The New York Independent System Operator (NYISO) has proposed incorporating the social cost of carbon into the wholesale price of electricity.

According to an October-released study conducted by the consulting firm Analysis Group, “A carbon price in NYISO’s competitive wholesale power markets can help deliver New York’s clean-energy transition in faster, cheaper, more reliable, more efficient, and more creative ways.”

NYISO President and CEO Rich Dewey was a guest on The POWER Podcast. He seemed to agree that carbon pricing is the best way for New York to achieve its clean energy goals.

“We just thought that unleashing the power of competitive markets is really the most cost-effective and the most efficient way to do that,” Dewey said. “So, we designed a mechanism by which New York state as the policy-setter could establish a social cost of carbon. We could embed that cost right into the offers that the generators put in for producing power, and using the competitive forces, we could reward those sources of power that are zero or low-emitters and at the same time institute a payment, if you will, for the emitters of carbon dioxide to essentially pay for the pollution that they’re putting into the air. And we thought that by using the competitive market forces and the optimization engine that we have in place that we could more-efficiently and more-effectively achieve those carbon reduction goals from the electric sector.”

NYISO is the first ISO/RTO in the U.S. to propose a market-based mechanism for pricing energy-based carbon emissions. It would incorporate a carbon price in the NYISO-administered wholesale energy markets, in dollars per ton of CO2 emissions resulting from power plant operations. The carbon price would be based on the social cost of carbon emissions, which is to be established by the state.

Power plant operators would include their expected cost of carbon in their NYISO market offer prices, in dollars per unit of electricity sold. While suppliers of power with zero or low CO2 emissions would benefit from higher net revenues, fossil generators’ payments would reflect a deduction for the carbon charges related to their emissions.

Retail electricity suppliers (known as “Load Serving Entities” in the NYISO market) would be charged the locational price for power they need for their consumers, with that price reflecting carbon-related costs. They would also receive a credit to substantially offset the impact of carbon pricing, because consumers would see a portion of the carbon charges collected from generators returned to them.

The carbon charge would provide incentives to suppliers of power with low or no carbon emissions, including innovative low-carbon technologies that may not yet be developed or are unable to be commercial in wholesale markets that do not include carbon pricing. Imports of power into New York would include a carbon price to discourage leakage of CO2 emissions from neighboring regions.

“We’re sensing that even some of the participants who were skeptical or opposed to it are now recognizing it is the most cost-effective way to achieve these goals,” Dewey said. The Analysis Group found that carbon pricing could save up to $850 million while achieving New York’s aggressive climate targets.

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Aaron Larson is POWER’s executive editor (@AaronL_Power, @POWERmagazine).