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A task force will spend 18 months studying how to factor state carbon policies into the wholesale electricity market.
The nation’s largest electric grid operator is grappling with how to prevent state climate policies from merely pushing emissions — and costs — across state lines.
PJM Interconnection is the regional transmission organization for an area that spans all or parts of 13 states from Illinois to the Atlantic Coast.
A patchwork of state policies has emerged across its territory in recent years to curb generation from carbon-emitting power plants, from the Regional Greenhouse Gas Initiative to zero-emission credits for nuclear power plants.
Now, there’s growing concern these varying state approaches to carbon pricing are causing “leakage” — increasing use of more expensive and polluting plants in states that don’t have regulations that penalize emissions.
That’s why, in April, PJM announced a task force will spend the next 18 months figuring out how to integrate state carbon policies into its markets, which are supposed to provide a level playing field for buyers and sellers of wholesale electricity in the region.
It’s sure to be a delicate — and perhaps, confusing — dance.
“The goal isn’t to set a carbon price,” said Anthony Giacomoni, a senior market strategist for the grid operator. “PJM does not have the ability to set a carbon price. That has to come from a state or the federal government.”
While PJM prefers market-based solutions, Giacomoni said they also respect local governments’ abilities to pursue their own goals.
“Part of the confusion is the jurisdictional issue,” he said. “We’re not trying to preempt the rights of states.”
A key focus for the new task force will be how to prevent leakage. If emissions are taxed in one state, a power plant in another state could be dispatched more often because it now has a competitive advantage.
“So then you’re shifting emissions from inside the carbon region to outside,” Giacomoni said. “You’re increasing emissions overall, and you’re making it worse.”
Left unchecked, leakage can “affect generator investment decisions, the goal of reducing emissions and consumer costs in all areas,” according to a statement endorsed by PJM’s Markets and Reliability Committee.
“So how can we integrate carbon pricing into our market in a way that will minimize the impacts to the states that choose not to participate?” Giacomoni said. “I think that’s a crux of the lot of the issues.”
Mandy Warner, a senior manager for climate and air policy at the Environmental Defense Fund, called PJM’s carbon discussion the next step in a “critical conversation” that has been happening for some time.
She said it’s particularly relevant now, given the lack of action on climate solutions at the federal level.
“This is a constructive step,” she said of the new task force. “It’s a good sign PJM is recognizing this is happening and realizing we need to develop some thoughtful solutions. We’d love to see a federal limit on carbon, but this can help ensure carbon pollution is accounted for as power moves across state lines. We want to make sure we aren’t just having dirtier power move around.”
Some PJM states already price carbon through their participation in the Regional Greenhouse Gas Initiative, or RGGI, a cap-and-trade program among nine Northeastern states. New Jersey, which is in PJM’s territory, had dropped out of RGGI under former Republican Gov. Chris Christie but is in the midst of rejoining under current Gov. Phil Murphy, a Democrat.
In 2017 PJM published a white paper on carbon pricing, which noted that emissions leakage was already an issue, because not all the states in its territory participate in RGGI. The paper examined carbon-pricing frameworks that could address the issue. A uniform carbon price across the entire PJM region would be the “most efficient and cost-effective” mechanism, according to the paper.
That was two years ago, but the reason the leakage conversation is really ramping up now is because states have also started creating special subsidies (known as zero emission credits, or ZECs) for nuclear power plants within their borders, according to Christina Simeone, a senior fellow at the University of Pennsylvania’s Kleinman Center for Energy Policy.
“There are these big, meaningful states that are now subsidizing nuclear plants,” she said. “But they are not fixing the underlying market failure [a lack of a carbon price]. They are just pricing carbon for certain resources. I think the market distortion that is being created through ZEC policy could kill PJM markets.”
The nuclear industry has struggled amid competition from cheaper natural gas, renewables, high operating costs, and stagnant demand for electricity. However, the nuclear industry has successfully argued to states that the wholesale power market design is inherently flawed because it does not recognize the carbon-free benefits nuclear plants provide. New York, Illinois, New Jersey and Connecticut have all moved to subsidize their nuclear plants in recent years. Pennsylvania is considering doing so as well, but a pair of nuclear subsidy bills recently stalled in Harrisburg.
Yet as ZECs have proliferated, PJM has had to walk a fine line between respecting states’ rights and urging market-based solutions to address policy goals. Simeone thinks a region-wide carbon price could save PJM markets, but that it would be politically difficult at the moment.
“If stakeholders decide and can agree on a carbon pricing regime it would have to be approved by [the Federal Energy Regulatory Commission],” she said. “And that’s going to be a challenge given the current composition at FERC.”
As an independent agency regulating power markets, FERC is supposed to have five commissioners, but currently only has four — two Democrats and two Republicans. By law, no more than three seats at the commission can be held by one political party. Democrat Cheryl LaFleur has said she intends to step down after her term expires June 30.