Most people recognize that carbon dioxide (CO2) is a greenhouse gas (GHG), and while not everyone agrees, a majority of climate scientists believe increasing concentrations of GHGs in the atmosphere are causing climate change on Earth.

Carbon pricing is a market-based strategy for reducing CO2 emissions. The goal of carbon pricing schemes is to place a value on carbon emissions so that the costs can be passed on to GHG emitters, thereby creating financial incentives to reduce emissions.

However, enacting a carbon pricing strategy in the U.S. has been difficult. Some observers blame the fossil fuel industry, such as coal mining and oil drilling companies, for lobbying in Washington to halt carbon pricing efforts. Yet, even some fossil-focused groups are getting behind the idea. In March this year, the American Petroleum Institute (API), an advocacy group representing all segments of America’s natural gas and oil industry, endorsed “a Carbon Price Policy to drive economy-wide, market-based solutions.”

Another strong proponent of carbon pricing is Neil Chatterjee, a former commissioner and chairman with the Federal Energy Regulatory Commission (FERC), who recently joined Hogan Lovells as a senior advisor in the firm’s Energy Regulatory practice. As a guest on The POWER Podcast, Chatterjee said, “As someone who had a front row seat to the challenges within competitive power markets in the U.S., I have really come to the conclusion that pricing the externality—putting a price on carbon—is a vastly superior approach to carbon mitigation than subsidies or mandates or over-reaching burdensome regulations. I just think that given those choices—I saw it firsthand—a carbon price is a far more effective and efficient market-based approach to carbon mitigation.”

Chatterjee spearheaded an effort to provide clarity for regional transmission organizations (RTOs) and independent system operators (ISOs), which resulted in a FERC policy statement on carbon pricing. Chatterjee said a FERC policy statement is not like a rulemaking, but rather, it provides a roadmap to stakeholders for how to engage with the commission.

“I wanted to make clear that: A) the commission didn’t have the ability to unilaterally impose, collect, and administer a price on carbon but, B) that should a state implement a price on carbon that got incorporated into an RTO or ISO tariff, that there was a roadmap whereby the commission could make a determination of whether such a tariff change was just and reasonable,” he explained. “And the reason I think it’s important is I do think you have a couple of RTOs and ISOs who are looking at the possibility of incorporating a carbon price. And some people will say, ‘Well, that’s just a baby step.’ Well, I say, let’s take the baby step.

“We’ve had economists across the political spectrum say that this is an effective market-based way to decarbonize,” Chatterjee said. “Let’s take a baby step. Let’s see if an RTO or an ISO can implement a price on carbon, if this iteration of FERC can make the determination that such a price on carbon is just and reasonable, and then let’s see if it works. And perhaps, if we have that successful model within the U.S. power market, and we take that baby step successfully, then maybe other grid operators will take note of that, and you could see further utilization of this market-based tool.”

To hear the full interview, which includes much more insight from Chatterjee’s time at FERC, listen to The POWER Podcast. Click on the SoundCloud player below to listen in your browser now or use the following links to reach the show page on your favorite podcast platform:

For more power podcasts, visit The POWER Podcast archives.

Aaron Larson is POWER’s executive editor (@AaronL_Power, @POWERmagazine).