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ELPAR 2020: Opportunities and Challenges for FERC to Price Carbon Emissions

Wednesday, August 12, 2020

Electricity generation, one of the leading sources of greenhouse gas emissions, rarely accounts for the social cost of damages caused by carbon dioxide emissions. Embedding these costs into market rates is one way to address the pressing need for decarbonization. In this year’s Environmental Law and Policy Annual Review (ELPAR), a special issue of The Environmental Law Reporter, authors Bethany Davis Noll and Burcin Unel argue that addressing the price of emissions falls within the authority of the Federal Energy Regulatory Commission (FERC). The authors examine how imposing a cost on carbon aligns with FERC’s main goal of ensuring just and reasonable rates, and they explore opportunities and limits for FERC’s authority.

ELPAR 8 2020Since carbon emissions pose a negative externality, Davis Noll and Unel argue these emissions cause a market failure related to the social marginal cost of electricity generation, the efficient price suppliers should receive for production, and the costs incurred by consumers. As the rate regulator responsible for ensuring economic efficiency, FERC has the power to address such externalities, and it has done so in the past for issues such as network congestion. The authors provide important limits to consider, including potential challenges by states, which retain authority to govern local energy distribution, and the need for FERC’s findings to employ substantial evidence.

In a follow-up commentary to the article, Kim Smaczniak offers a range of critiques to FERC’s authority over carbon prices. Smaczniak argues that if carbon externalities directly affect market rates, then any manner of air, water, or land pollution could also pose an externality for FERC to regulate. Without a reasonable limit to FERC’s authority, federal courts are likely to question its ability to address carbon emissions. The comment also explores potential challenges related to the line between state and federal authority. Finally, climate policies must be political and embed equity and health considerations. Holistic and aggressive policies are needed to achieve decarbonization, and Smaczniak contends that FERC cannot offer a sufficiently comprehensive set of tools to address carbon emissions or climate change.

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