it seems this "formula" incentivizes people to reduce their energy consumption below the "ever lowering average" as people "chase the average" downward in order to be compensated. So if I were to buy an electric car my consumption would go up considerably, likely above the average, and now I would have to pay the carbon tax, even though I took my gas guzzler off the road and tried to do the right thing for the planet. It seems the only way I can continue to be below the average in electricity consumption and get some of my carbon tax money back is to replace electric options with other options, like propane for heating and continue to keep my gas guzzler car so not to exceed the average electricity consumption and have to pay the carbon tax. Do I understand this correctly or am I still missing something?

Bob Meinetz on Dec 7, 2019 6:45 pm GMT

"So if I were to buy an electric car my consumption would go up considerably, likely above the average, and now I would have to pay the carbon tax, even though I took my gas guzzler off the road and tried to do the right thing for the planet."

Your fossil-fuel consumption would only go up if gas or coal was burned to generate the electricity charging your electric car. In that case, your utility would raise its electricity rates to cover the added cost of the tax on their fuel. If renewables or nuclear were used to generate all or part of your electricity, you'd be taxed less than you would be for a gas-powered car.

But that's assuming electric cars get the same energy "mileage" as internal combustion cars. They don't - they're far more energy-efficient. The miles-per-gallon equivalent (MPGe) of electric cars is ~five times better than the MPG of comparable internal combustion cars, thus both your fuel costs and carbon taxes driving an EV will be much lower.

If your EV was powered by 100% nuclear or renewable electricity you'd pay no carbon tax at all to drive it. That's the point - people are only be taxed for doing excessive damage to the environment, either directly or indirectly.

British Columbia's revenue-neutral carbon tax has lowered emissions by 19% since it was initiated, but BC blew it - they didn't send everyone the same check, a critical part of the equation. Some people were reimbursed by tax credits and other means, raising suspicions of anti-tax hawks who suspected handouts were being given to special interests. For a revenue-neutral tax (also known as fee-and-dividend) to work, the accounting must be simple and transparent.

onedit: switching to fossil-fuel propane probably wouldn't save you any money. Sales of propane would be taxed too.

Richard Brooks on Dec 7, 2019 6:43 pm GMT

Bob, How can I guarantee that the electrons delivered to my house "was powered by 100% nuclear or renewable electricity" so that I wouldn't have to pay the carbon tax? It seems to me, the only way to avoid paying the carbon tax is to reduce electricity consumption below the average consumer, which would seem to incentivize use of other energy options, like propane, natural gas and gasoline, in order to stay below the average. Any increase in electricty use raises the probability that I will go above the average and have to pay the carbon tax, eliminating any incentive to electrify.

If the goal is to reduce emissions then a direct incentive to eliminate emissions would seem to be more effective to me. For example, compensate a coal plant to shut down and replace their coal with Solar/Wind, or whatever aims to reduce emissions and give the owner a premium capacity payment for the Solar/Wind implementation. I can easily connect the dots between reduction in coal powered generation emissions and green emission free generation in this scenario, but I cannot connect the dots using a carbon tax on electricity and lower emissions, without the possible unintended consequences that could backfire and keep people using fossil fueled energy.

I'm remain open to being convinced that I'm completely wrong in my analysis and I hope that somone can show me how a carbon tax is more effective at eliminating emissions than a direct incentive to replace the offending resource (fossil plant or gasoline car) with a better alternative, recognizing that "load pays for everything" no matter what the solution is.

Bob Meinetz on Dec 8, 2019 5:05 pm GMT

Obviously there's no way to separate your electrons from anyone else's, but it's not necessary.

To be clear: only the original vendors of fossil fuel are taxed - fossil fuel entering the state; coal at the mine entrance; oil at the wellhead, based on the energy content of each unit of fuel. Your utility, forced to pay more for fuel, will raise rates proportionally to compensate. If your utility uses only coal to generate electricity, rates will go up for everyone - a lot. Utility execs will get a mouthful from angry ratepayers, and seek less carbon-intensive ways to generate electricity. If they use more renewables/nuclear, rates will go down. Ratepayers will calm down.

"...compensate a coal plant to shut down and replace their coal with Solar/Wind, or whatever aims to reduce emissions and give the owner a premium capacity payment for the Solar/Wind implementation."

Who pays to compensate the coal plant owner? What if he charges too much for his solar/wind, and utilities buy from another coal plant instead? With a revenue-neutral carbon tax, all coal plants have to pay more for fuel. They're all encouraged to find other ways to generate electricity.

Gasoline you buy at the pump, propane you buy for your BBQ, all of that will be more expensive, but it's because the oil company bringing it to you has had to pay the tax, not you. You have the option to use electric alternatives if they're cheaper. In any scenario, the public will be incentivized to use the least carbon-intensive way to get the job done.

BC was smart about one thing: they started the tax off very small, then gradually raised it. When it hurts enough anyone will change their habits, and over time plenty of other options become available.

