There has been considerable chatter on the topic of carbon pricing (taxes) on electricity filling the airwaves and cyberspace. The New York ISO Carbon Pricing proposal to apply a carbon pricing “tax” on electricity is receiving “astro-turf” support from some economists who stand to benefit by supporting the proposal. I'm reminded of the unintended consequences that played out in the movie King Kong as I write this article. Let’s be perfectly clear, carbon pricing of electricity, as proposed by NYISO, is bad for consumers, it’s bad for electricity generators who are counting on EV sales to increase electricity consumption and it’s bad for the environment, here’s why.
A little understanding of how energy prices are determined is needed to understand why I believe this to be true. In New England, energy is acquired in sufficient quantity to meet demand and reserve requirements for reliability. So, if ISO New England (ISO-NE) determines that 10,000 MW’s are needed each hour to meet demand they will acquire 10,000 MW’s from generators to meet demand. Generators submit offers to supply this 10,000 with varying prices and quantities, i.e. 10 MW for $20, 50 MW for $100 and so on until all generators have placed an offer to sell their energy. Suppose there are 20,000 MW of generator offers available but ISO-NE only needs 10,000 MW to meet demand – we have an overabundance of offers so ISO-NE ranks these offers from lowest to highest cost until all offers have been represented on a “supply curve”. ISO-NE searches the offers from lowest to highest cost until if finds the offer that meets the target of 10,000 MW. This offer determines the “marginal unit” and it sets the marginal energy price for electricity across New England, called the uniform clearing price (UCP). More times than not this marginal unit is a fossil fuel generator and therefore the price of electricity is dictated by a “fossil fuel generator” offer. If a carbon tax is added to fossil fuel generators then their offers will be considerably higher in price, raising the cost of electricity for everyone. NYISO employs a virtually identical approach to the description above to establish the marginal energy price component of their LBMP.
Consumers suffer from carbon pricing of electricity because the cost of electricity goes up, significantly. In today’s environment electricity is the economic choice for many use cases, because we have no “carbon tax”; prices are the results of a competitive process called the Energy Market. Frequently, electricity is the only option available to consumers; I haven’t seen a TV run on Natural Gas so electricity is the only option available that I’m aware of. However, there are other cases where the choice between electricity and a fossil fuel option is reasonable, like in the case for electric vehicles versus a combustion engine automobile running on gasoline. Today, an EV compares very favorably, in terms of cost per mile to operate, versus a car using gasoline, because there is no carbon tax on electricity. The following chart from Idaho National Labs show how electricity prices compare to gasoline prices. An electricity price of $0.20 kWh equates to a gasoline price of $3.30 per gallon in the chart below, whereas an electricity price of $0.30 kWh equates to a gasoline price of $4.00 per gallon. As you can see, the higher the price of electricity, the more you pay to travel/charge the electric vehicle and it could actually cost less to drive a gasoline powered vehicle that gets 40/MPG. Why would anyone buy an electric vehicle if it costs more to drive as compared to a gasoline vehicle, largely because of the higher price of electricity imposed by the carbon tax of the marginal unit supplying electricity? Plus, at the same time you’re paying more for electricity you’re also consuming more electricity from having to charge the electric vehicle. You’re paying more for electricity and you need more of it, when you own an Electric Vehicle. You’re better off, economically, with a very efficient gasoline powered car that gets 40 miles per gallon at $2.50 per gallon versus some electric vehicles. The rising cost of electricity from a carbon tax is a disincentive for consumers to purchase an electric vehicle so long as there are better options available with high efficiency automobiles, e.g. 40/MPG, running on gasoline, and gasoline prices that make it the obvious economic choice.
Some studies have shown that carbon pricing of electricity also has a negative effect on employment, largely due to companies that find the higher cost of electricity, caused by the carbon tax on electricity, effects their variable costs and they can become more competitive and profitable, by moving their operations to a region with lower electricity costs (and no carbon pricing tax), resulting in large layoffs in the area with carbon pricing on electricity.
There have been many studies and articles, both positive and negative, with regard to adding a carbon tax to electricity. In my opinion, any rise in electricity price gives consumers pause to consider other, lower cost alternatives. They will keep their natural gas fired home heating system and their gas guzzler cars, because it would cost more to own and operate an equivalent solution that’s powered by electricity as the carbon tax raises the cost of electricity. Consumers would be incentivized to minimize electricity consumption, not increase it, as electricity prices rise, which is bad for electric vehicle sales and the environment as consumers continue to burn lower cost fossil fuel alternatives and for electricity generators who are depending on increased electrification of the transport and heating sectors to create greater demand for electricity.
Carbon pricing on electricity, as proposed by NYISO, is NOT the same as a nationwide carbon tax on all fossil fuels. It's important to understand the difference. The NYISO Carbon Pricing Proposal is truly a bad policy for electricity consumers and others.