Regulators deciding whether to raise 'social cost of carbon' in Minnesota

The costs of climate change — in other words, putting a price on greenhouse gases — will be hashed out before Minnesota utility regulators over the next week, and it's guaranteed to be both complicated and contentious.

Minnesota was a pioneer in affixing a price to carbon dioxide back in the 1990s and is still one of only a handful of states with such a standard. Environmental and energy groups want the state's carbon pricing formula to be revised, adopting the federal government's "social cost of carbon."

"In the 20 years since the state specified the cost of carbon dioxide, there has been a wealth of new information published on the health and climate impacts of burning fossil fuel," said J. Drake Hamilton, science policy director for St. Paul-based Fresh Energy, a renewable energy advocacy group.

The federal social cost of carbon, devised in 2010 by several government agencies, is the most complete measure of the costs of carbon dioxide emissions, Fresh Energy and environmental groups argue.

Utilities agree the cost needs to be updated but have proposed their own formulas.

The federal social cost of carbon ranges from $11 to $57 per ton of carbon, and has often been applied at $37 per ton. That's considerably higher than the state's current cost of 44 cents to $4.53 per ton.

Consumers won't see a carbon fee on their bills, but it could be important to utilities deciding on new power plants.

The Minnesota Department of Commerce and the Minnesota Pollution Control Agency both back using the federal social cost of carbon. An administrative law judge last year also backed the federal cost, allowing for two exceptions, and such rulings usually play a significant role in cases before public utilities regulators.

But the state's utilities and their large industrial customers aren't keen on using the federal social cost of carbon, and instead are offering their own means to update carbon costs. Their formulas generally come up with prices higher than today's state standard, but below the federal cost. Xcel Energy's proposed cost is closest to the federal cost.

Xcel has argued in state regulatory filings that updated social carbon costs "will directly affect what kind of resources Minnesota utilities will rely on and build in the future." The Minneapolis-based utility, the state's largest, declined to make an executive available for an interview.

Xcel said in a statement, though, that it's committed to its long-term strategy, which pivots on moving from coal to natural-gas-fired power and wind energy, "regardless of future carbon regulations."

To add a twist to the state proceedings, President Donald Trump earlier this year discarded the federal social cost of carbon, which has been instrumental in setting environmental and energy regulations.

Trump's order on energy in March, among other factors, eliminated the 12-agency group that devised a carbon cost to be applied uniformly on a federal level. Instead, each agency will make its own carbon cost determination, based on a less-stringent regulatory proclamation from 2003.

Proponents of using the federal cost in Minnesota say Trump's action isn't relevant for state proceedings. But utilities and large utility customers have asked the Minnesota Public Utilities Commission (PUC) to take Trump's decision into consideration.

The PUC is slated to listen to arguments at meetings starting Friday and make a decision next Thursday. Also at those meetings, the PUC will consider a petition from environmental groups on pricing particulate matter emitted from fossil-fuel plants, as well as the pollutants sulfur dioxide and nitrogen oxide.

The PUC is grappling with what is known in economics as negative externalities: Costs that are not paid for by a producer, but instead are borne by a nonrelated third party, usually the public.

The social cost of carbon is used in resource planning by utilities. No utilities in Minnesota plan to build new coal plants. So in practice, the social cost of carbon most likely will affect plans for new natural-gas plants. Burning natural gas emits about half of the greenhouse gases as coal, but wind and solar power emit none.

Carbon pricing is rooted in the idea of climate change. "There is now undeniable evidence that CO2 emissions are already having a dramatic impact on the earth and its climate," wrote LauraSue Schlatter, the Minnesota administrative law judge who adjudicated the carbon cost proceeding.

Administrative law judges are commonly appointed to contested cases before the PUC and a host of other regulatory agencies.

Schlatter wrote that the U.S. Supreme Court observed in 2007 that the harms of climate change are "serious and well recognized" and that greenhouse gases can be regulated as an air pollutant.

The U.S. social cost of carbon was devised in 2010 by scientists and economists from such federal bodies as the Environmental Protection Agency and the departments of energy, agriculture and commerce.

The federal agencies combined three mathematical models to account for the effect of carbon dioxide emissions on climate change and the potential economic costs of climate change, including higher temperatures and higher sea levels.

Since the effects of carbon dioxide are long term, the social cost of carbon is calculated with a range of discount rates, which value future costs in today's dollars. The range of discount rates leads to the range in carbon cost levels. Choosing discount rates is contentious; the higher the rate, the lower the present value of future costs.

The federal social carbon cost is the most established pricing model in the U.S., said Leigh Currie, energy program director at the Minnesota Center for Environmental Advocacy. "There hasn't been another effort like this to quantify damages."

But Xcel concluded that the federal cost of carbon "is not statistically sound or reasonable on its own," according to PUC briefing papers. Great River Energy, Minnesota Power and Otter Tail Power, three other Minnesota power producers, also consider the federal cost "unreasonable on many levels."

All parties to the social carbon case — including environmental groups — agree there is a significant amount of uncertainty in calculating the cost.

Some opponents of carbon pricing argue that the uncertainty is so great, the cost estimate is essentially meaningless, according to PUC briefing papers. But proponents argue that uncertainty isn't "an adequate excuse for inaction."

Mike Hughlett • 612-673-7003