Proxy Carbon Pricing: A Tool for Fiscally Rational and Climate-Compatible Governance

8/18/2019 Proxy Carbon Pricing: A Tool for Fiscally Rational and Climate-Compatible Governance

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Proxy Carbon Pricing

A Tool for Fiscally Rational and Climate-Compatible Governanc

By Alison Cassady and Gwynne Taraska April 2016

WWW.AMERICANPROGRESS.O


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Proxy Carbon PricingA Tool for Fiscally Rational and

Climate-Compatible Governance

By Alison Cassady and Gwynne Taraska April 2016


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1 Introduction and summary

4 The proliferation of carbon pricing

8 Opportunities for government agencies to use a

proxy carbon price

11 Setting a proxy carbon price to inform government decis

13 Using a proxy carbon price in energy infrastructure

permitting decisions

17 Potential paths forward

19 Conclusion

20 About the authors and acknowledgments

21 Endnotes

Contents


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1 Center for American Progress | Proxy Carbon Pricing

Introduction and summary

As he world unies o figh climae change, more and more counries are urning

o carbon pricing as a means o reduce heir greenhouse gas emissions. By puting

a price on carbon, governmens can correc he marke’s ailure o accoun or

he climae coss o burning ossil uels; in so doing, carbon pricing mechanisms

encourage polluers o find cleaner, lower-carbon processes. Some counries

have adoped emissions rading sysems and carbon axes o esablish an explici

price on carbon, while ohers have urned o nonmarke regulaory policies ha

esablish an implici price on each on o polluion. I is reasonable o expec heserends o coninue as naions endeavor o ulfill he naional and global goals o

curb climae change ha hey esablished hrough he Paris agreemen in 2015.

Te ineviable shif o a low-carbon uure presens he world wih boh ransiion

risks and ransiion opporuniies: some projecs, echnologies, and invesmens

will become increasingly cosly or noncompeiive, while ohers will become

increasingly economical. Privae-secor acors are aking noice. A growing num-

ber o invesors, companies, and business-minded sakeholders are concerned

abou “carbon asse risk”he financial risk carried by ossil uel-inensive asses

ha may become sranded and lose heir value or viabiliy in a world wih sricer

limis on greenhouse gas emissions.1

As fiscally raional agens, companies are beginning o anicipae a price on car-

bon as hey evaluae he financial viabiliy o poenial long-erm projecs, even

i hey do no operae in a region governed by an explici carbon pricing insru-

men. Many companies assume ha a carbon price exiss o help guide long-erm

capial invesmen decisions, paricularly or invesmens involving ossil uels.

By evaluaing hese invesmens hrough he lens o a carbon price, companies

can avoid sranded asses ha hey would have o reire beore he end o heiruseul lives and mark as a loss on heir balance shees. Tis praciceknown

in he privae secor as shadow carbon pricing and reerred o generally in his

repor as proxy carbon pricinghelps sofen hese companies’ landings in he

impending low-carbon economy.


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Sae and ederal governmens do no have invesors. However, hey do represen

axpayers and raepayers who may have o shoulder he burden o energy inra-

srucure decisions and oher invesmens o public dollars ha do no make sense

in a world ha needs o decarbonize rapidly. Officials responsible or evaluaing

he environmenal and economic coss and benefis o governmen acion, such

as a decision o approve a new oil pipeline or power plan, have he responsibiliyo consider how ougher carbon limis could affec he viabiliy o projecs and

invesmens under consideraion. A proxy carbon price is one insrumen ha can

inorm governmen decision-making and provide a ramework wihin which o

deermine wheher a paricular choice makes long-erm climae sense.

Sae and ederal governmens have wo primary moivaions o use a proxy carbon

price o evaluae he long-erm financial viabiliy o heir invesmens and decisions

in a carbon-consrained world. Firs, governmen officials should be moivaed by

fiscal prudence and he need o prepare he Unied Saes and is local economies

or he global pivo o clean energy. I a ossil uel invesmen becomes srandeddue o carbon consrains in he uure, i will do more han harm he invesor’s

botom line. Unwise commimens o carbon-inensive energy inrasrucure could

leave he broader U.S. economy unable o adap quickly in a world ha needs o

limi warming o 2 degrees Celsius above preindusrial levelshe generally recog-

nized ceiling above which climae change could be caasrophic.

Second, governmen acors should be moivaed by he commimen o propel he

low-carbon shif domesically. Inrasrucure projecssuch as pipelines, power

plans, and ossil uel expor erminalshave lieimes ha measure in decades.

Given ha such projecs drive climae change cumulaively raher han on an indi-

vidual basis, governmen officials need a ool ha evaluaes poenial projecs in

he conex o heir consisency wih a low-carbon uure raher han solely in he

conex o heir individual climae effecs. A proxy carbon price could be one such

ool. Governmen officials could apply a proxy price o a proposed projec o see

wheher i would be financially viable in a world in which he price o ossil uels

includes he coss o climae change.

