Climate 411

Locking in the U.S. NDC: New report finds policy combined with IRA can ensure significant power sector reductions and major benefits

By Ian Lloyd / Published: September 3, 2024

Photo Credit: Laura Penwell via Pexels

As we race to decarbonize the economy this decade, the Inflation Reduction Act (IRA) has provided an enormous economic opportunity for the clean energy industry. With costs of deploying clean energy solutions becoming so low, we are in a critical window of time to adopt new carbon policies and lock in “cost-optimal” model projections and go beyond them to realize a pathway for the U.S. that’s consistent with a 1.5°C warming trajectory.

However, according to a recent report by the Rhodium Group (RHG), the United States is not on track to meet its nationally-determined contribution (NDC) goal of 50-52% economy-wide emissions reduction in 2030 from 2005 levels, with RHG projecting a reduction of only 32-43%.

With this carbon policy imperative in mind, a new peer-reviewed journal article, building on a report by Resources For the Future (RFF), demonstrates how policies that constrain carbon emissions in the power sector could unlock the full potential of IRA incentives in order to achieve the economy-wide goal of 50-52% emission reductions from 2005 under the U.S. NDC, with 80% emission reductions in the power sector.

Electricity Sector Carbon Emissions

The article finds that combining a carbon cap with the IRA significantly drives down the cost of achieving reductions to meet the cap. Modeling showed a marginal abatement price of $27/ton to achieve 369 million tons of additional abatement and reach 80% power sector emission reductions by 2030, compared to 2005 levels, which is nearly 60% cheaper when compared with model scenarios that only have a carbon cap, without the IRA. The combination of a carbon cap with the IRA would also lower consumer costs this decade to roughly $114/megawatt hour (MWh), compared to $117/MWh without either policy in place, and create significant net climate and health benefits due to deeper reductions in fossil fuel pollution.

Net Social Costs and Benefits

Background

The U.S. NDC is ambitious and aligned with recent COP28 decisions consistent with keeping a 1.5°C warming trajectory within reach. Achieving the NDC would demonstrate global climate leadership and be significant, given that the U.S. contributes about 11% of global emissions. The power sector is the core component for achieving the NDC, with numerous studies continuing to show that the majority (about two-thirds) of near-term abatement is projected to have to come from the power sector. Moreover, the power sector plays a key role in decarbonizing the economy through electrification of other sectors such as buildings, transportation and heavy industry.

To reach the 2030 target, U.S. power sector emissions need to drop by roughly 80% by 2030, compared to 2005 levels, or “80×30”. This goal will require rapid acceleration of electric power sector decarbonization, striving to triple the annual deployment of new clean energy projects and phase out fossil fuel pollution — consistent with the COP28 pledges.

Recent federal and state-level policy actions are accelerating progress towards 80×30. The IRA and the Infrastructure Investment and Jobs Act (IIJA) have changed the economics of decarbonizing the power sector and paving the way for a cost-optimal pathway to clean energy. If realized, this pathway, in tandem with state policies and company-level actions, could contribute to a significant portion of the emission reductions needed in the power sector and across the economy to meet the NDC target. However, there are both risks to locking in the cost-optimal trajectory under the IRA projected by models and opportunities to go beyond the IRA in order to fully unlock the potential of the power sector to drive progress to the NDC target.

We are already seeing a powerful effect from the incentives in the IRA, which are projected to unlock around $390 billion of spending on energy and climate through 2022-2031. Of this amount, around $160 billion (41%) is expected to be spent on tax credits for clean electricity, underlining the significant investment the IRA makes in the power sector transition and the importance of maximizing its implementation. The tax credits are also uncapped, in that there is no limit in the legislation that restricts government spending on them.

The problem

Despite this promise, a wide range of model projections reflect uncertainty in the degree and magnitude of IRA implementation as well as other pressures such as increased demands and risks to faster clean deployment. Model projections assume “cost-optimal” conditions whereby decisions to build, maintain, and/or retire power generation are optimized for system costs, which may differ from real-world investment decisions.