Richard Brooks on Dec 9, 2019 10:55 pm GMT

Bob, in many ISO controlled wholesale markets the price of electricity is established with a uniform clearing price that is one of the components of a Locational Marginal Price (LMP). All generators that clear the market are paid this "marginal price" for their electricity, no matter what amount they bid in (even those bidding zero) or what type of fuel they use. More times than not, this marginal generator is a fossil fueled generator which means the higher marginal cost resulting from the carbon tax reflected in he fossil generators offer sets the price of electricity for all consumers, regardless of which generator supplied your electrons. So instead of paying $50/MWh without the carbon tax we will all pay $70/MWh for energy which includes the carbon tax - even if that energy is produced by a clean generator, because all generators receive the uniform clearing price for their energy production based on the clearing price of the marginal unit clearing the market. The kickback to consumers comes from the additional carbon tax funds collected ($20/MWh in this example), purely based on your own, relative to average, consumption. If you own an electric vehicle and you drive/charge it daily then chances are quite good you will not receive the carbon tax kickback because your electricity usage will likely be above the average, like your neighbor who's driving their gas guzzler and using natural gas for home heating and cooking needs who's electricy use is only 10% of your consumption. I'm not convinced that a carbon tax on electricity will incentivize electrification across the consumer base and sincerely doubt it will accelerate the move away from fossil fuels into renewable resources by generators.

Bob Meinetz on Dec 8, 2019 10:22 pm GMT

Richard, your comments only serve to confirm my conviction competitive, free "markets" in wholesale electricity are a sham. What you describe is a market failure - as is CAISO's "loading order", favoring renewables over equally-clean nuclear energy, when they offer no additional value in return.

Ask an economist: for any buyer-seller dynamic to qualify as a market, consumer choice is a requirement. Without it, a free market does not, and cannot, exist. Maybe electricity market reform should start by dismissing the notion one even exists.

A possible solution would be exempting electricity generators from the carbon tax, and replacing Renewable Energy Certificates with post-market emission penalties levied on consumers, reflecting the social cost of fossil fuel generation across the state's entire electricity mix. Proceeds would be deposited in the same fund used for the revenue-neutral carbon tax.

"If you own an electric vehicle and you drive/charge it daily then chances are quite good you will not receive the carbon tax kickback because your electricity usage will likely be above the average..."

Not sure you understand that with a revenue-neutral carbon tax, everyone in a state receives the same dividend, paid on a regular basis. Instead of wealth redistribution, think of it as "carbon-footprint redistribution". With the above workaround, people who use less dirty electricity than the average would show a net gain; those who use more would have a net loss. If the state offers 100%-clean electricity no one is penalized, and everyone benefits from cleaner air.

Of course, if you live in an area dominated by coal generation ("Duke Country") it's very possible an EV could be worse for the environment than driving a gas guzzler. In that case, you might actually recognize a net gain by driving the guzzler. But that's the way it should be.

Richard Brooks on Dec 9, 2019 4:23 pm GMT

Bob, I do indeed understand the zero sum nature of this game, where some win and some lose. You have not offered a counter position that would change my position, which is: a rational player will seek the best economic outcome, which is to receive payments from the carbon tax on electricity, instead of paying into the pool, which requires them to reduce their electricty usage below the average. One way to achieve this is to reduce dependence on electricity using alternative fuels, like gasoline cars instead of an EV, and naturla gas for home heating, instead of an electric alternative, like a heat pump. The carbon tax works against the economics of electricty by raising the cost to use electricity, when a cheaper alternative may be available.

Bob Meinetz on Dec 10, 2019 5:01 am GMT

Richard, it sounds like you're still not understanding how it works.

The "pool" resets at the end of each month. All money is distributed, an equal amount to each taxpayer. The only payment made by residents (every resident) is a higher price on fossil fuels, or fossil-fueled electricity.

If half of your electricity is generated by renewables, half by coal, only the portion generated by coal would cost more. Example:

• Your electricity rate is 20¢/kWh before the tax
• Because half of your electricity is generated by coal, only 10¢/kWh is taxed
• If the carbon tax is 10%, you pay an extra 1¢/kWh (21¢/kWh) after the tax goes into effect
• Gasoline that formerly cost $3/gallon will now cost $3.30/gallon ($3 + 10% tax, assuming gas is taxed at the same rate as coal).
• You're far better off driving an electric car - you're generating fewer emissions

It doesn't matter whether your electricity is above the average electricity usage - the only thing that matters is whether your carbon emissions are above the average. Those responsible for a lot of emissions will have the choice whether to continue their lifestyle or not, but those who emit more carbon than your state's average - their "fair share" - will have to pay more to do it.