Te Cener or American Progress proposes ha ederal agencies and sae

governmens adop he privae-secor pracice o proxy carbon pricing whenevaluaing long-erm governmen decisions and invesmens. Tis pracice would

apply o decision-making wih respec o boh direc governmen acion, such

as invesmen in ransporaion inrasrucure, and indirec governmen acion,

such as permiting. Tis repor ocuses on energy inrasrucure permiting and


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how a proxy carbon price could inorm governmen decisions abou he U.S.

nework o pipelines, power plans, ransmission lines, and oher aciliies ha

ranspor and generae energy.

Specifically, he repor recommends ha Congress enac legislaion o require all

ederal agencies o use a proxy carbon price when reviewing permi applicaions orenergy inrasrucure. In he absence o legislaion, he Obama adminisraion or is

successor should ideniy exising auhoriies and direc ederal agencies o employ

proxy carbon pricing. Te repor also recommends ha sae agencies, such as pub-

lic uiliy commissions, leverage exising auhoriies ha would allow hem o use a

proxy price when evaluaing he long-erm viabiliy o poenial projecs.

Te U.S. public secor could learn rom he privae secor’s movemen oward

proxy pricing as a risk miigaion ool. In he absence o an explici price on car-

bon, public officials need o hink abou how o assess he poenial climae risks

posed by major governmen invesmens and acions, such as approval o energyinrasrucure projecs. Proxy carbon pricing can help inorm hese decisions and

shed ligh on heir poenial long-erm climae implicaions.


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The proliferation of carbon pricing

Trends in the public sector

Regional, naional, and subnaional emissions rading sysems and carbon axes

are burgeoning. (see Figure 1) In recen years, Mexico and France implemened

carbon axes; he Republic o Korea implemened a rading sysem; China

began seven subnaional rading pilos and announced plans or a naional

sysem by 2020; and Onario and Manioba announced plans o join he rad-

ing sysems o Caliornia and Quebec, which hemselves linked in 2014. Teseevens urher develop an ex ising landscape o carbon pricing insrumens

esablished in regions including he European Union, Japan, Briish Columbia,

and he norheas Unied Saes.2

What is the function of a carbon price?

Carbon pollution from the burning of fossil fuels results in significant costs to

human society and the environment through the damage that climate change

causes. This includes damage to health, agriculture, regional security, economies,

livelihoods, and ecosystems. The price of fossil fuels often does not reflect these

costs. As a result, climate change remains a cost that is external to the market;

the market therefore cannot respond appropriately to incentivize the develop-

ment and deployment of cleaner, lower-carbon processes. Instead, the economy

consumes more fossil fuels than it would if prices accurately reflected the costs of

greenhouse gas pollution.3

By putting a price on carbon, policymakers can help correct this market failure byensuring that the price of fossil fuels accounts for their climate costs on a per-ton basis.


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In addiion oor insead oexplici carbon pricing insrumens, some govern-

mens are implemening nonmarke regulaory policies ha reduce emissions and

creae a so-called implici price on carbon.4 Te U.S. Environmenal Proecion

Agency, or example, is pursuing nonmarke regulaions under he Clean Air Ac

o curb carbon polluion rom new and exising power plans.5

FIGURE 1

The number of implemented or scheduled pricing mechanisms hasincreased by 90 percent since January 2012

Number of implemented or scheduled carbon pricing systems (regional, national,

and subnational combined)

Source: Alexandre Kossoy and others, “State and Trends of Carbon Pricing 2015” (Washington and Utrecht, Netherlands: World Bank

Group and Ecofys, 2015), available at http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/09/21/ 090224b0830f0f31/2_0/Rendered/PDF/State0and0trends0of0carbon0pricing02015.pdf.

10

0

20

30

40

2000 2005 2010 2015

In December 2015, more han 190 counries adoped he Paris climae agree-

men, a legally binding agreemen o curb carbon polluion and build resilience o

he effecs o climae change. I is reasonable o expec ha he rends in carbon

pricing will coninue as naions endeavor o reach he naional and collecive

objecives hey se in Paris. Te agreemen obligaes counries o submi naional

climae goals every five years, wih he expecaion ha he goals will become

increasingly ambiious. In addiion, he agreemen ses collecive arges o limi

warming o 2 degrees Celsius over preindusrial levels and o achieve ne-zero

emissions in he second hal o his cenury.6


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Trends in the private sector

Carbon pricing is becoming increasingly prevalen in he privae secor as well. In

2015, more han 1,000 companies repored ha hey currenly or will imminenly

use some variey o an inernal carbon price (see ex box definiion), wih he

number o companies ha repored a curren price nearly ripling rom 2014.7

Companies use inernal carbon pricing or a number o reasons. Some use i o

evaluae he financial and social cos o heir operaions’ carbon emissions. Ohers

use i as a financial risk assessmen ool o inorm business invesmen decisions.8

Inernal carbon pricing is prevalenmainsream, evenin he oil and gas indusry.

