CAISO continues to refine its approach to greenhouse gas accounting in its regional Energy Imbalance Market. In a revised February 2018 proposal, CAISO announced its decision to move away from the pilot two-pass approach to calculating net GHG emissions after "secondary dispatch" (i.e., resource shuffling to serve California load) and suggested a new approach for attributing net GHG emissions in the regional electricity market.
Although the challenges CAISO identified with the two-pass solution are serious and indicate the need for fresh thinking, CAISO's new proposal would put the costs of managing leakage only on out-of-state zero-carbon resources (wind, solar, and hydro). As I point out in a new comment letter, not only does this approach ignore the leakage risks from replacing high-carbon fossil resources with low-carbon fossil resources (i.e., replacing coal-fired electricity with power from natural gas), but the outcome would mean that the GHG costs attributable to zero-carbon resources will depend on whether those resources are located in California (in which case they face zero GHG costs) or outside of California (in which case they would face a positive GHG cost under the CAISO proposal).
In my view, CAISO's proposal increases the risks of a dormant commerce clause challenge. This should cause some concern as the state government of Utah is actively contemplating litigation behalf of its coal power plants (E&E News subscription req'd). While CAISO's proposal to exempt fossil resources from carrying the costs of GHG leakage might avoid potential legal challenges from coal resources, it wouldn't protect California's climate policies from a challenge brought by zero-carbon resources (such as wind, solar, or hydro) that want to sell their power to CAISO territory on equal terms with in-state competitors.
The good news is that CAISO has other options for incorporating California's climate policies in the EIM tariff design without increasing legal risks. For example, CAISO and the Air Resources Board could update and refine the situation in place today. Currently, ARB intends to retire a certain number of allowances based on a coarse estimate of the regional GHG leakage from "secondary dispatch" (as CAISO calls it, also known as resource shuffling in other discussions). These leakage estimates could be improved by CAISO's rigorous calculation of the net GHG emissions attributable to EIM deliveries to California territory. ARB could then account for leakage in the cap-and-trade program by retiring an equal number of allowances to compensate for the leakage CAISO observes. This approach would preserve the environmental integrity of California's carbon market without favoring in-state resources over comparable out-of-state facilities because retiring allowances places raises carbon prices equally for all entities subject to the cap-and-trade program, independent of the location of the power plant that exports electricity to serve California load.
CAISO has been a leader on integrating state-level carbon pricing into regional electricity market design, successfully implementing the country's first FERC-approved tariff to include an explicit carbon price in the EIM. I hope CAISO will continue to demonstrate climate leadership by carefully evaluating the dormant commerce clause risks of any modifications to the current EIM tariff structure and incorporating these issues into their discussions with ARB.