According to a study examining multiple models, power sector emissions are projected to fall by 47-83% below 2005 levels in 2030. RFF’s power sector modeling is consistent with this range, projecting a decrease of 44-63%, falling short of 80×30. And across the economy, reductions from the IRA are projected to be 33-40% below 2005 levels in 2030 with a 37% average, below the 50-52% the NDC target.

The solution

The challenge ahead of us for the power sector is to lock in these cost-optimal trajectories and maximize the potential benefits of the IRA — AND close the gap to reach 80×30. The RFF report offers a potential policy solution by combining the IRA incentives with a carbon emissions cap that constrains the total amount of carbon dioxide emissions in the power sector over time, and ensures that electric demand must be increasingly met by zero-emissions electricity generation. While the RFF analysis looked at the interaction of the IRA and emissions cap policies at the federal level, the same dynamics exist with state or regional caps as well.

Model methodology and scenarios

RFF used the Haiku model — a national capacity expansion model that reflects supply and demand at the State level and optimizes for system cost with a given set of inputs and policy conditions.

RFF’s model tests several scenarios, which include:

  1. Baseline: A “pre-IRA baseline” scenario that does not include the IRA;
  2. IRA: An IRA “Business-as-Usual” scenario that includes current policies;
  3. Cap mimic IRA:
  4. IRA + 80×30 cap: A scenario that combines the IRA with a carbon emissions cap to ensure 80×30 is reached; and
  5. 80×30 cap: A “Cap Only” scenario, for comparative purposes, that uses a carbon emissions cap to reach 80×30 without the IRA in place.

Key Findings

1.  A nationwide Carbon Emissions Cap can lock in the IRA at no additional cost: Including a carbon emissions cap with a carbon price on fossil fuel pollution will further incentivize uptake of IRA incentives to lock in the upper range of projected emission reductions and a shift to clean energy generation, and spur a faster transition away from coal generation in particular.

Change in Generation Mix in 2030 Relative to 2020

2.  A Carbon Cap is needed to achieve 80×30: The RFF model scenarios finds a carbon emissions cap combined with the IRA will both

  • lock in IRA abatement projections to maximum effect and provide certainty over the emissions outcome; and
  • close the gap on the 80×30 target at much lower incremental cost. The average resource cost of achieving 80×30 is $31/ton under the “IRA+CAP” scenario.

3.  The IRA dramatically reduces the cost of getting to 80×30 — slashing the cost per ton of emissions by nearly 60%: Reaching 80×30 in the “Cap only” scenario has a marginal abatement cost of $67/ton, while for the “IRA + CAP” scenario the marginal abatement cost is $28/ton — or about 58% lower with the IRA in place. This finding demonstrates how powerful the combination of the IRA with an emissions cap could be for reaching 80×30, and, therefore, the NDC target.

4.  A Carbon Cap combined with the IRA drives overall reduction in consumer costs: Energy prices are lower in the “IRA + CAP” scenario compared to the pre-IRA baseline ($112/MWh compared to $117/MWh for averaged across 2023-2032), which particularly benefits low- and mid-income consumers who pay a larger fraction of their income on utility bills. This outcome is due to the IRA incentives placing a downward shift in retail prices as the costs of clean generation that would have been paid by electricity ratepayers are shifted to taxpayers. While the carbon cap accounts for the cost of fossil fuel pollution and accelerates phase out of coal and uptake of renewables — while still extracting revenue from polluters — this is balanced by shift away from ratepayers under IRA incentives that does not impact consumer prices.

5.  A Carbon Cap combined with the IRA leads to major net health climate benefits: The “IRA + CAP” scenario shows climate and air quality health benefits that substantially outweigh resource costs, with a net benefit of $226 billion. This outcome is driven by an improvement of roughly 80% in additional air quality benefits, reflecting lower SOx and NOx emissions from coal generation. This finding further emphasizes that a limit and/or price associated with ongoing CO2 emissions is critical to driving down coal capacity and consumption and avoiding harmful pollution — with coal generation falling from 562 tera-watt hours (TWh) under the IRA, to only 110 TWh for the “IRA + CAP” scenario.