Hess Corporaion, or example, says ha i assumes a carbon cos or “all significan

new projecs as a sensiiviy analysis o financials o ensure ha we undersand

and evaluae he ramificaions ha poenial carbon regulaions may have on our

Variations of internal carbon pricing in theprivate sector

Some companies—even those that do not operate in a region with a government-

imposed carbon tax or trading system—are setting an internal price on carbon,

which can take several forms.

Some companies use an internal carbon price to evaluate or stress test possible long-

term investments as if there were a price on carbon emissions.12 That is, they incor-

porate a hypothetical price on emissions—known in the private sector as a shadow

carbon price and referred to generally in this report as a proxy carbon price—into

their decision-making processes in order to prepare their businesses for a future that

has stricter carbon limits. For example, ConocoPhillips applies an internal carbon

price as part of its base-case economic analysis for new capital expenditures.13

Other companies assess an internal fee for each ton of greenhouse gas emissions or

operate a trading system among divisions in order to limit companywide emis-

sions.14 Microsoft, for example, charges an internal fee to individual business groups

based on their carbon emissions, the proceeds from which are invested in energy

efficiency and clean energy projects.15

Whatever the form, these companies are using internal carbon pricing to mitigate

and account for the potential costs of greenhouse gas emissions and climate change.


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Opportunities for government

agencies to use a proxy carbon price

A he sae and ederal levels, governmen officials make decisions every day ha

have long-erm implicaions or he climae. Tey make enormous capial inves-

mens o power he miliary, allocae ax dollars o mainain he naion’s rans-

poraion nework, and provide permis or large energy inrasrucure projecs,

ranging rom pipelines o naural gas expor erminals and power plans.

Tis repor ocuses on he ederal governmen’s responsibiliyshared wih he

saeso oversee, manage, and approve permis or he naion’s energy inra-srucure. Te privae secor anicipaes a price on carbon when i evaluaes he

risks associaed wih capial-inensive energy invesmens. Te public secor could

ollow his model and apply a proxy carbon price when considering wheher o

approve new energy inrasrucure. Tere are wo primary moivaions or all

levels o governmen o use a proxy price o inorm decisions relaed o energy

inrasrucure invesmen.

Mitigating transition risks and seizing transition opportunities

Te uure is unavoidably and increasingly carbon consrained. Globally, here will

be a coninued expansion o programs, building on rends o dae, ha explicily

or effecively price carbon. In he Unied Saes, he Obama adminisraion has

pursued emissions reducions hrough nonmarke regulaions or he power

secor, ransporaion secor, and oher pars o he economy.20 In he long erm

alhough a specific ime horizon is impossible o predici is reasonable o

expec congressional inacion o give way o legislaion ha esablishes a naional

carbon price. Synapse Energy Economics, or example, argues ha he scienific

and economic imperaive o respond o climae change ulimaely will lead o acarbon price as an “efficien, leas-cos pah o emissions reducion.”21


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Climae change presens no only physical risksin he orm o climae

impacsbu also so-called ransiion risks: As governmens, invesors, and

companies respond o climae change by seering he world oward a low-carbon

uure, some projecs, echnologies, and invesmens will become increasingly

cosly. I is imporan o add, however, ha he low-carbon shif also presens ran-

siion opporuniies: some projecs, echnologies, and invesmens will becomeincreasingly economical.

Te ineviable pivo o clean energy is he privae secor’s primary moivaion or

incorporaing a proxy priceor a range o proxy prices ha represen a range o

possible uuresin long-erm business planning.22 Proxy prices are a ool or he

fiscally raional: Tey help minimize ransiion risks and seize ransiion opporu-

niies. Tere is ample evidence, or example, o proxy carbon prices helping drive

privae-secor invesmens in energy efficiency, naural gas, and carbon capure and

sorage.23 For insance, proxy pricing was one o he acors ha encouraged Shell

and SaskPower o approve carbon capure and sorage projecs in he Albera oilsands and he Saskachewan Boundary Dam Power Saion, respecively.24

Jus as companies assume a price on carbon in order o avoid sranded asses and

capialize on he global response o climae change, so should governmens use a

proxy carbon price o evaluae he long-erm viabiliy o proposed energy inra-

srucure projecs. Tis will help posiion he naional economy and local econo-

mies or he global low-carbon shif.

Facilitating the low-carbon shift

Proxy pricing would no only help he U.S. economy prepare or he global shif

o clean energy bu also help propel he shif domesically. I would be an addi-

ional ool o move he counry closer o is miigaion goals. A he naional level,

he U.S. has commited o reduce greenhouse gas emissions 17 percen below

2005 levels by 2020 and 26 percen o 28 percen below 2005 levels by 2025.25

Many saes have esablished heir own emissions reducions goals. Caliornia,

or example, has esablished an aggressive greenhouse gas emissions arge o 40

percen below 1990 levels by 2030.26

Tese goals should serve as a benchmark agains which o measure energy policy

decisions, bu ha is ofen easier said han execued in pracice. A single energy

inrasrucure projecwheher i is a pipeline, expor erminal, or oher proj-


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ecis unlikely o have a significan effec on he global climae on an individual

basis.27 Raher, hese projecs drive climae change cumulaively and lock in a

cerain amoun o ossil uel use and disribuion over heir lieimes. Te sae

and ederal environmenal review process radiionally ocuses on he direc emis-

sions effecs o an individual energy projec proposal. While his is a criical par

o he permiting process, i likely is insufficien o undersand how a single projec would or would no affec he counry’s broader climae goals.

