The governor of New York State has delayed efforts to implement a cap-trade-and-invest program that would limit greenhouse gas emissions. What are the consequences of this delay, and what’s next for climate policy in the state?
In January, New York State signaled that its long-awaited flagship policy for meeting the state’s goal of achieving net-zero greenhouse gas emissions by 2050—a cap-trade-and-invest program—may be delayed. Governor Kathy Hochul (D-NY) was expected to discuss the cap-trade-and-invest program in her annual State of the State Address, but the policy got only a short mention in the briefing book that accompanied the speech. This briefing indicates that regulations for reporting state emissions were in development, but that the state needed “more space and time for public transparency and a robust investment planning process.” Sensitivity over the cost of the program to New Yorkers may be a main sticking point in forward movement on the cap-trade-and-invest program.
This pullback is disappointing, because putting a price on emissions is an efficient way of meeting emissions-reduction targets. In a cap-trade-and-invest program, large emitters, such as industrial facilities or fossil fuel suppliers, self-determine the best way to cut emissions to meet the “cap,” which is the total amount of emissions allowed by the state in a given year. These firms purchase allowances from the state that permit a certain amount of emissions and can trade these allowances with other firms.
New York State legally is committed to meeting certain emissions-reduction targets by 2030 and 2050; meeting these targets will require unprecedented investment in clean energy and other pathways to decarbonization. The cap-trade-and-invest program offers a way to incentivize emissions reductions while generating revenue for the state that can be used to accelerate decarbonization of the economy and offer financial support to households. New York State could raise between $6 billion and $10 billion in revenue depending on the price of emissions allowances, with a third of that money likely going right back to New Yorkers in the form of cash payments or credits for utility bills, according to an analysis from the New York State Energy Research and Development Authority (NYSERDA) and the New York State Department of Environmental Conservation (DEC).
Instead of proceeding with the cap-trade-and-invest program in the near term, the governor announced a plan to invest $1 billion this year in efforts to promote electrification and energy efficiency. This investment could help spur electrification and reduce household exposure to higher fossil fuel prices under a future cap-trade-and-invest program, but a $1-billion investment is much lower than what would be possible if revenue were being raised through cap-trade-and-invest, particularly if policymakers let the price of emissions allowances rise to levels that reflect the statutory emissions-reduction targets. (These levels are reflective of a “price ceiling” that is commensurate with emissions-reduction targets.) The cost of transitioning all homes to heat pumps could require on average $5.7 billion per year until 2035, with the spending split between federal subsidies, state subsidies, and out-of-pocket costs for households, according to an analysis from Switchbox. (This figure includes the cost of installing heat pumps and the cost of weatherization for homes that require efficiency upgrades before installing a heat pump.) With the future of federal subsidies uncertain, New York State may need to offer more financial support to achieve electrification and decarbonization goals.
Research from Resources for the Future (RFF) and others offers evidence that distributing a portion of revenues from a cap-trade-and-invest program back to households (through direct-cash rebates and investments in decarbonization efforts) can cover typical increases in household expenditures that are due to carbon pricing. Further, many households could be better off financially, in a scenario with a cap-trade-and-invest program compared to a scenario without a program, when these rebates are larger than a concomitant increase in household expenditures. In a recent RFF analysis, researchers find that a cap-trade-and-invest program with a high allowance price and targeted payments to households could save lower-income households hundreds of dollars in 2030 while still covering the average increases in expenditures for households that earn up to $200,000 per year (Figure 1).
Figure 1. Average Annual Household Costs and Savings from a Potential Cap-Trade-and-Invest Program in New York State in 2030, by Annual Income
NYSERDA and DEC also found that, while households could face net costs in the first year of the program, average low-income households could, on net, gain between $98 and $200 in 2030 after their cash payments, depending on the location of these households and assuming that the average household makes moderate investments in decarbonization investments and the highest modeled allowance price is used. These savings more than double under assumptions of greater household decarbonization. Earlier work from RFF also shows that shifting revenues from carbon pricing back to households can lead to net gains for lower-income and many middle-income households that spend less on fossil fuels than their higher-income peers. Overall, the revenues from a cap-trade-and-invest program can be an important part of supporting households during the transition to clean energy.
A delay in implementing the cap-trade-and-invest program has negative consequences beyond smaller subsidies for clean energy and electrification and lost opportunities to issue payments to households. Billions of dollars in health and climate benefits, which can be realized by reducing emissions and air pollution, also would be forfeited or delayed. Even if the 2030 emissions-reduction target is met, delayed action means more emissions in the meantime, which adds to the total cumulative emissions in the state. NYSERDA and DEC have estimated that a cap-trade-and-invest program with a high allowance price between 2025 and 2030 would reduce 49.1 more million metric tons of carbon dioxide equivalent relative to a case without a cap-trade-and-invest program. Those emissions reductions avoid more than $9 billion in reduced climate damages, using RFF’s $185 estimate of the social cost of carbon, which is the cost to society of emitting an additional ton of carbon dioxide. NYSERDA and DEC also have estimated that reductions in negative health impacts due to improvements in air quality could deliver another $2.9 billion–$6.5 billion in benefits to New York State by 2030. If the program is delayed, those benefits could be delayed, as well; what remains unclear is how much of these benefits could be achieved by the $1 billion in investments that the governor announced. While delayed action may give households and businesses more time to make investments that align with future climate policy, a weak signal from the state also may lead households and businesses to continue investing in fossil fuels, which increases the cost of achieving state emissions-reduction goals and slows the pace of decarbonization.
New York State remains a leader among US states in terms of developing policies to address climate change. But to cost-effectively meet emissions-reduction goals, the price of fossil fuels should more accurately reflect the environmental damages from using these fuels. Research from both RFF and state agencies indicates that the funds raised through a cap-trade-and-invest program can not only address concerns about the affordability of a transition to clean energy, but also can make many households in New York State better off financially, compared to a scenario without a cap-trade-and-invest program.
Even if the program is delayed, assurance from the governor that the program will be implemented can help continue forward momentum and offer stakeholders clarity and confidence about implementation in the future. If households and businesses are confident that carbon pricing is coming, they may be more likely to invest in electrification and energy efficiency. In addition, other states that are considering similar programs also may be encouraged to push ahead if these states have greater confidence that the cap-trade-and-invest program in New York State is on the horizon.
