Guest essay by Roger Caiazza
The Federal Energy Regulatory Commission (FERC) hosted a technical conference regarding Carbon Pricing in Organized Wholesale Electricity Markets on September 30, 2020. This post describes the presentations and issues raised at the conference. It is intended to give an overview of the conference and provides references so that readers can follow up on their own.
Goal of Conference
Last April I posted an article that described the reasons I think that carbon pricing is a practical dead end that was prompted by news that organizations had asked to host a conference on carbon pricing. The September conference was held in response to those requests. According to FERC:
“The purpose of this conference is to discuss considerations related to state-adoption of mechanisms to price carbon dioxide emissions, commonly referred to as carbon pricing, in regions with Commission-jurisdictional organized wholesale electricity markets (i.e., regions with regional transmission organizations/independent system operators, or RTOs/ISOs). This conference will focus on carbon pricing approaches where a state (or group of states) sets an explicit carbon price, whether through a price-based or quantity-based approach, and how that carbon price intersects with RTO/ISO-administered markets, addressing both legal and technical issues.”
There were three panel discussions at the conference:
- Legal Considerations for State-Adopted Carbon Pricing and RTO/ISO Markets,
- Overview of Carbon Pricing Mechanisms and Interactions with RTO/ISO Markets, and
- Considerations for Market Design.
Experts were invited to submit comments to FERC before the conference (available in the event details). During the conference each expert gave an opening statement and then FERC Commissioners posed questions to the panelists. There is an audio recording of the conference available and I added the approximate times of each speaker to a copy of the agenda here.
The first panel covered general legal issues that may “arise under the Federal Power Act when the Commission is presented with a proposal to integrate a carbon price set by a state (or group of states) into a Regional Transmission Operator (RTO)/Independent System Operator (ISO) market design”.
Most of the panelists were lawyers and their comments mostly addressed the limits of the Commission’s jurisdiction. In my opinion, Professor Rossi’s submitted comments were the best summary of the responses. The following issues were raised by FERC: whether the Commission has statutory authority under the Federal Power Act (FPA) associated with implementation of carbon pricing in electric markets; how integrating a state-set carbon price into an RTO/ISO market can be just, reasonable and not unduly discriminatory or preferential; how to deal with proposals by RTOs/ISOs to incorporate costs associated with participation in state or regional cap-and-trade programs; whether potential rate impacts stemming from the integration of carbon pricing into RTO/ISO markets are just, reasonable, and not unduly discriminatory or preferential; and legal implications under the FPA associated with any implementation of a carbon price.
In my opinion, every panelist who participated agreed that carbon pricing was the most efficient approach to reduce carbon emissions and that if implemented across the country there would be no problem for FERC. As that is not the case, the problem is how FERC deals with carbon pricing amongst different jurisdictions. The consensus on this panel was that FERC does have jurisdiction to deal with carbon pricing. There also was a discussion whether FERC should react to issues raised by carbon pricing in different areas or FERC should become pro-active and impose a carbon price outside of legislative authority. Roy Shanker’s comments described this issue. My impression is that being reactive has fewer legal hurdles but the pro-active approach would face many more legal challenges.
Overview of Carbon Pricing Mechanisms and Interactions with RTO/ISO Markets
The objective of the second panel was to “provide a common understanding of (1) how RTO/ISO markets currently incorporate carbon pricing set by state and regional initiatives (i.e., state-administered carbon pricing), and (2) carbon pricing mechanisms that are under development that contemplate a greater role for RTOs/ISOs in administering a carbon price set through a state or regional initiative, and how such mechanisms intersect with RTO/ISO markets”.
The panelists in this session had technical backgrounds. They agreed that the options to carbon pricing were a worse alternative. The different options include renewable portfolio standards that require energy suppliers to provide their customers with a specified minimum level of electricity from eligible renewable sources, renewable energy certificates, and direct subsidies to specific renewable sources. Dr. Joe Bowring from the PJM Interconnection explained that “the state renewables programs in PJM are not coordinated with one another, are generally not consistent with the PJM market design or PJM prices, have widely differing objectives, have widely differing implied prices of carbon and are not transparent on pricing and quantities”. Dr. Frank Wolak of Stanford described the economic advantages of pricing fossil-fired “brown generation” rather than subsidizing renewable “green generation”. Of particular concern to all the panelists, including spokespersons for the New England and New York grid operators, was that alternatives to carbon pricing may present grid resource adequacy concerns.
Considerations for Market Design
Two panels addressed “the operational and market design issues that arise as RTOs/ISOs seek to integrate carbon pricing into their energy and ancillary services markets”. The panels also presented “perspectives from both market design experts (about ways to integrate carbon pricing into RTO/ISO markets) and market participants (about how carbon pricing might affect their participation in the RTO/ISO markets)”.
There were 12 people on these panels: four from RTO/ISO organizations, three from generating companies, three from trading organizations, one academic and one representing industrial customers. I thought Dr. William Hogan expressed the common concerns of this panel well. Everyone agreed that emission leakage is a concern but others also raised the issue of economic leakage where the increased costs inside the control area leads to business leaving for non-affected areas. Another aspect of economic leakage was described by Chris Parker in the final roundtable discussion: “If a generator in Utah would run in a given dispatch period in an organized market based on its marginal cost, but it finishes out of the money solely because of another state’s carbon price adder, the other state’s policy has illegal extraterritorial effect.”
Closing Roundtable Discussion
By the time of the roundtable discussion I had enough so I did not listen to that section. The statements of each participant are available for review. My impression is that, not surprisingly, all of the roundtable speakers were biased to support their company, state or organization’s vested interests. As a result, their commentary was predictable.
The ultimate problem is that while everyone agreed that a carbon price is the most efficient and effective way to reduce carbon, they also recognized that carbon pricing works better for a national price on carbon and others pointed out that in should also be across all sectors. Because that is not possible FERC has to figure out how to deal with fragmented carbon policies.
This conference might foreshadow the future direction of FERC and carbon pricing. My impression is that if this conference is any indication then FERC will likely not act to prevent a jurisdiction enacting a carbon pricing scheme. Note that there are jurisdictions opposed to that who would no doubt fight that interpretation. I also understood that FERC likely does not have the authority to establish a national carbon pricing scheme on its own. That would require legislative authority.
While there were some suggestions that fragmented carbon policies were not the best solution, there was no discussion of the spatial and sectorial cut-off point where carbon pricing would work so poorly that it should not be considered. There were plenty of instances where speakers were unaware or did not address the practical issues with carbon pricing that I discussed last spring. Many participants had motivations to support carbon pricing based on their biased interests and I don’t think they necessarily align with the best interests of the general public.
Furthermore, I think there is a big gap between the theory that setting a price will actually cause the desired shift to zero-emitting electric generation and the real world. Multiple speakers hinted that the carbon price needed to make those changes would have to be much higher than the current values of the social cost of carbon. I believe that is true and if that is the case there is a fundamental problem. The social cost of carbon represents the negative externalities of climate change due to emitting CO2 today. If the price to convert to renewables exceeds that cost then the theory says it is not cost-effective to convert to renewables. Logically the carbon tax proceeds should be invested elsewhere. Offhand spending it on R&D to find a zero-emitting cheaper alternative and investing the money to make society more resilient would be better options than social cost ineffective mitigation.
Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York. This represents his opinion and not the opinion of any of his previous employers or any other company he has been associated with.