Recommendations

RFF’s journal article clearly illustrates how an additional carbon policy could work at the federal level, but there’s also a critical role for State- and company-level actions. For example, efforts such as the Regional Greenhouse Gas Initiative (RGGI), North Carolina’s Carbon plan and regulator efforts across 25-member U.S. Climate Alliance that concretely create an obligation to reduce emissions are necessary to close the emissions gap to 80×30. Power companies and utilities also have a major role in realizing the “cost optimal” model outcomes and developing and executing plans that maximize IRA incentives, reduce customer costs and realize social and environmental benefits.

With clean energy deployment costs plummeting, it is essential to act fast and build on the impacts of the IRA by putting in place additional policies to reduce carbon emissions — at all levels — that lock in cost-optimal model projections and go beyond them to reach the U.S. NDC target.

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Setting an 80 by 30 target is critical for the third RGGI program review, new EDF modeling shows

By Peter Della-Rocca and Tom Brindle / Published: July 26, 2024

As the Regional Greenhouse Gas Initiative (RGGI) undergoes its third program review, it is critical that the program scale its ambition to both meet the demands of the climate crisis and to fully capitalize on the cost-saving potential of the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA).

Ensuring ambitious reductions in carbon pollution before 2030 is key to both these objectives. A RGGI cap that aligns with at least 80% emission reductions from a 2005 baseline by 2030 (80 by 30) would reduce cumulative emissions by 182 million tons (between 2025 and 2035) relative to a straight-line trajectory to zero emissions by 2040. Reaching at least 80 by 30 in the power sector is a critical step to achieving the United States’ 2030 economy-wide commitments in line with the U.S. Nationally Determined Contribution (NDC) under the Paris Agreement, and the RGGI states should lead the way. It will also significantly increase the value of the IRA funding currently flowing into the RGGI region.

Power sector modeling commissioned by EDF demonstrates that RGGI states can achieve at least this critical level of abatement while keeping costs low. Aligning the cap trajectory with at least 80 by 30 is a “no regrets” decision that would put the RGGI region on a path consistent with nationwide climate targets. In fact, EDF’s modeling shows that RGGI could go beyond 80 by 30, implementing an 85 by 30 interim cap, achieving even greater emissions reductions at modest cost.

On top of this, near-term reductions in the power sector are crucial to enabling the effective decarbonization of other sectors. A cap aligned with at least 80 by 30 is a strong foundation on which to drive the decarbonization of transport, buildings and industry.

Near-term action is critical

As EDF has argued before, setting an 80 by 30 interim target leads to better results than simply targeting reductions either by 2035 or by 2040 — the two budget trajectories that have been modeled by the RGGI states. A program with no 2030 target will leave critical carbon emission reductions on the table at the precise moment that climate impacts are accelerating and the U.S. is sprinting to deliver on its NDC. Decreasing economywide emissions 50-52% by 2030, as the U.S. NDC requires, will necessitate rapid emissions cuts in the power sector, as electricity is a large source of low cost abatement and a necessary precondition to decarbonizing sectors like transportation and industry where electrification is key. In fact, analysis after analysis indicates that at least an 80% cut in power sector emissions is a critical linchpin for achieving our economy-wide decarbonization commitments on the 2030 timeline.

Limiting the supply of allowances in the early years incentivizes rapid reductions in carbon dioxide emissions, leading to lower cumulative emissions over the study period. CO2 can persist in the atmosphere for centuries, meaning that every year a facility continues emitting, it is contributing more to the stock of CO2 in the atmosphere. Cumulative emissions of long-lived climate pollutants like carbon dioxide, the stock of pollution built up in the atmosphere, largely govern the maximum warming — and associated impacts — we will experience. As a result, the program’s performance on a cumulative basis is a critical measure of its overall climate benefits.

