FERC urged to make way for carbon pricing

Source: By Arianna Skibell, E&E News reporter • Posted: Thursday, October 1, 2020

Carbon pricing in regional wholesale power markets is a good if not necessary step to combat climate change and ensure reasonable rates for electricity customers.

That was the consensus yesterday among 30 energy sector panelists who discussed the pricing mechanism before the Federal Energy Regulatory Commission.

In an all-day, long-anticipated virtual conference, an array of academics, grid operators and utility executives discussed FERC’s legal authority, various designs for adding a carbon price in regional markets — and potential pitfalls.

“Far from a debate about whether the Commission has any authority in this area at all, there was remarkable consensus that the Federal Power Act does not restrict FERC from incorporating state carbon pricing into wholesale markets,” Jeff Dennis, general counsel and managing director at Advanced Energy Economy, said in an email. “In fact, there was substantial agreement that the statute obligates FERC to consider how state carbon policies” can fit into the market, he added.

That could send a signal to states that they can develop carbon pricing programs without fear that FERC would reject those proposals, Dennis said.

Sen. Sheldon Whitehouse (D-R.I.) opened the conference on an optimistic note for the policy.

“Let me dispel the notion that carbon pricing has had its demise politically,” he said. “Pretty much every Republican official or Republican-leaning group that has recommended a climate policy has landed on a carbon price.”

The lawmaker urged the commission to “proceed here as if a lot depended on you getting this right, because a lot does depend on all of us getting this right,” pointing to recent analyses predicting a climate-related economic crash.

Republican FERC Chairman Neil Chatterjee stressed that the independent energy agency is not approaching carbon pricing as an environmental regulator but rather as a way to correct market imbalances resulting from disparate state policies.

“We have neither the expertise nor the authority to weigh in on how to best curb emissions,” he said.

“What we do have is the expertise — and the mandate — to ensure just and reasonable wholesale rates. In our modern construct, that requires us to ensure that the organized wholesale markets we oversee — with their layers of complexity, their diverse footprints, and their constantly emerging and evolving challenges — remain efficient and transparent,” Chatterjee said.

Legal considerations

Experts on the first panel yesterday focused on FERC’s legal authority to implement carbon pricing in wholesale markets. Kate Konschnik, the director of climate and energy programs at Duke University, and Ari Peskoe, the director of the Harvard Electricity Law Initiative, agreed that such a policy is within the agency’s purview.

“The Federal Power Act poses no fundamental obstacle to markets incorporating state carbon pricing,” Konschnik said.

Peskoe said pricing carbon is not merely an environmental issue, noting financial regulators have warned about potential costs from failing to put a price on emissions.

“No serious conversation about the future direction of the power industry ignores carbon emissions,” he said. “The commission has a duty to encourage the industry’s orderly development. It should not dismiss carbon pricing as someone else’s job.”

Republican Commissioner James Danly expressed concern that FERC would be overstepping its bounds by regulating a carbon price.

Danly said he was only interested in the legal debate, not the other aspects of carbon pricing, and therefore declined to participate in the subsequent panels, eliciting a range of reactions on Twitter.

“Well Danly makes a statement by leaving after the legal considerations panels of the FERC Carbon Pricing Technical Conference,” wroteJessica Bell, an attorney with the State Energy and Environmental Impact Center.

David Hill, a research scholar at Columbia University’s Center on Global Energy Policy, acknowledged that FERC’s authority is very broad but said if FERC were to proactively pursue a carbon price — as opposed to responding to regional plans — that “walks pretty far afield” and may run into legal trouble.

Nevertheless, Hill said FERC does have the authority to integrate carbon pricing into electricity rates by reacting to state policies and that failing to do so may be “unjust, unreasonable or unduly discriminatory.”

Tax brown vs. subsidize green

Later discussions at the technical conference explored how to allocate revenues tied to a carbon price.

One consideration that emerged was a phenomenon called “leakage.” Leakage occurs when some states in a regional electricity market have adopted a carbon price and others have not. This means power production in the states not subject to a carbon price goes up and can potentially negate the carbon cuts of neighboring states.

“Leakage represents the biggest technical hurdle to implementing a regional carbon price,” said Arnold Quinn, a former senior FERC official who now heads FERC-jurisdictional markets at Vistra Corp.

Quinn said one way to address this is to apply a standard carbon price across the entire regional grid operator’s footprint.

Another sticking point — one that Harvard University professor of global energy policy William Hogan called the “elephant in the room” — centers on the need to reconcile state mandates and subsidies for clean energy technologies with a market-based solution like a carbon price.

“Subsidizing green is a much more expensive way to reduce greenhouse gas emissions than taxing brown,” said Stanford University professor of economics Frank Wolak. “If we subsidize green energy, more green energy will be produced. However, there is no guarantee this will lead to less greenhouse gas emissions.”

Democratic FERC Commissioner Richard Glick noted that many environmentalists are wary of a carbon price as a substitute for state policies. The concern is that “carbon prices would be lower than what is needed to reduce emissions significantly enough to impact climate change,” he said.

Rana Mukerji, the senior vice president of market structures for the New York Independent System Operator, said that if the carbon price is not working, states will take other approaches, as they are doing now with renewable goals.

AEE’s Dennis said FERC has been warned to ensure its approval of a carbon price does not override or preempt state policies.

“That advice is well-taken if FERC is to use this conversation as a catalyst for better harmonizing state and federal policies going forward,” he said. “Using FERC authority to insert carbon pricing as a replacement for other policies within state authority won’t achieve the harmonization that is necessary.”