California PUC Carbon Adder

“Carbon adders” are a means of accounting for possible future costs of mitigating GHG emissions. A carbon adder is an expected future price for CO2e that is assumed when comparing investment options. Carbon adders are used to compare the cost of fossil fuel and renewable generation, as well as demand-side management investments. The carbon adder is used for utility planning purposes only, and is not assessed to consumers. Taking the cost of carbon into account means that an investment is considered more cost-effective if it avoids a ton of CO2 emissions at an incremental cost equal to the value of the carbon adder. One significant advantage of this approach is that the carbon adder anticipates the future compliance costs of a carbon constraint, rather than attempting to estimate the cost of damages from future climate change. Such damage calculations are highly uncertain and controversial. There is a smaller range of uncertainty in assessing future compliance costs than in predicting the economic impacts of future climate change.

Program Summary
Brief Description: 
"Carbon adders" are a means of accounting for possible future costs of mitigating GHG emissions.
Benefits: 
While utilities have not credited the addition of a carbon adder with changing procurement decisions, there are a number of benefits to developing and implementing a carbon adder. The inclusion of a carbon adder institutionalizes the consideration of climate change in utility investment decision-making, which may encourage a broader examination of available generation resources. It also provides a mechanism for utilities to weight more heavily the importance of reducing carbon emissions in the future, as the utility becomes increasingly certain about impending regulated carbon constraints.
Development: 
In December 2004 the California PUC approved a requirement that a carbon adder be included in resource plans for three of California's utilities, Pacific Gas and Electric Company, Southern California Edison, and San Diego Gas and Electric Company. The CPUC based this range of costs on a number of studies, including the Idaho Power Company's 2004 resource planning process, which assessed a carbon adder of $12.30 per ton of CO2.California's carbon adder was developed while updating the avoided cost methodology for IOU resource evaluation. In Decision (D.) 03-04-0555, the CPUC mandated that the avoided costs methodology explicitly reflect externalities; calculating avoided costs for energy efficiency and other procurement issues is a well-established CPUC practice.Estimates of the future carbon constraint compliance costs were based on work developed by E3 (www.ethree.com). In a draft of Rule 05-04-024 the CPUC adopted the $8/ton figure as a reasonable proxy for the future cost of a carbon constraint, acknowledging that “it would be illogical to conclude that carbon emissions costs will be zero, ” as suggested in comments from SCE. The rule was adopted on April 7, 2005, and applies to all avoided cost calculations competed by the IOUs, not only energy efficiency programs.