RGGI states need to do two things to improve program performance

First, with 2030 fast approaching, it is critical that the RGGI states quickly and decisively finalize the program review and put a new, ambitious cap into place. The sooner such a cap is adopted, the greater its effect will be on cumulative emissions, as facilities that could be taking additional abatement measures today instead continue to produce greenhouse gases under the significantly less ambitious current cap. Every year up to 2030 that the current cap remains in place leads to an additional 19-34Mt of emissions, relative to moving to a 0x40 cap or 24-62Mt relative to an 80 by 30 cap.*

Second, the cap needs to be as ambitious as possible on the 2030 time-horizon, which will improve cumulative performance and ensure these leadership states are actually achieving power sector reductions aligned with what is necessary to hit U.S. goals under the Paris Agreement.

Ambitious 2030 targets drive considerable additional cumulative emissions reductions, relative to adopting a cap with a straight-line trajectory to zero.

Compared to a zero by 40 cap alone, a zero by 40 cap with an 80 by 30 interim target would yield 19% lower cumulative emissions between 2025 and 2040. Implementing an even more ambitious 85 by 30 cap would lower cumulative emissions 30% relative to a straight path to zero by 2040.

Moreover, the chart above shows that if the RGGI states adopted a cap that went through 80 by 30 on the way to zero by 40, the increased near-term reductions would mostly compensate for the longer run up to deep decarbonization, relative to the zero by 35 scenario. Securing those reductions now, while they are significantly cheaper, would help the program achieve serious environmental ambition at low cost.

These potential savings indicate the stakes of the current program review progress. Should RGGI Inc. pursue an ambitious path forward, the region could see cumulative emissions fall considerably. The certainty of a firm cap will incentivize covered entities to act quickly, while further delay in the program review process — and a less ambitious near-term (2030) trajectory — will result in slower action.

EDF’s modeling approach

EDF’s new analysis evaluates a range of potential caps under various cost, electricity demand and policy design assumptions using FACETS, a multi-region energy system model used for power sector analysis. The model was used to demonstrate how different cap trajectories affect allowance prices, emissions, and electricity costs across a range of policy scenarios.

EDF’s modeling is intended to complement the modeling conducted on behalf of RGGI Inc. by ICF. Like ICF, EDF modeled deep decarbonization of the RGGI participants’ power sectors by 2035 and 2040 but modeled these caps both with and without an interim 80 by 30 target. EDF also tested the impact of different banking rules, leakage mitigation and the Emissions Containment Reserve (ECR) and Cost Containment Reserve (CCR).

Beyond cap and policy options scenarios, EDF tested the impact of cost assumptions for renewables and natural gas, as well as high electricity demand through a range of sensitivities.

FACETS does not solve for zero emissions, instead using a 95% emissions reduction (over 2005 levels) as an approximation of net zero.

This analysis complements ICF’s modeling using IPM, by using broadly similar assumptions and demonstrates that a more ambitious cap on the 2030 time horizon can yield very significant emissions benefits at very low cost.

High ambition at low cost

These emission reduction benefits can be achieved with a low price tag. When the cap includes an 80 by 30 interim target on the way to deep decarbonization in 2040, allowance prices remain below the recent RGGI average through 2030, and even through 2040, average allowance prices remain at or below the ECR trigger level. The RGGI system could even go beyond 80 by 30 at modest cost. Under an 85 by 30 cap, allowances prices remain near the ECR trigger price for roughly a decade and fall below the ECR trigger after 2035. Throughout the entire study period, allowance prices remain well below the CCR trigger under an 85 by 30 cap. As illustrated earlier, this cap trajectory yields considerably lower emissions, indicating that cheap abatement opportunities are readily available in the region.

Further, the EDF analysis shows that a more ambitious cap has only a modest impact on electricity costs. The cost of delivered electricity follows a similar trajectory in scenarios with and without the 80 by 30 interim target, in spite of the emissions benefits the near-term target achieves.

