Initial PJM Carbon Pricing Study Results Presented

Using RGGI states as a guide, PJM looked at the effect of border adjustments on potential impacts of a carbon-reduction program

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PJM presented initial study results at the Jan. 14 meeting of the Carbon Pricing Senior Task Force (CPSTF) exploring the potential effects that different carbon-pricing scenarios could have on the region it serves.

The PJM Study of Carbon Pricing and Potential Leakage Mitigation Mechanisms was conducted in tandem with a stakeholder initiative to research options for constructing a framework that would enable states to incorporate potential carbon-pricing policies into PJM’s energy and ancillary services markets, while mitigating the policies’ impact on both the carbon-pricing sub-region as well as surrounding areas not participating in such programs.

PJM’s study on the potential impact of carbon prices in a specific sub-region of the RTO indicates that carbon-pricing initiatives established by the individual jurisdictions (Delaware, Maryland and New Jersey) could be accommodated by PJM’s competitive markets, with border adjustment constraints possibly mitigating the resulting impacts on generation, emissions and price.

The results should not be extrapolated as general conclusions to be applied to other regions, as they are strong functions of the states in the carbon-price sub-region, the generation mix in that sub-region compared with the area without a carbon price and the carbon price itself. Stakeholders suggested additional iterations of the study that will be presented at future CPSTF meetings. 

Traditionally, PJM’s markets have been exclusively focused on reliability at least cost. PJM is examining mechanisms that would address the impacts of carbon pricing through its market clearing engine.

PJM is not proposing to establish a carbon price or policy.

Study Used RGGI States

The initial set of study results considered a sub-region consisting of Delaware, Maryland and New Jersey – the PJM states currently participating in the Regional Greenhouse Gas Initiative (RGGI) – a market-based effort among 10 states to cap and reduce carbon dioxide emissions from the power sector. Future study results may include other states in the carbon-price sub-region, as Pennsylvania and Virginia also are considering joining the RGGI.

PJM modeled the year 2023, the most recent planning case from the Regional Transmission Expansion Plan and market efficiency process.

It did not consider potential changes to the resource mix that might occur with the application of a carbon price.

Mitigating ‘Leakage’

The base model included no adjustment for a carbon price in energy transactions between the carbon-pricing and non-carbon-pricing sub-regions of the RTO. Other scenarios accounted for one-way transfers into the carbon-pricing region and two-way transfers.

These border adjustments aim to mitigate “leakage,” or shifts in generation and related emissions from a regulated jurisdiction, to a less regulated area because of differing compliance costs. This can drive up emissions in the overall footprint and defeat the purpose of carbon-reduction programs, as well as raise prices for consumers.

There are multiple approaches to mitigating leakage, but the study focused on border adjustment constraints within the wholesale electricity market. It did not study state-specific approaches external to the wholesale electricity market.

Border Adjustments Make a Difference

Among the observations of the initial results: With no border adjustment in place, higher carbon prices in one sub-region would lead to higher energy prices throughout the RTO. And, while greenhouse gas emissions would drop in the region where carbon was priced, they would increase elsewhere, leading to a net rise in emissions for the whole region.

For the border adjustment constraints, PJM considered RGGI prices with a low-end reference of $6.87 per short ton of carbon dioxide, and a high-end reference price of $14.88 per short ton of carbon dioxide for generators capable of producing at least 25 MW (the RGGI eligibility threshold).

Under a one-way adjustment on energy imported into the carbon-pricing region, emissions would be higher in the carbon-pricing sub-region compared to the scenario with no border adjustment – which would be generating more energy – but would decrease as a whole throughout the RTO.

Also in that scenario, the locational marginal price would be expected to dip in the carbon-pricing region compared to the scenario with no border adjustment, while there was no clear pricing trend for the rest of the RTO.

In a two-way border adjustment, under both carbon price variables, generation and emissions increased in the carbon-pricing sub-region – compared to the scenario with no border adjustment – and decreased elsewhere. In both sub-regions, locational marginal prices trended downward compared to the scenario with no border adjustment. This result mirrored the one-way adjustment, but on a larger scale, according to the study.