FERC’s carbon pricing dialogue may be worth the price of admission
While the show hasn’t even begun, the fireworks are well underway. Some oppose FERC initiating this dialogue at all, which misses the context — a regulator responding to an industry petition — as well as the big picture. There is a dire need to harmonize state climate policy with federal electricity policy.
That’s not to say FERC hasn’t deserved some fair critiques on the matter. But the degree of skepticism held by some stakeholders perhaps reflects a frustration with other adversarial, legal approaches to reconciling state and FERC policy. The irony is, a productive dialogue on carbon pricing may heal other wounds by taking steps toward aligning state and FERC policies with their mutual interests.
In that sense, FERC’s conference is bigger than carbon pricing. It is an opportunity to lay out the ground work for state and federal stakeholders to start a productive dialogue rather than working at cross-purposes. The conference is, in many ways, a small but relevant outgrowth of conversations to reconcile state and FERC policies which grew in importance over the past decade.
Backstory
Since Congress declined to price carbon a decade ago, climate policy pivoted mostly to the states. States have since exhibited a wide range of methods in pursuing emissions-reducing policies. For example, many states elected to pursue clean energy promotion via standards and incentives as the primary catalysts, and others have adopted cap-and-trade programs to complement these efforts. FERC began raising anti-competitive questions over state incentives as they pertain to their effect on organized electricity markets.
As states became more active in defining environmental policies within electricity markets, it led to a bipartisan recognition over the imperative of harmonizing state policy and wholesale electricity markets in 2017, when FERC hosted a technical conference on the subject. Since then, a majority at FERC has made clear that it views state incentives as incompatible with competitive wholesale electricity markets. This has frustrated — even enraged — many stakeholders.
Now FERC offers a prelude to dialogue on a compatible climate policy — carbon pricing. All stakeholders would be wise to set their frustrations aside and keep their eye on the prize; routinizing proactive federalism. Healthy stakeholder engagement would encourage subsequent attempts to harmonize state climate and FERC electric competition objectives.
Sure, the rollout of the carbon pricing conference has raised eyebrows. With more than 30 invited panelists, the limited representation of states and consumers at the conference is perplexing.
No state utility regulators will testify, with only one panelist representing a state that neither fully participates in an RTO/ISO nor is a member of an established carbon pricing program. Numerous supply-side entities abound the agenda, yet only one consumer voice and not a single member of the most established carbon pricing system in the United States — the 10-state Regional Greenhouse Gas Initiative — made the cut.
While FERC’s leadership deserves credit for organizing this conversation quickly, not to mention under the present political climate, there will be a glaring lack of state and consumer interests at the table. Nevertheless, the stage is set now for an important dialogue with states following this opportunity to hear from FERC’s list of qualified speakers on this subject.
Conference potential
FERC is not explicitly framing the conference in the big picture of state-federal harmonization, but it is consistent with doing so. Specifically, FERC clarified that states are in the driver’s seat by limiting the scope to “approaches where a state (or group of states) sets an explicit carbon price.”
This, combined with an upfront legal panel — an unusual start for a FERC conference — makes it clear that FERC wants to hone the public conversation to legal pathways for bottom-up carbon pricing. In doing so, FERC can build a record upon which it can clarify its proper role as an electricity — not climate — regulator and discard lingering concerns of FERC one day instituting a top-down uniform carbon pricing scheme.
A path toward conflict resolution begins with identifying mutual policy objectives. Again, while FERC’s framing does not explicitly seek to do so, the conference’s technical panels should address some obvious criteria of agreement. For example, FERC’s emphasis on economic efficiency could be deconstructed into several components all states care about: costs, reliability, innovation and environmental effectiveness.
While most states interested in carbon pricing are already in cap-and-trade systems — an emissions quantity instrument — RTO carbon pricing would likely use a price instrument. That distinction alone may affect costs, emissions and innovation incentives for carbon pricing overlayed on top of the variety of “complementary” policies such states already enacted.
On the other hand, RTOs could employ leakage mitigation mechanisms — another topic of the conference — to aid the effectiveness of existing cap-and-trade programs. These tools, combined with an accommodative signal from FERC, may motivate cost-minded states to make their carbon reduction policies more efficient and effective.
As states revise their climate strategies moving forward, the more quality information they have, the better. In a one-day conference, FERC can only begin to cover so much ground, but the conference could still be very useful. Nuanced issues may not get addressed at this stage. And that’s fine, because any progress on state-FERC harmonization would be magnified overall.
At the least, FERC’s intent to help and appreciate that states are the drivers of climate policy (aside from Congress) should open the door to more fruitful subsequent dialogues which explicitly seek input from the states upfront.
We need everyone at the table, regardless of whether we were expressly invited to the party. The price to be constructive on the conference record — namely stakeholders’ time and patience — is worth admission.
All stakeholders must be heard as we begin a return to an evidence-based dialogue on sound economics and the proper role of our institutions in climate and electricity policy. If we do, we will materially change the world for the better.
