Prioritizing Justice in New York State Cap-Trade-and-Invest

New York State is currently planning for and implementing the New York Climate Leadership and Community Protection Act (CLCPA), which was passed in 2019 to promote renewable energy and battery storage, transportation electrification, building decarbonization, and climate resiliency and adaptation. The CLCPA directs the state to reduce statewide greenhouse gas (GHG) emissions by 40 percent by 2030 and 85 percent by 2050 (relative to 1990 levels)—and to achieve net-zero GHG emissions economy-wide. In meeting these targets, the state must prevent disproportionate burdens on disadvantaged communities (DACs) and prioritize GHG and copollutant reductions in DACs as defined by the Climate Justice Working Group. Additionally, Section 0117 of Article 75 of the Environmental Conservation Law, an environmental justice (EJ) provision of the CLCPA, requires that DACs receive at least 35 to 40 percent of climate investments and benefits.The CLCPA established the Climate Action Council to develop a framework for how the state could meet the CLCPA goals and commitments. In January 2023, the Council released its final Scoping Plan, which outlined strategies to achieve the GHG and net-zero emissions targets and increase renewable energy usage. A cap-trade-and-invest program was among the strategies identified as a tool that could help the state hit its emissions targets and generate revenue for climate action and investments. The New York State cap-trade-and-invest program is intended to encourage decarbonization by capping carbon emissions, requiring emitters to purchase allowances to emit, and subsidizing (the “invest” side) the adoption of low-carbon technologies such as heat pumps.Since early 2023, the governor and state have announced and focused on a cap-trade-and-invest program (“NYCI”) as a priority measure to reduce GHG emissions economy-wide. The state has named it the New York Cap-and-Invest or NYCI, however, regulatory agencies have expressed that there will be a form of trading so we refer to it as cap-trade-and invest to be clear about the program. Draft cap-trade-and-invest regulations are expected to be released by the Department of Environmental Conservation (DEC) and New York State Energy Research and Development Authority (NYSERDA) in mid-2024, with a public hearing and comment period to follow. As currently described by state agencies, cap-trade-and-invest will establish an auction for emissions allowances and allow entities to freely trade allowances in a secondary market, as in the economy-wide carbon cap-and-trade systems of California, Washington State, and the European Union (NYSERDA and DEC 2023). However, New York State’s cap-trade-and-invest must additionally meet the CLCPA’s explicit requirement to not disproportionately burden DACs and to prioritize emissions reductions in them. The preproposal released by NYSERDA and DEC in December 2023 offered some ideas about how the program might ensure benefits for DACs and highlighted its willingness to consider implementing facility-specific caps outside the cap-trade-and-invest program. The preproposal indicates that the caps would be administered separately under DEC and that the state is seeking additional guidance on how these caps might be implemented (NYSERDA and DEC 2023).Our research analyzes the emissions effects of different cap-trade-and-invest policy designs at the statewide and community level Communities are defined by census tracts in this analysis. in New York. The first policy design is a traditional cap-and-trade program with full trading allowed between sectors and with no facility-specific restrictions (the full trading case, or FTC). Because of modeling constraints, we were unable to model a case with carbon allowances that can’t be traded in a secondary market, Our modeling reflects a system with a free market for allowances because obligated entities will only pay up to their marginal cost of carbon abatement for a carbon allowance. In a system without a secondary market, entities may behave differently, or some allowances may end up stranded with obligated entities that cannot use them or sell them. We cannot capture these behaviors in our models. so the second case restricts trading through facility- and sector-specific caps designed to prioritize emissions reductions in DACs and limit their pollution burden (the restricted trading case, or RTC). Both the FTC and RTC obligate the power sector and are designed with caps that assume achievement of the 40 by ‘30 target mentioned above. We do not model all sectors, so we establish an emissions budget for the modeled sectors estimated to reflect economywide reductions under the 40 by ‘30 target (40 percent below 1990 levels by 2030). See Appendix E for more detail. The preproposal analysis released by the state signaled that the electricity sector may not be obligated to purchase allowances in New York state cap-trade-and-invest program but would be covered by the Regional Greenhouse Gas Initiative. We discuss how that policy may impact the interpretation of our results in the conclusion. Our analysis assesses the two policy designs and compares them with a business-as-usual (BAU) policy case where no economy-wide carbon pricing or trading policy is implemented.In this report, we provide GHG and copollutant emissions (fine particulate matter, PM2.5; nitrogen oxides, NOX; and sulfur dioxide, SO2) results, along with a variety of economic metrics. Air quality results, along with an additional policy case, will be forthcoming in a separate issue brief. In that analysis, we leverage a model that considers how direct emissions covered in this report combine, migrate, and settle into PM2.5 concentrations at the census tract level. The initial emissions analysis presented in this first report provides key insights on direct pollutants, particularly in the power sector, where our model provides detailed data at the latitude-longitude level about the proximity of copollutant emissions to DACs.Our analysis has revealed several insights:A cap-trade-and-invest program reduces carbon emissions in all modeled sectors beyond the baseline policies included in the BAU. Implementing either modeled cap-trade-and-invest system (FTC or RTC) yields an approximately 22 percent reduction in emissions from the BAU statewide in 2030.At facilities within one mile of a DAC, facility-specific caps (RTC) increase the average facility direct PM2.5 emissions reductions (from 2016) by nine percentage points, from 80 to 89 percent, compared with a scenario with a cap-trade-and-invest program that doesn’t include facility-specific caps. SO2 and NOX emissions behave similarly.The facility-specific caps included in the RTC reduce New York direct PM2.5 emissions within a mile from DACs on net by over 44,000 pounds in 2030 (with significant reductions in SO2 and NOX emissions). The caps have virtually no impact on retail electricity prices.Sector-specific caps (RTC) that force greater emissions reductions in specific sectors reduce GHG emissions by 4 percent more in the residential sector (or 0.76 MMT CO2e) relative to a cap-trade-and-invest program with full trading across sectors (FTC).Sector-specific caps (RTC) that require fewer GHG emissions reductions in the transportation and power sectors lead to lower gasoline and residential electricity prices relative to a cap-trade-and-invest program with no sector-specific caps (FTC). Prices are lower by 10 cents per gallon and 30 cents per MWh respectively. The increase in average household heating costs is outweighed by the reduction in average household transportation costs.Our research demonstrates that cap-trade-and-invest policy design choices can affect the distribution and cost of GHG emissions reductions. Including facility-specific caps can ensure a minimum level of reductions for each facility without driving costs significantly higher, compared with not having facility-specific caps. Additionally, sector-specific caps with no trading between sectors can help ensure a minimum level of reductions in each sector while mitigating some important household costs. Our cost findings reflect the assumption that New York State will make generous investments in electrification subsidies for households. The details of a cap-trade-and-invest program, such as those we model, will determine whether New York State simultaneously achieves its GHG emissions goals, prevents disproportionate burdens in DACs from conventional pollution emissions and concentrations, and produces revenue that can sustain and drive climate action and investments by the state. For EJ stakeholders, this research is essential because they will not support a cap-trade-and-invest system that may further harm the health and quality of life for low-income communities and communities of color, which could violate Section 7(3) of the CLCPA.