By Rama Zakaria
Six states could see significant opportunity and low costs if they put in place protections against carbon pollution from the electricity sector, according to a new report.
The report, by Resources for the Future, looked at Pennsylvania, North Carolina, Minnesota, Wisconsin, Illinois, and Michigan.
It found that taking two steps – setting a binding, declining limit on power sector carbon pollution, and creating a flexible, market-based mechanism to achieve that limit – could reduce cumulative carbon pollution by 25 percent in the next decade at low cost. The findings also suggest that even greater ambition is feasible for the six states.
Thirteen states not covered by the report already have – or are about to have – regulations that limit carbon pollution from their electricity sector. Other states, including Pennsylvania, are actively seeking opportunities to reduce emissions and deploy clean energy.
The new report has three key takeaways for Pennsylvania:
Pennsylvania has significant opportunity for cost-effective pollution abatement by limiting carbon pollution and linking with the Regional Greenhouse Gas Initiative
The Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort among New England and Mid-Atlantic states to cap and reduce power sector carbon emissions. RGGI is delivering cost savings to consumers by driving investments in energy efficiency.
The new report finds that if Pennsylvania were to put in place regulations that are similar in structure and stringency to RGGI that go into effect in 2021, those regulations could substantially reduce the state’s carbon emissions in the near term – from 116.2 million tons in 2026 without the regulations, to 70.3 million tons with them.
The report found those reductions are possible at an allowance price of $6.8 per ton in 2026 (consistent with the price range expected for RGGI). That would result in minimal change in electricity prices in Pennsylvania and would generate $478 million in revenue for the state.
The report found that if Pennsylvania sets a binding, declining limit on carbon pollution and creates a flexible, market-based mechanism to achieve that limit, it would result in more than 40 million tons more pollution reductions in 2026 than a technology-specific policy would (that’s more than 10 times the pollution reduction). The declining limit on carbon pollution would also spur almost as much generation from renewables as a technology policy would.
Linking Pennsylvania with RGGI would allow for emissions trading and even more cost-effective abatement across the region, according to the report – with allowance prices dropping to $3.8 per ton in 2026 and slightly lower emissions across the linked region. Linking to RGGI would also offer other benefits – like making Pennsylvania’s program resilient to unexpected changes in weather or the economy, or other events that could affect electricity markets. It could also reduce uncertainty by limiting fluctuations in allowance prices, thus making compliance planning less costly.
Low costs indicate that Pennsylvania has an opportunity to move forward with an even more ambitious carbon program
As evidenced by the low allowance prices, the report finds that the cost of achieving emission reductions similar in stringency to RGGI’s trajectory (30 percent reduction below 2020 levels by 2030) is small. In some states, this is in part due to the power sector becoming cleaner over time.
In most cases, the allowance price is low enough to trigger the emissions containment reserve – a program feature that withholds up to 10 percent of allowances if the auction-clearing price falls at or below $6.80 (in some cases, the allowance price is at the price floor of $2.05). In such instances, the number of allowances issued is less than the nominal cap, which declines by three percent of 2020 emissions each year. This outcome indicates that emission reductions are achieved at an accelerated rate. The report thus suggests that more ambition is plausible without incurring substantial cost.
By allocating allowances to support expenditures for energy efficiency, the program further protects consumers and reduces energy bills. Investments in energy efficiency also create jobs and promote economic development.
Studies have shown that by driving investments in energy efficiency, RGGI is reducing consumer energy bills and generating net economic benefits of about four billion dollars.
Even more important, RGGI has generated public health benefits that have saved hundreds of lives, prevented thousands of asthma attacks, and saved almost six billion dollars in health-related economic costs.
Addressing emissions leakage will be an important part of any carbon program in Pennsylvania
When a state or group of states puts a limit on carbon pollution in electricity markets, emissions leakage to emitting sources that are not covered under the program is always a concern. While the new report finds that such leakage will not dwarf the benefits of the program, it may partially erode emission reductions.
Linking programs and investing in energy efficiency can help but are not sufficient to fully mitigate leakage. Instead, more robust mechanisms are needed.
One mechanism explored in the report is allowance allocation to generators based on their share of generation – also known as output-based allowance allocation. This approach provides an incentive to in-state generation that will be covered under the emissions cap.
In Pennsylvania, the report finds leakage of emissions reductions (from covered sources to uncovered sources, inside and outside the state) to be about one-third. Output-based allowance allocation increases in-state generation compared to no allocation. While covered emissions slightly increase – from 70.3 million tons in the no-allocation case to 76.7 million tons in the allocation case – output-based allocation results in negative leakage by pulling generation into the state and bringing it under the cap.
In addition to the allocation strategies modeled in the report, PJM (the regional transmission organization that coordinates the movement of wholesale electricity in all or parts of 13 states including Pennsylvania and the District of Columbia) has an opportunity to help states make their programs even more environmentally effective, and also level the playing field between resources across the region, by providing states with better information to further reduce emissions leakage.
PJM recently approved a carbon pricing issue charge that will explore how the PJM market design can be leveraged to support state carbon policies and help mitigate leakage between states or subregions that are part of a carbon market and those that are not. This initiative provides PJM with an important platform to engage with the states and provide them with the information states need to help mitigate leakage by capping emissions associated with power imported across their borders and developing the market frameworks to align incentives across the region.
As it becomes increasingly urgent for us to address climate change, this report shows that Pennsylvania has an opportunity to lead by putting in place an ambitious, declining limit on power sector carbon pollution and creating a flexible, market-based mechanism to achieve that limit. Doing so would secure deep carbon pollution reductions and lock in public health benefits for Pennsylvanians at the lowest cost.