The Partial Observer: Cap and Invest-It’s Complicated

The Partial Observer by Roger Caiazza

Cap and Invest: It’s Complicated

As part of the Hochul Administration’s plan to implement the Climate Leadership & Community Protection Act (Climate Act), a market-based pollution control program called ‘’cap and invest” was proposed earlier this year in legislation associated with the budget. It was not included in the final budget bill but it will be considered later this year. This is an overview of this complicated proposal that has affordability and energy use implications.

The Climate Act Scoping Plan identified the need for a “comprehensive policy that supports the achievement of the requirements and goals of the Climate Act, including ensuring that the Climate Act’s emission limits are met.” It claimed that the policy would “support clean technology market development and send a consistent market signal across all economic sectors that yields the necessary emission reductions as individuals and businesses make decisions that reduce their emissions” and provide an additional source of funding. The authors of the Scoping Plan based these statements on the success of similar programs, but did not account for the differences between their proposal and previous programs.

The cap and invest proposal is a variation of a pollution control program called cap and trade. In theory, placing a limit on pollutant emissions that declines over time will incentivize companies to invest in clean alternatives that efficiently meet the targets. These programs establish a cap, or limit, on total emissions. For each ton in the cap an allowance is issued. The only difference between these two programs is how the allowances are allocated. The Hochul Administration proposes to auction the allowances and invest the proceeds but, in a cap-and-trade program, the allowances are allocated for free. The intent is to reduce the total allowed emissions over time consistent with the mandates of the Climate Act and raise money to invest in further reductions.

The Environmental Protection Agency administers cap-and-trade programs for sulfur dioxide (SO2) and nitrogen oxides (NOx) that have reduced electric sector emissions faster, deeper, and at costs less than originally predicted. In the EPA programs, affected sources that can make efficient reductions can sell excess allocated allowances to facilities that do not have effective options available such that total emissions meet the cap. Also note that EPA emission caps were based on the feasibility of expected reductions from addition of pollution control equipment and a schedule based on realistic construction times.

However, there are significant differences between those pollutants and greenhouse gas pollutants that affect the design of the proposed cap and invest program. The most important difference is that both SO2 and NOx can be controlled by adding pollution control equipment or fuel switching. Fuel switching to a lower emitting fuel is also an option for carbon dioxide (CO2) emissions but there are no cost-effective control equipment options. Consequentially, CO2 emissions are primarily reduced by substitution of alternative zero-emissions resources. For example, in the electric sector replacing fossil-fired units with wind and solar resources. The ultimate compliance approach if there are insufficient allowances available is to limit operations.

New York State is already in a cap and invest program with an auction for CO2 emissions from the electric generating sector. Although significant revenues have been raised, emission reductions due to the program have been small. Since the Regional Greenhouse Gas Initiative started in 2009, emissions in nine participating states in the Northeast have gone down about 50 percent, but the primary reason was fuel switching from coal and residual oil to natural gas, enabled by reduced cost of natural gas due to fracking. Emissions due to the investments from the auction proceeds have only been responsible for around 15 percent of the total observed reductions.

The Hochul Administration has not addressed the differences between existing market-based programs and the proposed cap and invest program. Although RGGI has provided revenues, the poor emission reduction performance has been ignored despite the need for more stringent reductions on a tighter schedule to meet the arbitrary Climate Act limits. The Hochul Administration has not done a feasibility analysis to determine how fast the wind and solar resources must be deployed to displace existing electric generation to make the mandated emission reductions. Worse yet, the Climate Act requires emission reductions across the entire economy and the primary strategy for other sectors is electrification, so electric load is likely to increase in the future.

In late March, the Hochul Administration proposed a modification to the Climate Act to change the emissions accounting methodology to reduce the expected costs of the cap and invest program. New York climate activists claimed that the change would eviscerate the Climate Act and convinced the Hochul Administration to delay discussion of the cap and invest proposal. This cost issue will have to be resolved in the upcoming debate.

In addition, the Hochul Administration has proposed a rebate to consumers that will alleviate consumer costs. This raises a couple of issues. The market-based control program intends to raise costs to influence energy choices, so if all the costs are offset there will not be any incentive to reduce consumer emissions by changing behavior. The other issue is that the auction proceeds are supposed to be invested to reduce emissions. If insufficient investments are made to renewable resources, then deployment of zero-emission resources to offset emissions from fossil generating units will not occur.

The final issue related to the cap and invest proposal is that it provides compliance certainty. The plan is to match the allowance cap with the Climate Act emission reduction mandates. As noted previously, there are limited options available to reduce CO2 emissions. The primary strategy will be developing zero-emissions resources that can displace emissions from existing sources. That implementation is subject to delays due to supply chain issues, permitting delays, and costs, as well as other reasons that the state’s transition plan has ignored. Once all the other compliance alternatives are exhausted, the only remaining option is to reduce the availability of fossil fuel and its use.

The cap and invest proposal is a well-meaning but dangerous plan. It necessarily will increase the cost of energy in the state. If the costs are set such that the investments will produce the necessary emission reductions to meet the Climate Act targets, it is likely that the costs will be politically toxic. If the investments do not effectively produce emission reductions, then the compliance certainty feature will necessarily result in artificial energy shortage. Given that this is a disguised tax, it probably is better to just establish a tax so that the compliance certainty does not arbitrarily limit fossil fuel use to produce electricity, heat our homes, or drive our cars.

Born in Cooperstown and a graduate of Oneonta High School, Roger Caiazza holds a bachelor’s in meteorology from SUNY Oneonta and a master’s in meteorology from the University of Alberta, Edmonton. Before his retirement in 2018, he was a certified consulting meteorologist and worked in the air quality industry for more than 40 years. The goal of Caiazza’s blog, “Pragmatic Environmentalist of New York,” is to explain the importance of balancing risks and benefits of both sides of environmental issues.

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