It's the most equitable and fair arrangement for a carbon tax, and enjoys widespread, bipartisan support except among fossil fuel interests - it hurts their business. But when they're making money at the expense of the environment, that's the point.

https://en.wikipedia.org/wiki/Carbon_fee_and_dividend

Richard Brooks on Dec 10, 2019 4:38 pm GMT

Bob, thank you for the link to the carbon tax proposals and other analysis; that was very helpful. I've been operating under the belief that the proposed carbon tax would only be applied to electricity generation and pricing, which NYISO is proposing. This material indictates that a carbon tax would apply to all fossil fuels, regardless of their use. After further reviewing S.2284, the Climate Action Rebate Act of 2019, it appears the incentive to migrate to renewable energy comes from the annual, automatic tax increase until such time that emission levels are <=10% of the 2017 emissions total. This could get very expensive especially when you consdier we are dependent on fossil fuel generators of electricity for 24x365 reliable electric supply. The big problem I see with implementation is that it has to be an across the board tax which nobody in the US can escape from. If I move from my gasoline car to an EV, then I may still have to pay the carbon tax, if the marginal generating unit is a fossil generator. I cannot escape paying this tax until emissions from all of the electricity produced falls below the 2017 threshold, even if I do all the right things. My best hope is that I may get a "kickback" of some of my carbon tax payments, along the way, as the tax continues to increase.

Bob Meinetz on Dec 10, 2019 5:51 pm GMT

Richard, you will only end up paying more than you receive in your monthly dividend if the carbon intensity of your overall consumption is higher than average.

Because there are so many ways applying a carbon tax at the source will affect the cost of goods we purchase every day, it would be difficult to determine whether any individual is making or losing money. As an environmentally-conscious person you may be surprised to get a check for $50 or more in the mail each month, that far outweighs the slightly-higher prices you're paying for gasoline and electricity.

"...and sincerely doubt it will accelerate the move away from fossil fuels into renewable resources by generators."

If it does it will be a long, slow process. It's been successful in BC and Switzerland, in no small part, due to the availability of abundant hydropower at both locations.

It won't accelerate the move away from fossil fuels to solar and wind, not because the tax is poorly-designed, but because solar and wind are not very effective at reducing carbon emissions. It's based on results, and when it comes to replacing fossil fuel, results are something neither solar nor wind can deliver.

onedit: NYISO's proposal looks like it was written by the American Petroleum Institute. I agree - a tax on electricity alone will only serve to extend reliance on gasoline.

Richard Brooks on Dec 10, 2019 6:00 pm GMT

I believe we are in agreement Bob. The NYISO proposal seems to suffer from the potential of misaligned incentives which promotes the use of alternative fuels to prevent paying the higher cost of electricity one would incur with an EV. The only way to avoid paying the higher electricity cost is to minimize electricty use, and rely on other alternatives, which are not subject to carbon pricing fees. Wind and Solar alone cannot "get us there"; nuclear is a vital contributor to achieving our clean energy goals.

John Simonelli on Dec 17, 2019 1:30 pm GMT

Let's look at the reality of the New England resource mix. All the coal units in the region have retired except for those in New Hampshire which represent an infinitesimally small percentage of the total resources in the region. The old oil burning units only run during extreme cold periods in the winter when natural gas availability for generation is marginal. So, the bulk of the fossil burning resources in New England are natural gas which in general, are the cleanest of the fossil fleet. If one looks at the planning queue there are literally 10’s of thousands of megawatts of offshore wind, onshore wind, solar resources and HVDC ties to allow import of hydro resources from Canada. The resource mix in New England is already changing of its own volition. The carbon tax proposal is being presented by those people who are impatient and want things to change overnight, they refuse to wait for the natural evolution of the changeover. I think the carbon tax is unnecessary. Maybe if this was 15 or 20 years ago, it might have been applicable, but the change is already occurring. Why hit the consumers with higher rates now?

Bob Meinetz on Dec 17, 2019 4:17 pm GMT

"Maybe if this was 15 or 20 years ago, it might have been applicable, but the change is already occurring. Why hit the consumers with higher rates now?"

John, the urgency of climate change doesn't afford us 15 or 20 more years.

"So, the bulk of the fossil burning resources in New England are natural gas which in general, are the cleanest of the fossil fleet."

Gas is not remotely clean enough. Here in California, it's responsible for 41 million tonnes of CO2 emissions each year, and consumption is steadily growing.

"Why hit the consumers with higher rates now?"

A revenue-neutral carbon tax wouldn't be levied on electricity consumers directly, but utilities which use fossil fuels to generate electricity.

Most importantly, it would encourage the retention and construction of nuclear plants, which generate no carbon emissions and aren't dependent on offshore wind or sunshine. Next year's scheduled shutdown of New York's Indian Point Energy Center will immediately void 2.1 billion watts of clean electricity, and there's no evidence offshore wind resources will be sufficient to replace it.

Richard Brooks on Dec 17, 2019 6:05 pm GMT

John,

I look for cause and effect in much of my analytics work. Today, emission free power generation is coming online from solar and wind resources at an alarming rate, without a carbon tax on electricity. I have difficulty connecting the dots that a carbon tax on electricity will result in more investment in emission free resources. In fact, I suspect it will have the exact opposite effect as electricity prices rise from the carbon tax, eliminating the economic benefits of electrification, that may push consumers to use lower cost options, like Natural Gas for heating and gasoline for transportation. We need to find an approach that will incentivize the consumer to electrify and replace fossil fuel use in their lives. Make electricity the low cost alternative across the board, that will drive the movement toward a greener grid and build more, fossil free generators, including wind, solar, wave and nuclear.

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