Wholesale electricity costs are expected to rise over the next decade in the RGGI region, whether or not the cap is tightened. A 2040 deep decarbonization cap does not push these costs up much further and an 80 by 30 interim target does very little to drive costs up beyond that. Ultimately, gas prices and high electricity demand represent much larger upside risks to electricity prices regardless of the cap scenario. Under reference gas price and demand assumptions, an 80 by 30 cap is associated with at most a roughly 2% increase in electricity prices. To the extent that increase in wholesale prices is reflected in actual consumer bills, the impact is likely to be even smaller than 2%, as retail electricity prices include other costs and states are often deploying other strategies, including using RGGI revenue, to help lower customer bills.

The low cost of ramping up RGGI’s ambition is attributable in part to the investments made by the IRA. A November 2023 analysis from Resources for the Future modeled a nationwide 80 by 30 cap with and without the IRA, finding that inclusion of the IRA is associated allowance prices 43-66% lower than under the cap alone. While the RFF analysis considered a nationwide cap, the same fundamental dynamic is at play in the RGGI system. That is, the IRA buys down the cost of clean energy resources, easing the cost burden of electricity providers substituting away from fossil fuels.

It is the perfect moment for RGGI to take advantage of the IRA investments, leveraging the significant cost declines to lock in policy frameworks to ensure emissions abatement at significantly lower cost.

Conclusion

EDF modeling results clearly show that more ambitious caps for the RGGI system — caps that actually match the ambition necessary from the electric power sector — will not drive up costs. Enacting a cap that requires at least an 80% reduction below 2005 levels by 2030 would generate significantly greater climate change mitigation benefits without meaningfully impacting electricity prices. The RGGI states should prioritize including this interim pollution reduction goal in their third program review.

 

* The difference in annual emissions between cap trajectories varies from year to year, with caps beginning to diverge in 2026. The difference between the BAU cap and more ambitious caps general increases in the later years, as the BAU cap levels off after 2030 but other caps continue to decline.

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Five years into New York’s climate law, the state needs a bold cap-and-invest program to bring emissions goals into reach

By Kate Courtin / Published: July 25, 2024

This blog was co-authored by Lulu August, State Climate Policy Intern

This month marks five years since New York State’s Climate Leadership and Community Protection Act (CLCPA) was signed into law. At the time of its enactment in 2019, the groundbreaking climate law set New York apart as a national and global climate leader.

Indeed, action in line with the CLCPA’s emissions and environmental justice requirements would be transformative — promising a safer future, cleaner air and good-paying jobs in the growing clean energy economy for New Yorkers today and for future generations.

Five years in, however, New York does not yet have the rules in place to deliver on the climate law and all the promise it holds for New Yorkers.

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Navigating Jurisdictional REDD+: A Pricing Guide for Tropical Forest Nations

By Dylan McCall-Landry and Dave McLaughlin / Published: July 11, 2024

The challenge is clear: if tropical deforestation were a country, it would rank fourth, only behind China, the US, and India in emissions. However, the solution is even clearer: these same forests can provide 23% of the cost-effective climate mitigation needed before 2030, if the right economic incentives are in place.[1]

Despite numerous pledges, forest loss shows little sign of abating. The cost of protecting all forests at high-risk of deforestation by 2030 requires $130 billion in annual funding while existing financing is only $2-3 billion.[2] Bridging this gap will require public, private, and philanthropic funding on a scale and at a speed we have never seen before.

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Despite threat of repeal, Washington state’s carbon market continues to raise urgently-needed revenue for communities in The Evergreen State

By Caroline Jones / Published: June 12, 2024

Photo of Mount Rainer

Results were released today for Washington’s second quarterly auction of 2024, administered last Wednesday by the Department of Ecology (Ecology). During the auction, participating entities submitted their bids for allowances. Under the Climate Commitment Act, Washington’s major emitters are required to hold one allowance for every ton of greenhouse gas that they emit, with the total number of allowances available declining each year. This requires polluters in Washington to reduce their emissions in line with the state’s climate targets. By distributing allowances via auction, the state can both regulate emissions and raise important revenue to invest in frontline communities, accelerate clean job creation, and more.

