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Market-Based Approaches to Decarbonization

Brattle experts have advised government regulators and system operators on the effective design and implementation of carbon policies into wholesale competitive markets. Our work considers the economic principles underpinning good policy design, the existing system, and the political realities. In particular, we have supported clients regarding the proposed Clean Power Plan rulemaking, AB32 in California, the Regional Greenhouse Gas Initiative (RGGI), and initiatives to incorporate decarbonization goals into wholesale market design. We have worked with market participants to identify the effect such policies might have on operations, risks, and asset valuations.

Engagements
REPRESENTATIVE ENGAGEMENTS

Below is a list of representative engagements for our Market-Based Approaches to Decarbonization practice.

Evaluation of an ISO-administered carbon charge
For the New York ISO (NYISO), Brattle experts analyzed the effect a $/ton carbon charge would have on carbon emissions and customer costs. The carbon charge would be administered by NYISO in the dispatch process to all carbon-emitting generators, and all collected carbon charges would be refunded to customers. The carbon charge would supplement existing New York clean energy policies such as the Clean Energy Standard (CES). Our work includes evaluating customer cost impacts, and options for preventing leakage of emissions to other states. We also assess how such an approach supports the state’s objectives and interacts with the Regional Greenhouse Gas Initiative (RGGI) and other existing policy instruments.
Review of international carbon mechanisms
For an RTO, Brattle experts conducted a survey of international carbon pricing, cap-and-trade, and rate-based mechanisms. We provided a detailed review of design elements of the mechanisms implemented in Europe, California, Alberta, and the Regional Greenhouse Gas Initiative (RGGI). We also evaluated a range of alternatives for implementing the Clean Power Plan across states while effectively integrating with wholesale markets.
Evaluation of wholesale electricity market interactions with different carbon policy designs
For the electricity regulator of an international market, Brattle experts evaluated the policy and market design options for implementing the government’s carbon policy within the guidelines of the policy constraints. We surveyed the advantages, disadvantages, and likely price impacts of rate-based and mass-based mechanisms in electricity market, interactions with the broader economy-wide offsets market, potential implications for the total national carbon budget, investment/retirement implications, approaches to accommodating new entry, interactions with current renewables standards, and alternative mass allocation approaches. Based on the regulator’s priorities and constraints, we designed two comprehensive policy design options that minimized the potential for investment and dispatch inefficiencies, one with a rate-based standard and one with mass-based.

For a U.S. consortium of electric utilities, Brattle performed a similar evaluation of the merits of a cap-and-trade versus carbon tax approach to GHG pricing. The report considered the consequences of volatility in the price of emissions versus the uncertainty in quantity of realized emissions reduction that would result from the two different approaches. It also evaluated the effects of price uncertainty on likely willingness of power plant owners and environmental control developers to make long-term investments in new emissions control technologies, as well as effects on tax revenues available for redistribution to customers or generators with stranded costs.

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