Key Takeaways

1. The program will place caps on the emissions of certain sectors, including power generation, transportation, and buildings and will require them to purchase emissions allowances, which can be bought at the auction and traded between market participants.
2. Auction proceeds from the sale of these allowances will be invested in clean energy and energy efficiency programs, as well as in communities that are disproportionately affected by climate change.
3. A key goal of the program will be to deliver new investment into green industries and sectors that create sustainable jobs across a range of communities and prioritize front-line, disadvantaged communities that have suffered from pollution and environmental injustice.
4. DEC and NYSERDA are undergoing the process of developing enforceable regulations by 1^st January 2024.

On 19^th December 2022, New York’s Climate Action Council adopted a climate scoping plan that incorporates a range of policies and actions to meet the State’s carbon neutrality goal in 2050. Among these, the Council proposed an economy-wide cap-and-invest program designed to reduce emissions cost-effectively, mitigate leakage, and direct investment towards clean technologies and disadvantaged communities. In a press release shortly after this announcement, the agency stated that the state’s Department of Environmental Conservation (DEC) and New York State Energy Research and Development Authority (NYSERDA) have until 1^st January 2024, to draft and issue regulations to implement the plan, which was mandated under the state’s Climate Act.

New York’s Choice: Cap-and-Invest

To achieve its goals, the final scoping plan proposed a cap-and-invest program that caps emissions after careful exploration of two economy-wide GHG policies:

• A tax or fee establishing a carbon price.
• A program that caps emissions across the economy, or within particular sectors, and allocates emissions allowances primarily through an auction mechanism that provides revenues for investment, called ‘cap-and-invest’.

The reason behind this choice was three-fold. A cap-and-invest program provides a clear and quantifiable limit on GHG emissions as opposed to a carbon tax by establishing a clear target for emissions reduction and a market-based mechanism for achieving those emissions. It also provides an opportunity to reinvest the revenue generated from the sale of allowances in emissions reduction and clean energy projects that further feed into the state’s ambitions to deploy new low-carbon technologies that support the transition to a low-carbon economy. Finally, it allows the flexibility to target specific sectors of the economy, such as the power sector, that are responsible for a large portion of emissions; making it a more effective approach to reducing emissions compared to a carbon tax which would apply across the entire economy.

The primary method of allocation is expected to be auctioning and in order to reduce the possibility of carbon leakage, the Council suggested a free allocation mechanism for industries that are trade-exposed and account for significant emissions. While offsets may play a role in helping regulated entities comply with the GHG emissions cap, the specifics of their usage, including the types of offset projects eligible, the maximum amount of offsets that can be used, and the criteria for offset project approval, would likely be outlined in the regulations or guidance documents implementing the program.

Sectoral regulations of the program

The program sets emission caps for several regulated sectors of the economy, including:

• Electric power: Includes power plants that generate electricity and sell it to the grid.
• Transportation: Includes emissions from vehicles, including cars, trucks, and buses.
• Industries: Includes emissions from large industrial facilities, such as chemical and manufacturing plants.
• Buildings: Includes emissions from heating and cooling of buildings, as well as from electricity use in buildings.

The scope of the regulation evolves across different sectors. For instance, sectors like transportation and heating will be regulated upstream with fuel producers and distributors subject to compliance obligations equal to the carbon content of their fuels. Others such as industry, waste, and power sectors, will be regulated further downstream at the point source GHG emissions are being released into the atmosphere. Some special emission sources like aviation are exempt from compliance obligations at the outset due to federal constraints and hard-to-measure individual sources such as non-fossil fuel agricultural emissions and forestry.

The Council worked to align the state’s cap-and-invest program with RGGI, ensuring that the two programs are consistent and compatible. The emissions caps established by RGGI for the electric power sector were integrated into the emissions caps established by the NYSCAC for the same sector. It also allowed regulated entities to use RGGI allowances as compliance instruments, which they can purchase in RGGI’s quarterly auctions or on the secondary market. The regulations and guidance documents implementing the New York cap-and-invest program and RGGI have been harmonized to ensure consistency and minimize confusion and administrative burden for regulated entities. Additionally, The proceeds from RGGI’s quarterly auctions will continue to be shared among the RGGI states, including New York. The DEC would monitor the emissions from these sources with the purpose of removing them from the state-wide cap.

Finally, it’s likely that emissions from the use of natural gas would also be included in the New York cap-and-invest program. However, the exact details of the emissions sources covered under the New York cap-and-invest program, including the use of natural gas, would likely be outlined in the regulations or guidance documents implementing the program.

Understanding the revenue allocations within the program

Proceeds from the emissions cap allowances will then support the State’s critical investments in climate mitigation, energy efficiency, clean transportation, and other projects, in addition to funding an annual Climate Action Rebate that will be distributed to all New Yorkers to help mitigate any potential consumer costs associated with the program. The Council has proposed rebates to compensate for increased energy costs, a cost-containment mechanism, and a gradual phase-in of the program to lessen the impact on households.

Disadvantaged communities will directly benefit from a minimum of 35%, with a goal of 40%, of the benefits from cap-and-invest resources, and the program will be designed to ensure pollution burdens are reduced in frontline communities. Among other initiatives to reduce pollution hotspots, these investments will fund programs to improve air quality, reduce reliance on polluting power plants, retrofit homes and schools, and decarbonize transportation systems. The Cap-and-Invest Program will incentivize consumers, businesses, and other entities to transition to lower-carbon alternatives by applying to each metric ton of carbon emissions.

The end game: Ambitions of the program

The New York Cap and Invest Program is expected to help to mitigate the impacts of climate change, such as sea level rise, extreme weather events, and heat waves. The program also includes several other initiatives aimed at reducing emissions and promoting clean energy:

• Achieving 100% clean electricity by 2040
• Reducing greenhouse gas emissions by 85% below 1990 levels by 2050
• Investing in energy efficiency and renewable energy projects
• Supporting the growth of the clean energy workforce
• Helping communities and vulnerable populations adapt to the impacts of climate change

Conclusion

The New York Cap and Invest Program is a crucial step in the right direction, and it sets an example for other states to follow to address the global climate crisis. It’s important to keep in mind that the program is still in its early stages and there’s a lot of work to be done to ensure its success. There are some key differences from other such programs, such as the treatment of offsets and the program’s intersection with the existing electricity emissions RGGI program. How these differences play out will determine the success of the new NY cap and invest program and its role as a potential example for other new cap and trade programs.

Analyst Contact:

• Megha Jha (mjha@ckinetics.com)
• Craig Rocha (cmrocha@ckinetics.com)