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Carbon Pricing on Electricity is Bad for Consumers and could slow EV adoption

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Richard Brooks's picture
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  • Jan 24, 2020 4:00 pm GMT

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.

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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.

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Matt Chester's picture
Matt Chester on Jan 24, 2020

Some studies have shown that carbon pricing of electricity also has a negative effect of 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 low electricity costs (and no carbon pricing), resulting in large layoffs in the area with carbon pricing on electricity.

This is always a tricky argument-- the same could be said about certain labor laws and how they shift those jobs to different regions where labor is thus more affordable. How do you juggle those effects on jobs with the end goal is a tough question. 

Richard Brooks's picture
Richard Brooks on Jan 24, 2020

Matt, here is an excerpt from a March 2019 CLEAN ECONOMY
WORKING PAPER SERIES report WP 18-08 report on British Columbia's impact from carbon taxes:

"we find that the BC carbon tax caused larger companies in energyintensive
manufacturing sectors to contract, while it increased employment in smaller service sector industries, such as health services (e.g., massage therapists, dental), restaurants, tourism, small food manufacturers and small clothing companies."

Good bye $30/hour manufacturig job; hello $10/hour flipping burgers job.

Bob Meinetz's picture
Bob Meinetz on Jan 26, 2020

Richard, the reality in BC is more complicated than you present it here. Those interested should read at least the introduction to the working paper to get an overview.

Economists have been critical of BC's implementation of the tax because it ignored one of the concept's basic premises: everyone is both penalized or rewarded equally based on either their consumption / avoidance of carbon emissions. Instead:

"...the small business tax was reduced by a larger percentage than the overall corporate tax rate."

That BC's economy would shift, when burger joints are being rewarded while big industry is being punished, was predictable.

"We find that the manufacturing metal industry is hardest hit, and lost around 5,700 jobs, equivalent to a 15.3% decrease in jobs per capita in this industry."

Other factors:

1) It was implemented at a time of major macro-economic shifts, such as the great recession, rapid migration, and oil price shocks.

2) It was implemented suddenly, giving manufacturers less time to adapt to changes in energy supply, and less time for energy vendors to establish necessary supply chains.

3) Special interests received favored "carve-outs" - tax exemptions - raising the ire of conservative, anti-tax hawks.

That BC's revenue-neutral tax lowered its carbon footprint is undeniable, but it's obviously a work in progress. Hopefully other governments will recognize a diamond in the rough.

john Liebendorfer's picture
john Liebendorfer on Jan 24, 2020

Richard misses a couple impotant points here.

1- Carbon pricing would not be limited to electic production.  It would also apply to gasoline etc.  The operating costs of non electric vehicles would still be much more.

2- Carbon pricing would encourage utilities to pursue renewable’s at a faster pace, further reducing the operating cost of

 electric vehicles.

3- These arguments completely ignored the cost of climate change.  For example, in some areas of California the yearly cost of residential fire insurance  can be 1/3 the value of house, thus destroying real estate markets.

4-   Assuming you argument is correct that business would seek locations with lower electric rates  - if done nationally- would cause business to move to areas with high renewable generations, successfully achieve carbon pricing goal of less fossil fuels.   

Richard Brooks's picture
Richard Brooks on Jan 24, 2020

John, thank you for your response, which I respond to below:

1. The proposal by NYISO is strictly for carbon pricing of wholesale electricity and has no effect on other fuels, such as gasoline and home heating oil. It's easy to confuse "carbon tax" and "carbon pricing" concepts.

2. There is no clear cause-effect evidence that carbon pricing of wholesale electricity would directly incentivize the construction of renewable resources.

3. I agree, my focus is on the NYISO carbon pricing proposal and I did not consider the effects of other regions, which are not proposing carbon pricing on electricity.

4 A nationwide carbon tax is a very different concept from what NYISO is proposing, which is limited to carbon pricing on electricity only and does not effect any other fuel or application of that fuel, such as natural gas for home heating, which would not be subject to a "carbon price/tax" becasue it's not used for electric generation.

I hope this clarifies the matter.

Bob Meinetz's picture
Bob Meinetz on Jan 24, 2020

Agree Richard, and the clarification is important.

While revenue-neutral carbon taxes directly address the problem of consumption of carbon, carbon pricing on electricity shifts the problem, in part, to consumption of electricity - at a time when electrification of energy has never been more important.

Richard Brooks's picture
Richard Brooks on Jan 26, 2020

Amen Bob, we need to encourage electrification by keeping electricity prices down if we want to have any hope of positive environmental and climate impact. The NYISO carbon pricing plan looks like a cobra effect outcome to me. I really do hope they abandon this ill concenived idea as a solution for climate change - no matter what the astro-turf economists say.

Bob Meinetz's picture
Bob Meinetz on Jan 27, 2020

The "cobra effect" - reminds me of the time my Dad offered to pay me and a friend 5¢ for every piece of glass we picked up from a vacant lot he owned. So we broke a bottle, picked up the pieces of glass, and brought them to him to collect. I learned a hard lesson that day (break several bottles, each with glass of a different color).

Richard Brooks's picture
Richard Brooks on Jan 27, 2020

Your entrepreneurial spirit and innovative ideas still live on Bob.

Bob Meinetz's picture
Bob Meinetz on Jan 24, 2020

"Assuming you argument is correct that business would seek locations with lower electric rates [it] would cause business to move to areas with high renewable generations..."

John, you can safely conclude any renewables activist who recites the meme "renewables are now competitive with fossil fuels" is 1) referring to wholesale prices, 2) misinformed, or 3) in denial.

There is not a single instance where the introduction of renewables in the U.S. has resulted in lower rates for customers.

"How Electricity Prices Can Rise While Generation Costs Fall

The release this spring of a working paper by economists at the Energy Policy Institute at University of Chicago (EPIC) ignited a debate on the cost-effectiveness of renewable mandates. The paper examined the effects of renewable portfolio standards (RPS) programs, which have been adopted by 29 states and Washington DC, finding that these policies have raised retail prices considerably and have reduced CO2 emissions only modestly.

This paradox is even more striking when we consider that more renewables actually can drive down the wholesale prices that electricity generators are paid. But wholesale prices are paid to the generators; the retail prices paid by final customers reflect the full cost of delivering electricity. Generation, though the largest component, only accounts for 44 percent of the total cost. The other main costs affected by renewables integration are transmission and distribution of electricity to its point of use, reliability costs to maintain stable voltage and frequency, maintenance needed to keep the system running, depreciation and taxes.

Unit costs, however, tell only part of the story. Wind generation at night in the Midwest may be displacing coal, while solar generation in the afternoon in California may be displacing natural gas, each with different cost profiles. And to handle the intermittency of VRE (Variable Renewable Energy), system operators need to activate ramping resources more frequently to meet demand. These flexible plants are typically more expensive to operate and thus higher deployment can raise total system costs even as renewable costs decline. Moreover, these resources must be kept on hand to provide reliable capacity in a market characterized by more intermittent supply and the costs of maintaining this capacity is passed along to consumers.

The EPIC paper mentioned above took many of these factors into consideration and used econometrics to conclude that states with an RPS had statistically significant higher post-implementation prices than those without. If we were to take their findings at face value that RPS mandates drive up retail prices, what does that foretell about future efforts to scale up renewables?"

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