In addiion o undersanding a proposed projec’s poenial emissions, ederal and

sae governmens need o examine wheher an individual projec is consisen

wih achieving sae or ederal near-erm climae goals and building he ounda-

ion or seeper emissions reducions in he uure. Essenially, governmen offi-

cials have o ask: Does his paricular inrasrucure projec make sense in a world

ha needs o rapidly decarbonize?

One way o help approximae an answer o his quesion is o apply a financial lenso a proposed energy inrasrucure projec. In he same way ha a privae com-

pany would assume a carbon price o see how a capial invesmen would perorm

wih sricer emissions limis, a governmen agency could apply a proxy carbon

price o evaluae a proposed projec wihin he conex o an increasingly carbon-

consrained world.


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Setting a proxy carbon price to

inform government decisions

Governmen agencies have an incenive o adop he privae secor’s pracice

o proxy pricing or he public secor. One hreshold quesion is: A wha level

should he public secor se he proxy carbon price?

Adele Morris o he Brookings Insiuion has recommended esablishing an

exper commitee o look a how he ederal governmen could use an inernal or

proxy carbon price. One key charge o he commitee would be o deermine how

o se an appropriae price.28

Te Cener or American Progress sees wo poenial benchmarks or a proxy

carbon price.

Since 2010, he U.S. execuive branch has considered he social cos o carbon

which reers o he amoun o financial damage o sociey caused by each on o

greenhouse gas emissionswhen evaluaing he coss and benefis o poenial

regulaions ha affec emissions. Tis aciviy alls under Execuive Order 12866,

signed by Presiden Bill Clinon in 1993, which mandaes agencies o evaluae he

coss and benefis o poenial regulaions. In recen years, he social cos o car-

bon has been considered in he evaluaion o rulemakings such as uel economy

sandards and power plan regulaions.29 Te figures or he social cos o carbon

currenly in use by he U.S. governmen range rom $11 o $105 per meric on

in 2015depending on he discoun rae and he projeced severiy o climae

effecsand increase over ime.30

A logical nex sep would be or governmen officials o use he social cos o

carbon as a proxy price when evaluaing he financial viabiliy o poenial long-

erm invesmens. Te social cos o carbon has he advanage o being alreadyesablished as an ineragency meric and represening a range o values, which can

be used as a sress es or poenial invesmens.


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Alernaively, governmen agencies could ie he proxy price o he price needed

o drive a reducion in emissions o more han 80 percen rom 2005 levels by

2050he U.S. midcenury decarbonizaion goalor a price ha is consisen

wih he scenario o limiing warming o 2 degrees Celsius. Te Inernaional

Energy Agency, or IEA, esimaes ha applying a $140 carbon price economy-

wide by 2040 would be consisen wih emissions reducions compaible wihhe 2-degree Celsius goal.31 Governmen officials could use his as he basis or a

proxy price when reviewing inrasrucure projecs.


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Using a proxy carbon

price in energy infrastructure

permitting decisions

Tis secion ocuses on ederal permiting or energy inrasrucure, he shape o

which will deermine i he world is able o save off he wors effecs o climae

change. In 2012, he IEA examined cumulaive carbon emissions rom he global

energy sysem and warned ha he world’s exising power plans, acories, and

oher inrasrucure had already “locked in” almos our-fifhs o he global carbon

budgehe amoun o carbon polluion he world can emi beore 2035 wih-ou exceeding a 2-degree Celsius increase o warming and riggering dangerous

climae change.32

Te U.S. governmen, in close coordinaion wih he saes, plays a key role in

permiting many ypes o long-lived energy-relaed inrasrucure, such as iner-

sae and cross-boundary pipelines and ransmission lines, ossil uel expor

aciliies, and power plans. Numerous ederal and sae agencies share permiting

responsibiliies, and he permiting process differs by agency and ype o projec.

Broadly speaking, however, wo sages o he permiting process offer he poenial

or governmen agencies o use heir discreion o apply a proxy price o inorm

decision-making: during he environmenal review phase and during he assess-

men o nonenvironmenal acors.

Environmental review

For major ederal acions, he Naional Environmenal Policy Ac, or NEPA,

requires he relevan ederal agency o assess a proposed projec’s poenial envi-

ronmenal effecs on he human environmen and examine alernaives o miigaehese effecs.33 NEPA is an imporan ool or ederal agencies o inorm ederal

decision-makers o he poenial environmenal consequences o a decision beore

ha decision is made. o assess he long-erm financial viabiliy o an inrasruc-


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ure projec, however, ederal regulaors need o do more han examine he direc

and indirec greenhouse gas impac o a proposed projec; hey also need o assess

how he projec would perorm in a carbon-consrained world.

