New York State, the 11th-largest economy in the world, recently enacted the US’ most aggressive climate change legislation. By 2040, according to the new law, the state must get all of its electricity from zero-emission sources.

How does a state of 19.8 million citizens, which in 2018 generated more than 40% of its energy from fossil fuels, reach zero emissions in only two decades? A carbon-pricing proposal from the New York Independent System Operator (NYISO) can play a significant role - as new research by the Analysis Group has concluded.

We at the NYISO have independently managed New York’s electric grid and its competitive wholesale electric marketplace for 20 years. In the past two decades, price signals in the NYISO’s competitive markets have helped to drive down power sector emissions dramatically, according to the US Environmental Protection Agency’s Air Markets Programme data and US Energy Information Administration data on power generation. Specifically, we have reduced the emissions rates of carbon dioxide by 52%, nitrogen oxide by 88% and sulfur dioxide by 99%. Today, we seek to bring those numbers down even further, and have been working with our stakeholders since 2017 on a carbon-pricing initiative.

What is carbon pricing?

Carbon pricing would embed a cost-per-ton of CO2 emissions in the sale of wholesale electricity, creating a price signal for investment in new clean-energy resources, as well as for existing generators to minimize their CO2 emissions through upgrades and efficiency improvements. It would also better align NYISO’s wholesale energy markets with New York State’s environmental objectives.

Simply stated, pricing CO2 emissions makes cleaner energy more profitable and carbon-emitting energy less economic. It also appropriately places the financial risk for developing cleaner, greener technology on investors rather than consumers. Carbon pricing would make use of the power of New York’s competitive electricity markets to promote more clean energy on the grid.

Why markets?

Competitive markets reward the most responsible and efficient ideas, and have provided incentives for generators to replace older, more polluting generators with more efficient generation, reducing greenhouse gas emissions.

Our markets provide the price signals to attract innovation and investment to the grid, where and when needed, and have already made it easier to attract, for instance, wind and solar resources.

How it works

Here's how carbon pricing encourages investment in clean energy and further reduces emissions:

1. New York State sets a social cost of carbon as a price-per-ton of emitted CO2 based on the environmental impact

2. Power plants pay for the CO2 they release into the atmosphere

3. Generation owners receive an economic incentive to invest in low-carbon or carbon-free resources like wind, solar and hydro

4. Consumers benefit from payments made by polluting power producers.

Price signals create a strong economic incentive that values cleaner energy production and drives investment in new technologies like carbon capture and fuel cells. Carbon pricing promotes innovation, helping to grow clean energy businesses in New York State. And it encourages existing fossil-fuel plants to invest in repowering or in emission-reducing technologies.

Recognized by economists

The World Bank believes that carbon pricing is an essential tool to keep global warming to below 2°C and get to zero net emissions before the end of this century. In addition, a carbon price would “encourage technological innovation and large-scale infrastructure development” while accelerating the diffusion of carbon-efficient goods and services, according to a “Statement on Carbon Dividends” by the Climate Leadership Council, 3,554 U.S. economists, 27 Nobel Laureate recipients and other experts .

The report by the Analysis Group, commissioned by NYISO and co-authored by energy policy and economics expert Susan Tierney, concluded that our carbon-pricing proposal can help New York State meet its clean energy goals faster and more cost-effectively while reducing emissions and maintaining grid reliability.

The report also found that carbon pricing can:

· Reduce the consumer cost of reaching 100% carbon-free emissions

· Help grow investment and innovation in clean energy generation

· Promote innovation and energy efficiency in fossil fuel-burning technology

· Improve public health by encouraging the retirement of the highest-emitting generators

· Affirm New York’s position as a national leader on climate change

What’s next?

We are currently working with our stakeholders and with the state to finalize our carbon-pricing proposal. If the state and NYISO stakeholders support moving forward with carbon pricing, stakeholders vote whether to approve carbon-pricing wholesale market rules; the NYISO board of directors will then vote on whether to integrate carbon pricing into New York's wholesale energy markets. The proposal would eventually need to be reviewed and accepted by the Federal Energy Regulatory Commission.

In the meantime, we have a huge opportunity to make a difference, and we see carbon pricing as one of the best solutions to help New York State reach its clean-energy goals while reducing the cost to consumers, driving innovation on the grid and improving public health by encouraging the retirement of the highest-emitting generators.

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