Renewable Energy Policies in Fairbanks Alaska: Benefit-Cost Analysis of a Carbon Tax and a Renewable Portfolio Standard for Golden Valley Electric Association

Abstract

The electricity sector is a major producer of carbon dioxide emissions. Specifically in Fairbanks, Alaska. The electricity sector is also a producer of PM2.5 emissions. PM2.5 emissions are particles that form in the air from complex chemical reactions in sulfur dioxide and nitrogen oxides which are emitted from nonrenewable power plants. Research shows (Wu, 2023) that both carbon emissions and PM2.5 emissions have negative influences on the environmental and social welfare of citizens. Carbon emissions contribute to climate change, while PM2.5 emissions pose serious threats to human health. In 2009, the Fairbanks North Star Borough (FNSB) was declared a nonattainment area by the Environmental Protection Agency (EPA). A nonattainment area is a designated area that does not meet the standard for clean air quality in the United States. Carbon emissions and PM2.5 emissions have lowered the air quality within the FNSB and contributes to global warming. Within the United States as a whole, approximately 40% of all human-induced carbon emissions come from electricity generators powered by fossil fuels. The policy problem is how best to encourage the FNSB to transition to more renewable energy sources. Transitioning the electricity sector away from fossil fuels to renewable energy would curb carbon emissions and PM2.5 emissions from this sector. However, renewable energy sources often entail high costs, intermittency, and insufficient generation capacity. Within the FNSB, the power producer is Golden Valley Electric Company (GVEA). GVEA was founded in 1946 and now operates nine nonrenewable and renewable power plants while also purchasing power from around the state of Alaska. Through the combination of power plants it owns and operates, GVEA is on average operating on 23.4% renewable and 76.6% nonrenewable energy sources. GVEA has set goals for carbon reduction and implemented a strategic generation plan to increase their use of renewable energy; however, the state of Alaska has not implemented any renewable energy transition policies. Two models of renewable energy transition policies that have been proposed to curb emissions are a carbon tax and renewable portfolio standard (RPS). A carbon tax puts a tax on the amount of emissions that power producers emit into the atmosphere, while an RPS requires power producers to produce a minimum amount of electricity coming from renewable energy. Both policies are designed to encourage the reduction of nonrenewable energy sources. This analysis looks at the costs and benefits of a carbon tax and an RPS being implemented on GVEA’s nine owned and operated power plants. The costs of the power plants are totaled to calculate the short term marginal costs ($/mwh) and the long term Levelized Cost of Energy ($/mwh). The costs collected include capital costs, variable operating and maintenance costs, fuel costs, social cost of PM2.5, and the social cost of carbon. The benefits are revenue, benefit from PM2.5 reduction per ton, and benefit from CO2 reduction per ton. All the costs and benefits are collected from the years 2017- 2021 and averaged to get an average annual cost and benefit estimate. A pigouvian carbon tax is used to internalize the external cost of carbon through making the social cost of carbon equivalent to the carbon tax. The RPS is stimulated using GVEA’s proposed strategic generation plan which calls for the retirement of a nonrenewable power plant and the addition of a wind farm and new battery energy storage system (BESS). In this scenario the LCOE estimates are used to estimate the costs of the new renewable plants under the RPS scenario. This is because in the short term they will have to be initially built which will include capital costs. The other power plants that already exist and will continue to exist will use the marginal costs to estimate their costs because they are already up and running. This paints a realistic picture of the costs of implementing the RPS tomorrow. The implementation of a carbon tax results in a notable shift in both costs and benefits. Initially, the costs rose by $39,523,800 from the baseline. This increase is directly tied to the amount of carbon emissions released into the atmosphere, as the carbon tax is set equal to the social cost of carbon. These costs are specifically the marginal costs per megawatt-hour ($/MWh), as all power plants in this scenario are already established. Conversely, the benefits experience an increase. The benefits increased from the baseline by $101,982,620. This increase in benefits stems from various sources. First, it includes the government revenue generated from the tax itself. Additionally, there are substantial gains from the reduction in both CO2 emissions and PM2.5 These reductions occur as nonrenewable power plants, faced with the burden of the tax, are priced out of the market. These high-emission plants find themselves unable to sustain operations as their costs far surpass their revenue. Consequently, they are forced to cease operations, resulting in a decrease in both CO2 emissions and PM2.5. This further amplifies the overall benefits derived from the carbon tax. The benefit-cost ratio for both policies is above one,