Minn. judge recommends adopting federal ‘social cost’ of carbon

Source: Daniel Cusick, E&E reporter • Posted: Wednesday, April 20, 2016

A state judge has recommended that the Minnesota Public Utilities Commission apply the federal “social cost of carbon” calculation to determine how new energy projects affect the environmental health and well-being of the state.

In a nonbinding opinion handed down Friday, Judge LauraSue Schlatter declared the federal calculation “as reasonable and the best available measure to determine the environmental cost of CO2” when evaluating the impacts of energy projects in Minnesota.

That means new carbon-emitting energy projects will have to factor for externality costs of between $11 and $57 per ton of carbon dioxide, significantly higher than the state’s current carbon cost estimate of 44 cents to $4.53 per ton, experts say.

As with other administrative judicial opinions, Minnesota’s five-member PUC will have the option to accept or reject Schlatter’s findings, or it can proceed in a different direction using the opinion as a guide. All five commissioners were appointed by Gov. Mark Dayton (D), a strong supporter of clean energy policies.

While open to some interpretation, the social cost of carbon (SCC) generally refers to the range of negative outcomes associated with CO2 emissions, including rising average temperatures, rising sea levels, more frequent and intense weather events, and stress to wildlife and ecosystems.

Minnesota has factored for the cost of carbon emissions in energy policymaking since 1997, when carbon costs were estimated to range between 30 cents and $3.10 per ton. In the 19 years since, the figure has been adjusted upward only for inflation.

The federal SCC calculation (SC-CO2) emerged from an Obama administration working group convened in 2009 to explore the latest science on the relationship between carbon emissions and environmental health, then identify a cost of carbon to help monetize the impact of federal regulations on citizens and communities. The working group published its recommendation in 2010 and an update in 2013.

Xcel Energy exploring ranges

Friday’s opinion was viewed as a significant victory for clean energy advocates, nonprofit groups and state agencies, many of which had asked the PUC to adopt the federal carbon calculation in a series of hearings held last year in St. Paul.

“Using updated social cost of carbon values will give the PUC more information about the external damages inflicted on society by burning fossil fuels, and will help in its decisions about future investments in electricity generation in Minnesota,” a coalition of nonprofits led by the Minnesota Center for Environmental Advocacy and Fresh Energy said in a statement.

Stephen Polasky, a regents professor of economics at the University of Minnesota, estimated that pollution from fossil fuel power plants cost Minnesota more than $2.1 billion annually in health and environmental impacts, including doctor and hospital visits for conditions exacerbated by poor air and climate change.

Others who testified before the judge were nationally and internationally renowned climate scientists, as well as representatives of electric utilities, large industrial power users and Peabody Energy Corp., the nation’s largest coal company that filed for Chapter 11 bankruptcy protection last week.

A spokesman for Xcel Energy Inc., Minnesota’s largest investor-owned utility, said in an email that the company is still reviewing the opinion to see how it affects Xcel’s Upper Midwest operations. The utility has already taken significant steps to reduce its carbon emissions, including the closure of several large coal-fired generation units by the mid-2020s.

In testimony last year, Xcel said it was open to an upward revision to the state’s cost-of-carbon estimates. But it proposed the PUC use “a range of externality values” that would be evaluated on a project-by-project basis and subject to discount rates of between 2.5 and 5 percent.

Under such a system, Xcel’s expected range of carbon costs was as little as $2.07 per ton and as high as $102 per ton. A more refined calculation, relying on the 25th and 75th percentiles of projects, narrowed Xcel’s cost range to between $12.33 and $44.80 per ton.

Peabody argues coal costs nothing

In contrast, Peabody Energy testified that a fair cost of carbon was $0, arguing that the burning of fossil fuels was essential to economic growth and that no alternative energy source could provide low-cost, reliable electricity the way that coal did.

Peabody further testified that Minnesota’s adoption of a higher price for CO2 would drive new business out of the state and that electricity rates would increase for Minnesota residents who “would be lucky if they get 1 percent of the benefits of this costly program.”

Both Peabody and Xcel raised concerns about leakage, a problem created when efforts to reduce carbon emissions in one location result in the shifting of carbon-intensive activities and carbon pollution to another area, such as a neighboring state.

But others, like the St. Paul-based nonprofit Wind on the Wires, countered that “proper valuation of the costs associated with the environmental pollution … will send the right signals to the market to ramp up industries that can create jobs, strengthen the economy, and help support a cleaner and healthier environment.”

Clean energy advocates say that estimates of the social cost of carbon are much more reliable today than in 1997 since the impacts of climate change are better understood and scientific consensus has grown around the role that CO2 and other greenhouse gases have in a warming climate.

Other interest groups, however, remain concerned about how an increase in the social cost of carbon would be absorbed by Minnesota ratepayers and how utilities will shift generation toward higher-cost forms of energy.

Bill Blazar, senior vice president of the Minnesota Chamber of Commerce, said his organization was closely studying the opinion and will decide whether to file comments with the PUC. Exceptions to the report are due within 20 days, and replies to exceptions within 10 days of exceptions.

“Minnesota has incorporated a cost of carbon for several years, so we understand this is going to be part of the equation,” Blazar said. “The challenge for the commission is as it adopts a new cost of carbon, it needs to make sure that electric rates reflect the costs of serving all of the state’s customers,” and that the costs are not disproportionately shifted to commercial and industrial customers.