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Colorado considers adding social cost of carbon to resource planning decisions

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The change could make new fossil fuel plants less attractive and speed up the shuttering of existing power plants.

Colorado utilities would face a new test before investing in power plants or other generation resources under a proposal from Gov. Jared Polis.

Polis, who campaigned last year on a platform of achieving 100 percent renewable electricity by 2040, wants state regulators to filter all utility resource decisions through the lens of the social cost of carbon.

The social cost of carbon is an attempt to put a price on the harms (and some benefits) caused by carbon emissions, both now and in the future. It’s a way to “account for the full costs of and benefits of various actions,” Will Toor, the director of the Colorado Energy Office, said in recent testimony before the Colorado Senate Transportation and Energy Committee.

Consider a natural gas peaker plant. If a regulatory analysis included how its emissions would contribute to flooding, droughts and other global climate change impacts in the future, would the plant still be considered a lowest-cost generation source?

The proposal from the Polis administration comes as Colorado legislators take up how to reconfigure the powers of the Colorado Public Utilities Commission, if at all. A state regulatory review last October recommended no substantive changes.

But many activists see the urgency of climate change and a dramatically altered energy landscape as grounds for substantial changes. The last review was in 2007, just three years after the state adopted its first renewable energy mandate. What’s needed now, said Conservation Colorado’s Amelia Myers at the recent Senate hearing, are “smart, modern ways of thinking about how our citizens get their electricity.”

At the top of Conservation Colorado’s list and many others’ testifying at the hearing was institutionalizing the social cost of carbon.

It wouldn’t be the first state to do so. Minnesota and Washington apply the social cost of carbon in energy resource planning, while New York and Illinois use it to set payments to nuclear generators. The metrics were developed by a federal interagency working group from 2009 to 2016. The Trump administration disbanded the group, but the guidelines remain the primary reference.

Two years ago, the Colorado PUC ordered Xcel Energy, the state’s largest electrical utility, to include pricing of carbon emissions in plans for new generating capacity. Xcel soon made the exercise moot when it announced it wanted to shed two aging coal-fired plants and replace the power with wind, solar and a dab of natural gas.

Kevin Rennert, director of the Social Cost of Carbon Initiative at the Washington D.C.-based Resources for the Future, said “institutionalizing the damages from climate change into Colorado’s integrated resource planning process should lead to clean resources of energy being favored over higher-emitting sources of energy.”

What is the cost?

But the social cost of carbon is not without its methodological problems. Simply put, there is no single, clear, consensus value on what the social cost of carbon should be. That’s true even in the federal guidance.

Scientists and economists have created several models that seek to quantify the impacts of climate change. Underlying the math, however is a challenging question that involves as much ethics as economics: how much is future climate mitigation worth to us today?

This tension is reflected in disagreements about something called the discount rate, a figure that assigns the value today of cost and benefits in the future. (David Roberts, then writing for Grist, wrote a helpful explainer on the concept in 2012.)

The interagency working group in the Obama administration recommended a value that put the social cost of carbon around $45 per metric ton, while the Trump administration’s estimates only count domestic impacts and use a higher discount rate, reducing the cost down to $1 per ton, Rennert said.

A lower discount rate would make new fossil fuel plants less attractive and encourage shuttering existing plants or at least operating them less frequently.

In 2017, the Colorado PUC ordered Xcel to use three different discount rates, 6.78 percent, 3 percent and 0 percent, in its resource plan analysis.

Xcel, which supplies more than 60 percent of Colorado’s electricity, expects to be at 55 percent renewables by 2026.

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