Could FERC Implement a Carbon Price Equivalent?

Washington, D.C. – Many economists and policymakers believe that the best way to reduce U.S. carbon dioxide emissions is the simplest: a market-based price on the emissions. But that approach – either through a direct carbon tax or a somewhat more convoluted cap-and-trade mechanism – is simply not politically possible, as the Obama administration has discovered to its dismay.

Facing political gridlock over a national, congressionally-blessed approach to reduce the emissions, the administration has turned to an even more convoluted scheme using the authority of the 1990 Clean Air Act Amendments. The Environmental Protection Agency’s “Climate Action Plan” is so complex, with so many moving parts among the feds, the states, and industry, that it is quite reasonable to doubt that it will ultimately work. Entirely regulatory, it will not “put a price on carbon,” but impose multiple paths to emissions reductions.

But is there another way that the federal government could set what would be an equivalent to a price on carbon? Last month, two scholars from the University of California, Berkeley’s law school argued that the Federal Energy Regulatory Commission could take a series of actions that would “under existing law, without the need for approval by Congress,” effectively set a market price on carbon emissions.

The argument in the paper by Steven Weissman and Romany Webb – “Addressing Climate Change Without Legislation,” with a subtitle of “How the Federal Energy Regulatory Commission can use its existing legal authority to reduce greenhouse gas emissions and increase clean energy use” – is impractical, going against the way FERC traditionally has viewed its mission and implemented its policies, which have always focused on rates and reliability, based on the venerable Federal Power Act. But it raises some interesting ideas.

Weissman and Webb propose six ways FERC could use its authorities:

* FERC could recognize the external costs of CO2 “by including an adder” in the wholesale electric rates over which it has jurisdiction.

* The commission could use feed-in tariffs “that guarantee renewable generators a specified price for their power,” an approach widely used in Europe with mixed results.

* FERC could “simplify” the process for licensing offshore hydrokinetic projects.

* The agency could “require electric utilities to expand their transmission capacity to serve renewable power systems. Additionally, FERC can encourage utilities to voluntarily invest in such expansions by changing its transmission cost recovery rules to allow for broader allocation of investment costs.”

* FERC could push integrated resource planning and “require utilities to adopt a fully integrated approach when preparing regional transmission plans” under FERC’s Order 1000, recently upheld by the U.S. Court of Appeals for the D.C. Circuit.

* The commission could move to mitigate methane emissions from natural gas production and distribution and use “by requiring natural gas companies to report on the climate impacts of their operations and to take appropriate steps to minimize those impacts.”

The Obama administration’s climate plan, concocted by the EPA, nowhere mentions FERC. Indeed, the two agencies are engaging in a behind-the-scenes turf battle over whether the EPA plan could degrade the reliability of the U.S. electric grid.

The Berkeley authors implicitly acknowledge the impracticality of their plan. They note that their paper “does not assess the merits of the identified actions. Rather, it is left up to FERC to determine whether implementation of each action is a wise policy choice.”

Indeed, FERC is, at least nominally, an independent agency and sets its own agenda. It takes no orders from the White House. It is very hard to see FERC taking any of the actions in the report. Weissman runs the law school’s Center for Law, Energy and the Environment and Webb is a graduate of the schools advanced degree program.