NEPA ocuses on direc effecs o he proposed projec on he environmen and

indirec effecs ha are reasonably oreseeable.34

As a resul, he NEPA review pro-cess does no provide an obvious opporuniy o evaluae he effecs o a carbon

price on he financial viabiliy o a projec. One recen and high-profile environ-

menal impac saemen, however, offers a lens ino how ederal regulaors could

incorporae a proxy price ino he environmenal assessmen o cerain projecs.

Te U.S. Deparmen o Sae perormed a comprehensive environmenal review

o ransCanada’s Keysone XL pipeline, a proposed 875-mile pipeline o rans-

por ar sands crude oil rom wesern Canada o Nebraska, where i would hen

connec wih pipelines o he U.S. Gul Coas.35 As par o he final supplemenal

environmenal impac saemen, he Sae Deparmen conduced a compre-hensive review o he peroleum marke o inorm decision-makers abou he

poenial effec o he Keysone XL pipeline on oil supply and demand, oil flows,

and prices.36 Osensibly, he deparmen also could have analyzed how a carbon

price would change he oil marke and he Keysone XL pipeline’s viabiliy in ha

carbon-consrained conex.

Nonenvironmental review of financial and other factors

Te energy inrasrucure permiting process differs by agency and jurisdicion,

making i difficul o ideniy a one-size-fis-all approach o inroducing a proxy

price ino he decision-making process. As he ollowing examples show, however,

sae and ederal agencies ofen consider nonenvironmenal and financial acors

when reviewing proposed inrasrucure projecs.

Examples of potential federal opportunities

Te U.S. Deparmen o Energy, or DOE, has been working wih Clean LineEnergy Parners on a ransmission projec o deliver 3.5 gigawats o renewable

energy generaion in midsouh and souheas Oklahoma. Using is auhor-

iy under Secion 1222 o he Energy Policy Ac o 2005, he DOE conduced

“due diligence on non-NEPA acors such as he Projec’s echnical and financial


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easibiliy and wheher he Projec is in he public ineres.”37 For he Clean Line

projec, he DOE asked he applican o provide a levelized cos o energy analy-

sis ha includes an assessmen o he effec o a carbon price ranging rom $15

per on in 2020 o $60 per on in 2040.38 Te DOE used is exising auhoriy o

obain his analysis.

Te presidenial permiting process, which covers proposed energy aciliies ha

cross he U.S. borders wih Canada and Mexico, provides anoher poenial orum

or using a proxy price o inorm decision-making. Te relevan ederal agencies

have significan discreion when reviewing a permi applicaion.

Te U.S. Deparmen o Sae, or example, has he auhoriy and responsibil-

iy o approve or deny applicaions or peroleum pipelines ha cross he U.S.

border. Te secreary o sae can approve a permi applicaion only afer deer-

mining ha he pipeline would serve he “naional ineres.” 39 No saue or

regulaion esablishes crieria or he secreary’s naional ineres deerminaion, which is made on behal o he presiden and pursuan o he presiden’s con-

siuional auhoriy. As a resul, he secreary can consider any acors ha he

secreary believes are relevan o he naional ineres. For example, he secreary

could consider he long-erm financial viabiliy o he projecas approximaed

by he proxy priceas one o many acors when making a deerminaion. For

he Keysone XL projec, he Deparmen o Sae idenified several key acors as

relevan in is decision, including he environmenal effecs o he proposed proj-

ec and he relaionship beween he projec and he counry’s need o reduce

reliance on ossil uels.40

Beyond cross-border permiting, ederal agencies review permi applicaions or

domesic energy inrasrucure projecs and consider nonenvironmenal acors.

Under Secion 7 o he Naural Gas Ac, or example, prospecive inersae gas

pipelines mus obain a cerificae o “public convenience and necessiy” rom he

Federal Energy Regulaory Commission, or FERC. In addiion o environmenal

acors, FERC looks a he possibiliy o overbuilding naural gas pipeline capaciy,

he applican’s responsibiliy or unsubscribed capaciy, and effecs o a proposed

pipeline on consumer raes.41 I FERC used a proxy price as par o his analysis,

he commission would be able o examine he effecs o uure carbon consrainson he proposed pipeline’s capaciy and, hereore, is viabiliy.


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Examples of potential state opportunities

A he sae level, public uiliy commissions, or PUCs, a imes require elecric

uiliies o use a proxy price in invesmen proposals or applicaions or new power

generaion.

