Minnesota utility regulators Thursday significantly increased the “social cost” of carbon dioxide emissions from power plants, but not as much as requested by two state agencies and environmental and renewable energy groups.
Since the 1990s, Minnesota has been one of just a handful of states to try to quantify the economic impact of the greenhouse gases behind climate change. The Minnesota Public Utilities Commission voted 3-2 to raise that cost from the current level of 44 cents to $4.53 per short ton to a range of $9.05 to $43.06 per short ton by 2020.
“That’s a dramatic and I think appropriate increase in the value for CO2,” said Dan Lipschultz, the PUC commissioner who proposed the new cost range. “As far as I know, we are the only state in the country to adopt CO2 values comprehensively for [utilities’] resource planning.”
Consumers don’t see a carbon fee on their bills. However, Lipschultz said the decision would “in all likelihood” indirectly impact ratepayers.
Carbon emissions are what’s known in economics as a negative externality: a cost that’s not paid for by a producer, but instead is borne by a nonrelated third party, usually the public. In 1993, the Minnesota legislature required the PUC to consider the costs of air pollutants in decisions on power plants, which could impact a project’s total costs, which are at least partly borne by ratepayers.
Commissioners Nancy Lange and John Tuma joined Lipschultz in voting for the $9.05 to $43.06 per ton range. The two commissioners who voted against the measure, Matthew Schuerger and Katie Sieben, both wanted a higher carbon cost range of $12.30 to $63.56 per ton — a value proposed by the Minnesota Pollution Control Agency (MPCA) and the Minnesota Department of Commerce.
The Minnesota Center for Environmental Advocacy, the Sierra Club and Fresh Energy — a renewable energy group — all supported the higher value, too. Still, Leigh Currie, energy program director at the environmental advocacy center, called the increase “a dramatic and significant improvement,” noting the current Minnesota carbon cost was set 20 years ago.
The new carbon cost adopted by the PUC is closest to Minneapolis-based Xcel Energy’s proposal — a range of $12.26 to $41.84 per ton by 2020.
A lower range of $7.88 to $18.99 per ton was proposed by three other Minnesota utilities: Maple Grove-based Great River Energy, Duluth-based Minnesota Power and Fergus Falls-based Otter Tail Power.
These days, no utilities in Minnesota plan to build new coal-fired power plants, the largest emitters of carbon dioxide for the electricity industry. So in practice, the social cost of carbon most likely will affect plans for new natural-gas plants. Burning natural gas emits about half of the greenhouse gases as coal, but wind and solar power emit none.
Environmental and renewable energy groups asked the PUC to update the carbon cost a few years ago. Much of the debate boils down to an evaluation of the federal social cost of carbon, which was devised in 2010 by scientists and economists from such federal bodies as the Environmental Protection Agency and the departments of energy, agriculture and commerce.
Twelve federal agencies combined three mathematical models to account for the effect of carbon dioxide emissions on climate change and the potential economic costs of climate change, including higher temperatures and higher sea levels. The cost developed by the 12 agencies has been used in setting national environmental and energy regulations — though President Donald Trump earlier this year directed agencies to disregard it.
Carbon cost proposals from the MPCA and the commerce department stem directly from the federal social cost of carbon. But Minnesota utilities, while acknowledging some merits in the federal cost of carbon’s methodology, have argued that it’s statistically unsound and riven with uncertainties.
The “level of uncertainty” about the economic damages of climate change is a problem — “not uncertainty about (the science) of climate change,” said Tuma, a PUC commissioner who voted for the carbon cost range of $9.05 to $43.06 carbon.
Lipschultz and Lange, the PUC’s chairwoman, shared Tuma’s concern about calculating economic damages from CO2 emissions after the year 2100.
The year 2300 is used to assess damages in the federal social cost of carbon.
There’s no question that economic damages will extend at least until 2300, Lipschultz said. But “the economic assumptions you use to calculate the damages get less certain as you go out.”
The proposal from Lipschultz that passed the PUC was based on the federal social cost of carbon — but with more conservative economic assumptions. First, he assumed damages through only 2100 for the low end of the cost range, though he used 2300 for the high end.
Second, Lipschultz assumed discount rates of 3 and 5 percent for his proposal, throwing out the 2.5 percent rate used in the federal social cost of carbon and advocated by the MPCA, the commerce department and environmental groups.
Discount rates value future costs in today’s dollars. They are critical for modeling carbon costs since the effects of CO2 emissions are long term. But choosing discount rates is contentious; the lower the rate, the higher the present value of future costs.
Historically, the PUC has set costs for CO2 emissions using discount rates of 3 percent to 5 percent, Lipschultz said. “Science doesn’t tell us discount rates.”