Published July 28, 2017
On Thursday, the Minnesota Public Utilities Commission voted 3-2 in favor of raising the cost of air pollutants from power plants: carbon dioxide, nitrogen oxides, sulfur dioxide, and particulate pollution. The value receiving the most attention is the updated social cost of carbon emissions, increasing to a range of $9.05 to $43.06 per short ton beginning in 2020. Customers do not pay for the cost of pollution on their utility bills, but these pollutants do have costs on society through health and environmental damages. The updated social costs will factor into determining whether natural gas, wind, solar or other energy sources are the most cost-effective resource when a utility is adding new electricity generation to their system.
The deliberations at the PUC brought in parties from around the state with a stake in this decision from investor-owned utilities such as Xcel and Minnesota Power, cooperative utilities, and environmental groups. Each proposed their own cost of carbon value that would play an important role in deciding the state’s energy future. This begs the question: what is the social cost of carbon, and how will it affect consumers in Minnesota?
What is the Social Cost of Carbon?
The social cost of carbon attempts to put a value on the climate impacts created by a ton of carbon emissions. The social cost of carbon includes a variety of potential damages including health and environmental deterioration, agricultural productivity, and damage caused by more severe weather patterns. Using various models, analysts can estimate a present value of the costs associated with climate change.
Minnesota was one of the first states to implement a social cost of carbon back in the ‘90s, with the federal social cost of carbon following in 2009. Minnesota’s current valuation is a range of $0.44 to $4.53 per ton of carbon emissions. The federal standard ranges from $11 to $56 per ton. This most recent decision saw the Department of Commerce and environmental groups proposing Minnesota adopt a social cost of carbon in line with the federal standard, while utilities have provided their own evaluations that are below the federal cost. For example, Xcel has proposed a social cost of carbon ranging from $12.13 to $41.40 per short ton.
The social cost of carbon estimates the monetary cost of future carbon emissions that uses a discount rate to compare those costs in today’s dollars. The discount rate essentially works opposite of an interest rate. It calculates how much money would need to be invested today to cover the damages in the future. The reason we see a range in the value is due to the variety of discount rates and time periods used in the modeling. Most models use a 2.5%, 3%, and 5% discount rate to account for a variety of potential future scenarios. The lower the discount rate, the higher the present value of the social cost of carbon value will be. Similarly, including damages for a longer period will increase the social cost of carbon.
It is the many different assumptions that are made in these models that create uncertainty when estimating the social cost of carbon. The uncertainty surrounding the appropriate costs to include or the future response to those costs such as technological change provides plenty of room for debate. In Thursday’s decision, regulators opted to eliminate the 2.5% discount rate from the calculation and estimated damages through the year 2100 for a lower estimate and again through the year 2300 for a higher estimate. The federal standard includes the 2.5% discount rate and includes a longer time period for damages to accumulate which is why we see a higher federal cost.
How is the Social Cost of Carbon used?
Most importantly, consumers will not see a new item on their bills to pay for the social cost of carbon. What the updated social cost of carbon could impact is where our electricity comes from, since Minnesota takes these values into consideration on utility resource planning. The higher cost of carbon emissions will impact the cost-competitiveness of natural gas plants when compared to carbon-free generation such as wind, solar, and nuclear. The cost of carbon will play an important role as coal and nuclear plants are no longer a cost-competitive option and will need to be replaced in the coming decades.
The new social cost of carbon provides a more comprehensive assessment for regulators and utilities when determining the best sources of electricity. This updated value will assist utilities with the transition to a cleaner energy portfolio and consumers will notice the benefits from reduced health and environmental costs that are created by the pollutants in electricity generation from fossil fuels.
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