Minnesoa law requires he Minnesoa PUC o esimae he “likely range o coss

o uure carbon dioxide regulaion on elecriciy generaion.”42 Elecric uili-

ies mus use his price in all elecriciy resource acquisiion proceedings. For

example, in is “2016–2030 Upper Midwes Resource Plan,” Xcel Energy applied

a $21.50-per-on ax as a base assumpion in all o is modeling o examine he

implicaions or resource choices. Xcel also modeled scenarios using he ederal

social cos o carbon.43

Te Colorado PUC’s rules sae ha he “Commission may give consideraion o

he likelihood o new environmenal regulaions and he risk o higher uure cossassociaed wih he emission o greenhouse gases … when i considers uiliy pro-

posals o acquire addiional resources during he resource acquisiion period.”44

In 2013, or example, he Colorado PUC required he Public Service Company

o Colorado o “examine a scenario where a price is atached o carbon emissions,

since ossil-ueled generaion plans have long useul lives and may coninue o

operae in he uure afer he adopion o some level o carbon pricing.”45 Te

PUC concluded ha a $20-per-on price would be a reasonable saring value.46


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Potential paths forward

Given he number o agencies and jurisdicions involved in he energy inrasruc-

ure permiting process, i will require acion by policymakers a many levels o

governmen o inegrae a proxy price ino he process or reviewing energy inra-

srucure proposals. Boh legislaion and exising auhoriies could help policy-

makers advance he conceps oulined in his repor.

• Congress should enac legislaion ha requires ederal agencies wih responsi-

biliy or permiting energy inrasrucure projecs o use a proxy carbon price oinorm energy inrasrucure decisions.

• Given Congress’ curren inransigence on climae change policy, legislaion

is unlikely o pass on ederal proxy pricing. In he absence o legislaion, he

Obama adminisraion or is successor should issue an execuive order requiring

ederal agencies o use a proxy price when making decisions abou inrasrucure

projecs, he viabiliy o which may be compromised in a carbon-consrained

uure. Tis execuive order would complemen execuive orders already issued.

(see ex box)

• As a complemenary effor, saes wih he responsibiliy o review and approve

energy inrasrucure permis should ideniy and leverage exising auhori-

ies ha would allow hem o use a proxy price o assess he long-erm viabiliy

o projecs in heir jurisdicion. For example, sae PUCs could updae heir

regulaions o require elecric uiliies and ohers o include a proxy price in any

applicaions o add or modiy energy-relaed inrasrucure.


21/26


Executive orders related to climate change andfederal decision-making

A White House executive order that requires federal agencies to integrate a proxy

carbon price into their energy infrastructure permitting decisions could comple-

ment existing executive orders. For example, proxy pricing when evaluatingpotential federal infrastructure investments—for direct investments and grants—is

consistent with Executive Order 12893, which directs agencies to analyze expected

costs and benefits. Specifically, this executive order, among other directives, requires

federal agencies to base infrastructure investments on “systematic analysis of ex-

pected benefits and costs, including both quantitative and qualitative measures.”47

It also says that agencies should consider costs and benefits “over the full life cycle

of each project” to “enable informed tradeoffs among capital outlays, operating and

maintenance costs, and nonmonetary costs borne by the public.”48

In addition, Executive Order 13653, signed by President Barack Obama in 2013, aims

to build national climate resilience, including through the promotion of investment

that takes climate risks into account. The executive order states that interagency

groups “charged with coordinating and modernizing Federal processes related to

the development and integration of both man-made and natural infrastructure …

shall be responsible for ensuring that climate change related risks are accounted for

in such processes.”49 The long-term financial risks associated with stranded fossil fuel

assets arguably could fall under this framework.

A new executive order on proxy carbon pricing also could complement Executive

Order 13677, which directs agencies to consider the goal of climate resilience in

international development efforts and to pursue opportunities to promote low-

carbon development.50


22/26


Conclusion

Carbon pricing is gaining momenum around he world. More and more coun-

ries are imposing a price on carbon as an efficien way o cu heir emissions and

respond o climae change. Major mulinaional corporaions are using a proxy

carbon price in heir business planning o avoid overinvesmen in ossil uel proj-

ecs ha could become liabiliies as he world limis is carbon polluion. Tese

corporaions are working o proec heir shareholders rom unnecessary risks.

U.S. governmen officials, a boh he sae and ederal levels, have a similar duy oproec Americans and he U.S. economy rom he unnecessary risks ha over-

commimen o ossil uel inrasrucure poses. Several agencies a he sae and

ederal levels share he responsibiliy o permiting energy inrasrucure proj-

ecs. Tis repor recommends ha hese governmen officials use a proxy carbon

price o measure he long-erm viabiliy o energy inrasrucure projecs in an

increasingly carbon-consrained world. Tis will provide imporan inormaion

o regulaors and key sakeholders as hey examine wheher a proposed projec is

compaible wih he counry’s climae goals.


23/26


About the authors

Alison Cassady is he Direcor o Domesic Energy Policy a he Cener or

American Progress, where she ocuses on ederal climae policy and carbon pric-

ing. She was previously senior saff or Rep. Henry Waxman (D-CA) and he U.S.

House o Represenaives Energy and Commerce Commitee.

Gwynne Taraska is he Associae Direcor o Energy Policy a he Cener, where

she works on U.S. and inernaional climae and energy policy. Her recen work

has concenraed on mulilaeral climae negoiaions and finance, including he

Paris agreemen, he Green Climae Fund, and inernaional carbon pricing.