Here are the results, released today:

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California’s second carbon market auction of the year raises revenue at critical time for climate funds

By Caroline Jones / Published: May 30, 2024

This blog was co-authored by Sara Olsen, Project Manager, California Political Affairs

Results of the latest Western Climate Initiative auction were released today, showing continued demand for allowances and confidence in the long-term stability of this landmark program. This auction is expected to generate roughly $1.1 billion for the Greenhouse Gas Reduction Fund (GGRF), which is dedicated to funding initiatives aimed at reducing greenhouse gas emissions and building climate resilience.

A new report from the California Air Resources Board (CARB) finds that, in the past 10 years, climate investments like GGRF have reduced California’s emissions by 109.2 million metric tons — the equivalent to taking 80% of the state’s gas cars off the road — by investing in projects like adding zero-emissions transport options, building affordable housing near job centers and more. As California heads into another summer with an increased risk for wildfire and more impacts of climate change are becoming increasingly severe and evident, the importance of this fund is clearer than ever.

May auction results

  • All 51,589,488 current vintage allowances offered for sale were purchased, resulting in the 15th consecutive sold out auction. This is 0.72% or 373,000 more allowances than were offered at the previous auction.
  • The current auction settled at a price of $37.02, $12.98 above the $24.04 price floor and $4.74 below the February 2024 settlement price of $41.76.
  • All of the 7,211,000 future vintage allowances offered for sale were purchased — these allowances can be used for compliance beginning in 2027. This is the same number of future vintage allowances that were offered at the previous advance auction.
  • Future vintage allowances settled at $38.35, $14.31 above the $24.04 floor price and $2.65 below the February settlement price of $41.00.

What factors may be at play with these results?

A number of factors could be at play with today’s results which saw a lower settlement price than California’s most recent auction. The first is general market variability; potential program changes, such as those being considered by CARB, can drive uncertainty among market participants that results in price fluctuations. While prices in the WCI auctions tend to tick upwards, it’s not uncommon for prices to drop once in a while. This happened most recently in the August and November auctions in 2022, where prices dropped from the May 2022 price of $30.85 down to $27, and then down to $26.80 before starting to trend upward again. Last auction’s settlement price of $41.76 was a record price by $3.03, so today’s price puts the WCI market more on trend with where prices were in November and August of last year. Despite slightly lower prices this quarter, there’s still strong demand overall; the auction was completely sold out. The market continues to be stable, and some price fluctuations are to be expected, especially during periods of program adjustment.

Where is the revenue getting invested?

Over the past ten years, California delivered $11 billion from the Greenhouse Gas Reduction Fund (GGRF) to more than half a million projects that cut pollution and mitigate the impacts of climate change. These investments yield meaningful environmental and community benefits, including a 109 million metric ton reduction of greenhouse gas emissions, 1,248 new or expanded transit projects, 29,800 new jobs, and 12,606 affordable housing projects under contract.

The $1.1 billion in revenue for GGRF from this auction comes at a critical moment, as California grapples with a $27.6 billion budget deficit. As the Governor and policymakers explore budget strategies, climate initiatives face the looming threat of funding cuts. In January, Governor Newsom proposed more than $3.1 billion in cuts and more than $5 billion in delays for climate funding. In the May Revision of his 2023-24 Budget Proposal, Governor Newsom proposed over $3 billion in additional cuts to significant climate investments. The proposal also reallocated funding for various climate programs to GGRF, relying on this source to alleviate the effects of the budget deficit.

Cap-and-trade, through emissions reductions and revenue generation, will be pivotal in addressing California’s current budget and climate challenges. The State’s reliance on the Greenhouse Gas Reduction Fund as a lifeline for essential climate initiatives only further underscores the need for these funds to be allocated strategically and exclusively towards climate and environmental justice priorities.

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