On September 30, FERC held its much-anticipated carbon pricing technical conference. My written pre-conference remarks delineated our overarching views of the conference. This plays into a bigger theme of the imperative to harmonize state climate policy and federal electricity policy.

States are really the gatekeepers of this issue, however, current state regulators and representatives from existing carbon pricing programs were not asked to present at the conference. This was not well received by the states and other key stakeholders, who’ve considered walking away from this dialogue when we can least afford it. This prompted Jason Stanek, the head of the Maryland Public Service Commission, and I to co-author a piece to encourage everyone to come to the table, even if they weren’t explicitly invited. Sue Tierney, a former state regulator, stressed at the conference some parameters for FERC to avoid an “untenable position” for states and enhance cooperative federalism. Relatedly, I stressed in conference remarks that FERC address states’ informational needs on how carbon pricing would work under different state institutional arrangements.

Below is a recap of my quick thoughts on the conference:

  1. States (and Congress) are in the driver’s seat. Legal opinions were split on whether FERC could force a top-down uniform carbon price under the Federal Power Act, but suffice to say that political considerations take that option off the table for good reason. FERC, for its part, was quite clear that’s not where they want this to go. Whether this carbon pricing dialogue goes anywhere is up to states—unless the next Congress decides to take this up. Sen. Whitehouse, who provided opening remarks, suggested that private sector and bipartisan interest has grown in the topic that just may tip the scales—I concur. I’m particularly interested to see how the lessons learned from states translate into Congress next year; such as the large cost, innovation, reliability and environmental advantages of carbon pricing compared to a national clean energy standard.
  2. A nearly unanimous recognition that carbon pricing is the most cost-effective and grid reliability-supporting policy intervention to reduce emissions. This point requires little elaboration; it was a regular refrain in most panelists’ opening statements. One point worth noting is that carbon pricing doesn’t raise reliability concerns; it merely shifts the supply curve as generators reflect the cost in their offers, which permits the market design to work by clearing resources that satisfy reliability parameters. A point I emphasized was that the economic efficiency of carbon pricing varies enormously based on the prevailing state policy landscape, which can especially drive performance differences between quantity-based instruments (i.e., cap-and-trade) or price-based instruments (i.e., emissions fee like those considered under RTO tariffs).
  3. A general recognition that standards and subsidies for clean energy create unnecessary costs and may create reliability concerns. Dr. Joe Bowring, the monitor of the largest wholesale electricity market (PJM), and Dr. Frank Wolak of Stanford were particularly articulate on the economic advantage of pricing brown generation rather than subsidizing green generation. Dr. Bill Hogan of Harvard raised similar concerns, and he and I both raised the need to determine better counterfactuals to measure economic performance. Meanwhile, spokespersons for the New England and New York grid operators made clear that mandates and subsidies may present grid resource adequacy concerns. Although I didn’t get to it on the record, I’m particularly concerned that the more state policies drive investment entry and exit outside of market design parameters, the more we approach a situation where our reliability backstop procedures like reliability must-run provisions will be employed by grid operators.
  4. Opinions varied on technical implementation mechanics. This includes emissions leakage management, where seemingly everyone agreed that balkanized carbon pricing across geographic footprints presented material challenges, but whether RTOs should enact leakage mechanisms varied. If carbon pricing is conducted under an RTO tariff, one sticky point is how to allocate those revenues, which may naturally raise some equity vs. economy efficiency considerations. But these points matter little unless a critical mass of states want to take the next step.
  5. Next steps: FERC clarity and state objectives. FERC can coax productive state input by clarifying that it is taking a top-down approach to carbon pricing off the table, reiterating that carbon pricing is compatible with electric competition and deliberately asking states what their policy objectives are and what information they would find most useful to steer the harmonization of state climate policy and federal electricity policy. Dena Wiggins, the CEO of the Natural Gas Supply Association, suggested FERC issue a policy statement that address much of this, while state that it would consider a carbon pricing proposal built into an RTO tariff—i.e. , avoiding any “dead on arrival” concerns. The use of joint state-federal boards to drive cooperative federalism was raised by Commissioner Glick and described by Travis Kavulla, consistent with Kavulla’s advocacy of the vehicle in a R Street paper last year. Hopefully, that foreshadows further exploration of the concept and underlying principle—we certainly plan to.

I received some immediate emails asking why I didn’t go after bad state policies more. That was intentional for two reasons: first, FERC asked us to not go there (much), and we need states engaged if this is to go anywhere. As an economist and pragmatic libertarian, I enthusiastically agree with the chorus supporting carbon pricing in lieu of standards, subsidies and distortionary taxes. But I suggest pumping the breaks on this out-of-the-gate, as sounding off on this will put states in a defensive posture and stall momentum. We need states at the table and, ideally, to have them request better information on the interactive effects of carbon pricing and other state policy considerations. That outcome is likely the best we can do to make the “carbon pricing only” case, and the reality is that states would only be so willing to adjust complementary policies based on new evidence. A common refrain in the conference summed this up: do not let the perfect be the enemy of the good.

At one point during panel 3 a child’s voice became audible in the background, which caught a few smirks from participants. It was a nice reminder that this discussion is foremost about benefiting young and future generations. That means we need to be cost conscious and amplify drivers of global emissions reductions to provide a healthy economy and environment. Accomplishing this is anything but child’s play, but FERC’s conference indicated a simple parable; the best way to help future generations is for efficient emissions pricing and competitive markets to work in tandem.

Image credit:  kamilpetran