Acknowledgments

Te auhors would like o hank Greg Doson, Vice Presiden o Energy Policy a

he Cener, and Michael Madowiz, Economis a he Cener, or commens on an

earlier ieraion o his manuscrip.


24/26


Endnotes

1 Shanna Cleveland and others, “Carbon Asset Risk: FromRhetoric to Action” (Boston: Ceres, 2015), availableat http://www.carbontracker.org/wp-content/up-loads/2015/10/car_action_FINAL101415.pdf. See alsoChristopher Weber and Mark Fulton, “Carbon Asset Risk:Discussion Framework” (Washington: World ResourcesInstitute, 2015), available at http://www.wri.org/publi-cation/carbon-asset-risk-discussion-framework .

2 Alexandre Kossoy and others, “State and Trends of Car-bon Pricing 2015” (Washington: The World Bank, 2015).

3 The World Bank, “Pricing Carbon,” available at http://www.worldbank.org/en/programs/pricing-carbon (ac-cessed April 2016).

4 Patrick Luckow and others, “2015 Carbon Dioxide PriceForecast” (Cambridge, MA: Synapse Energy EconomicsInc., 2015).

5 U.S. Environmental Protection Agency, “RegulatoryActions,” available at http://www.epa.gov/cleanpower-plan/regulatory-actions (last accessed February 2016).

6 U.N. Framework Convention on Climate Change, “Adop-tion of the Paris Agreement” (2015), available at http://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf .

7 CDP, “Putting a price on risk: Carbon pricing in the cor-porate world” (2015), available at https:// www.cdp.net/CDPResults/carbon-pricing-in-the-corporate-world.pdf.

8 Ibid.

9 Ibid.

10 See, for example, Sustainable Prosperity, “ShadowCarbon Pricing in the Canadian Energy Sector” (2013),available at http://www.sustainableprosperity.ca/sites/default/files/publications/files/Shadow%20Carbon%20Pricing%20in%20the%20Canadian%20Energy%20Sec-tor.pdf ; CDP, “Putting a price on risk.”

11 CDP, “Putting a price on risk.”

12 Christopher Ragan, “‘Shadow’ carbon prices could makethe real thing easier to swallow,” The Globe and Mail ,February 4, 2014.


14 U.N. Global Compact and others, “Executive Guide toCarbon Pricing Leadership: A Caring for Climate Report”(2015).


16 U.N. Framework Convention on Climate Change, “SixOil Majors Say: We Will Act Faster with Stronger CarbonPricing,” Press release, June 1, 2015, available at http://newsroom.unfccc.int/unfccc-newsroom/major-oil-companies-letter-to-un/.

17 Ibid.

18 Carbon Pricing Leadership, “Home,” available at http://www.carbonpricingleadership.org (last accessed April2016).

19 Carbon Pricing Leadership, “Leadership Coalition,”available at http://www.carbonpricingleadership.org/leadership-coalition/ (last accessed April 2016).

20 Executive Office of the President, The President’s Climate Action Plan (2013), available at https://www.white-house.gov/sites/default/files/image/president27scli-mateactionplan.pdf.

21 Luckow and others, “2015 Carbon Dioxide Price Fore-cast.”

22 See Sustainable Prosperity, “Shadow Carbon Pricing inthe Canadian Energy Sector.” For example, David Collyerof the Canadian Association of Petroleum Producerssaid that shadow pricing “has become an industrystandard among Canadian oil players, with virtuallyall companies planning with the expectation of risingcosts of compliance with future greenhouse gas emis-sion regulations over the life of their projects.”

23 For example, see Sustainable Prosperity, “ShadowCarbon Pricing in the Canadian Energy Sector”; MarkHertsgaard, “If It’s Good Enough for Big Oil…,” Bloom-berg , November 13, 2014, available at http://www.bloomberg.com/news/articles/2014-11-13/carbon-tax-oil-companies-account-for-it-dot-will-politicians-follow.

24 Sustainable Prosperity, “Shadow Carbon Pricing in theCanadian Energy Sector.”

25 The White House, “Fact Sheet: U.S. Reports its 2025Emissions Target to the UNFCCC,” Press release, March31, 2015, available at https://www.whitehouse.gov/the-press-office/2015/03/31/fact-sheet-us-reports-its-2025-emissions-target-unfccc.

26 Office of Gov. Edmund G. Brown Jr., “Governor BrownEstablishes Most Ambitious Greenhouse Gas Reduc-tion Target in North America,” Press release, April 29,2015, available at https://www.gov.ca.gov/news.php?id=18938.

27 The White House Council on Environmental Quality, orCEQ, has acknowledged a key challenge in assessing

the climate impacts of federal decisions. In its reviseddraft guidance on how to evaluate the climate changeimpacts of major federal actions under the NationalEnvironmental Policy Act, the CEQ noted that federalaction “occurs incrementally, program-by-program andstep-by-step, and climate impacts are not attributableto any single action, but are exacerbated by a seriesof smaller decisions, including decisions made by thegovernment.” The White House, Revised Draft Guidancefor Greenhouse Gas Emissions and Climate Change Im- pacts (2014), available at https://www.whitehouse.gov/sites/default/files/docs/nepa_revised_draft_ghg_guid-ance_searchable.pdf .

