FERC Signals Green Light on Carbon Pricing to Help Reduce Emissions

The body that regulates the interstate transmission of oil, electricity, and natural gas has signaled its willingness to approve regional grid operator plans that incorporate carbon pricing into their rate structures. Carbon pricing encourages a market-based approach to reducing greenhouse gas (GHG) emissions, essentially by charging polluters.

The Federal Energy Regulatory Commission’s (FERC’s) Oct. 15, 2020, notice of proposed policy statement recognized that certain state efforts to reduce GHG emissions in the electricity sector could indirectly affect matters subject to FERC jurisdiction. The draft policy statement was intended to clarify FERC’s jurisdiction over filings pursuant to Federal Power Act Section 205 that seek to incorporate state carbon-pricing policies.


Significantly, FERC explicitly stated that as a matter of policy it sought to boost efforts to incorporate a state-determined carbon price in organized wholesale electricity markets operated by regional transmission organizations (RTOs) and independent system operators (ISOs). It stated, “proposals to incorporate a state-determined carbon price in RTO/ISO markets could, if properly designed and implemented, significantly improve the efficiency of those markets.” Though the policy statement gave no guidance as to what types of carbon-pricing market proposals would be acceptable to FERC, the statement encouraged regional electric market operators to explore the benefits of establishing carbon pricing.

Bipartisan Support

By proposing a framework for applying FERC jurisdiction to wholesale market rules that incorporate a state-determined carbon price, the draft policy statement marked a notable transformation on climate change policies for the Republican-led FERC. The bipartisan move was led by former Chairman Neil Chatterjee, a Republican, and Commissioner Richard Glick, a Democrat.

Shortly after the proposed policy statement was issued, then-President Trump stripped Chatterjee of the chairman title. Many, including Chatterjee, suspect this demotion was due to Chatterjee’s crossing of party lines to support carbon pricing. While the chairman’s vote does not carry more weight than that of the other commissioners, the chairman does have the ability to shape FERC’s policy agenda. Chatterjee had served as chairman since October 2018, and has been vocal about Trump’s decision to remove him. In a Facebook post, Chatterjee stated, “I will be judged by my grandchildren. And as of this moment I am confident that I will be able to look them in the eyes when they ask me where I stood on the most significant issues of this time and be proud.”

Trump replaced Chatterjee with Commissioner James Danly, a Republican who was appointed to FERC in March 2020. Danly dissented in part from the proposed policy statement on carbon pricing, stating it would have been better to wait until the commission actually had a Section 205 filing, rather than prejudging the issue based on unstated assumptions about how such programs might work. However, Danly did agree that the commission has jurisdiction to entertain Section 205 filings that seek to accommodate state carbon-pricing policies.

Danly’s time as FERC chair was short-lived. President Joe Biden on Jan. 21 named Glick to chair the agency. Considering that Chatterjee has been touting his policy achievements and has said he will stay on as a commissioner until his term expires on June 30, 2021, there is a good chance the Oct. 15, 2020-proposed policy statement will be finalized this year. If finalized, the policy statement would provide states with confidence that FERC would not deny state-led efforts to price carbon.

States Leading the Way

A dozen states currently impose some method of carbon pricing. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont cooperate as members of the Regional Greenhouse Gas Initiative (RGGI) to reduce CO2

Addisah Sherwood

emissions through a cap-and-trade program. Virginia is set to become a member of RGGI in 2021, and Pennsylvania is in the process of joining. Additionally, California and Massachusetts have cap-and-trade programs as well.

Cap-and-trade systems limit emissions by establishing a cap on total permissible emissions. The total amount of the cap is then split into allowances. Companies that reduce their emissions can sell or trade their allowances to companies that emit more; carbon prices thus emerge from the initial allocation of allowances and the trading of allowances on the secondary market.

By encouraging a market-based strategy for lowering global warming emissions, FERC greenlit state-led efforts to incorporate climate risks into the cost of doing business. As FERC observed, “States are currently taking a leading role in efforts to address climate change by adopting policies to reduce their greenhouse gas emissions.” But it’s not just states seeking to lower GHG emissions and shift to a clean energy economy; many major energy companies recently showcased net-zero emission goals in their environmental, social, and governance plans, and unveiled new initiatives aimed at delivering cleaner energy to their customers. FERC’s proposed policy statement signaling approval of carbon pricing supports these goals and could result in the more immediate monetization of these new green initiatives.

Addisah Sherwood is an attorney at Benesch, a business law firm where she works closely with utility companies to negotiate their business disputes as well as assisting with infrastructure upgrades.

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