The Use of Externality Adders for Greenhouse Gas Emissions in Electric Utility Resource Planning

Some state Public Utility Commissions (PUCs) in the United States require the use of external environmental adders in utility evaluations of the social costs of alternative power plants. These states require adders for CO₂ and other greenhouse gas emissions. This paper evaluates the adder approach as applied to greenhouse gas emissions, coming to several conclusions. First, the existing adders are based inappropriately upon the costs of tree planting to sequester CO₂, rather than on the conceptually-correct measure, i.e., the damages from additional greenhouse gases or, equivalently, the benefits from reduced greenhouse gases. Second, a state policy requiring adders for greenhouse gases in utility planning would represent an extremely altruistic policy, because virtually all of the benefits from reduced emissions would accrue to citizens outside the state, while state residents would bear virtually all of the costs from more expensive electricity. Third, reductions in CO₂ emissions due to state adders would be offset by increases elsewhere due to increased utility rates that encourage customers to use other electricity or energy suppliers or to move out of state, a phenomenon known as “leakage” in the national or international context. Four, although there is some argument that altruistic state policies such as CO₂ adders would have a “snowball” effect on national and international decisionmakers and eventually lead to coordinated decisions on global warming, there seems to be little evidence of such an effect in previous international environmental issues.