28 Adele Morris, “Why the federal government shouldshadow price carbon,” Brookings Institution, July 13,2015, available at http://www.brookings.edu/blogs/planetpolicy/posts/2015/07/13-carbon-footprint-governement-shadow-prive-morris.

29 U.S. Environmental Protection Agency, “The SocialCost of Carbon,” available at http://www3.epa.gov/climatechange/EPAactivities/economics/scc.html (lastaccessed March 2016).

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30 Ibid. See also Interagency Working Group on SocialCost of Carbon, Technical Support Document: SocialCost of Carbon for Regulatory Impact Analysis UnderExecutive Order 12866 (2010), available at https://www.whitehouse.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf . The figuresin use by the U.S. government for the social cost ofcarbon—which are widely acknowledged to somewhatunderestimate climate damages—are to be revised up-ward in light of new research. See, for example, FrancesC. Moore and Delavane B. Diaz, “Temperature impactson economic growth warrant stringent mitigation

policy,” Nature Climate Change 5 (2015): 127–131, avail-able at http://www.nature.com/articles/nclimate2481.epdf ; Peter Howard, “Omitted Damages: What’s Miss-ing from the Social Cost of Carbon” (EnvironmentalDefense Fund, Institute for Policy Integrity, and NaturalResources Defense Council, 2014), available at http://costofcarbon.org/files/Omitted_Damages_Whats_Miss-ing_From_the_Social_Cost_of_Carbon.pdf .

31 International Energy Agency, “World Energy Outlook2015” (2015), available at http://www.worldenergyout-look.org/media/weowebsite/2015/WEO2015_Chap-ter01.pdf .

32 International Energy Agency, “World Energy Outlook2012” (2012), available at http://www.iea.org/publica-tions/freepublications/publication/english.pdf.

33 40 C.F.R. § 1500-1508.

34 40 C.F.R. § 1508.8.

35 U.S. Department of State, Final Supplemental Environ-mental Impact Statement for the Keystone XL Project (2014), available at h ttp://keystonepipeline-xl.state.gov/documents/organization/221135.pdf .

36 Ibid.

37 U.S. Department of Energy, “Plains & Eastern Clean Line Transmission Line,” available at http://www.energy.gov/oe/services/electricity-policy-coordination-and-implementation/transmission-planning/section-1222-0(last accessed March 2016).

38 U.S. Department of Energy, “Plains & Eastern Clean Line Transmission Line – Part 2 Application: Appendix 6-B,Levelized Cost of Energy Analysis,” available at http://

www.energy.gov/sites/prod/files/2015/04/f22/Clean-LinePt2-Appendix-6-B.pdf (last accessed March 2016).

39 Executive Order 11423, “Providing for the performanceof certain functions h eretofore performed by thePresident with respect to certain facilities constructedand maintained on the borders of the United States,”August 16, 1998.

40 U.S. Department of State, Final Supplemental Environ-mental Impact Statement for the Keystone X L Project .

41 Federal Energy Regulatory Commission, “Certifica-tion of New Interstate Natural Gas Pipeline Facilities,”September 15, 1999.

42 Minnesota Statute, § 216H.06, available at https://www.revisor.leg.state.mn.us/statutes/?id=216H&view=chapter#stat.216H.06.

43 Xcel Energy, “2016–2030 Upper Midwest Resource Plan”

(2015), Appendix D, available at http://www.xcelenergy.com/staticfiles/xe/PDF/Regulatory/07-App-D-Environ-mental-Reg-and-Performance-January-2015.pdf .

44 Code of Colorado Regulations, 4 CCR 723-3-3610.

45 Colorado Public Utilities Commission, “Decision No.C13-0094: Phase I Decision Granting Application forApproval of 2011 Electric Resource Plan; Denying Appli-cation for Acquisition of the Brush Generating Facilities;and Granting Application to Retire Arapahoe Unit No.4 and Enter into a Transaction with Southwest Genera-tion Operating Company in Part” (2013), available athttps://assets.documentcloud.org/documents/893813/puc-decision-written-jan-24-2013.pdf.

46 Ibid.

47 Executive Order no. 12,893, “Principles for Federal Infra-

structure Investments,” Federal Register 59 (20) (1994),available at https://www.archives.gov/federal-register/executive-orders/pdf/12893.pdf.

48 Ibid.

49 The White House, “Executive Order -- Preparing theUnited States for the Impacts of Climate Change,” Pressrelease, November 1, 2013, available at https://www.whitehouse.gov/the-press-office/2013/11/01/execu-tive-order-preparing-united-states-impacts-climate-change.

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Proxy Carbon Pricing: A Tool for Fiscally Rational and Climate-Compatible Governance

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