Guest essay by Roger Caiazza
The Federal Energy Regulatory Commission (FERC) hosted a technical conference on carbon pricing in organized wholesale electricity markets on September 30, 2020. This article describes the presentations and topics raised at the conference. It is intended to provide an overview of the conference and include references so that readers can follow up for themselves.
Goal of the conference
Last April, I published an article describing the reasons I think carbon pricing is a practical impasse triggered by the news that organizations were about to host a conference on carbon pricing. The September conference was held in response to these requests. According to FERC:
“The purpose of this conference is to discuss considerations related to the government introduction of carbon pricing mechanisms, commonly referred to as carbon pricing, in regions with commissioned 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 a quantity-based approach, and how that carbon price compares with the RTO / ISO managed markets overlaps both legal and technical issues. "
There were three panel discussions at the conference:
- Legal considerations on government-recognized CO2 prices and RTO / ISO markets,
- Overview of the mechanisms of carbon pricing and the interactions with RTO / ISO markets and
- Considerations for market design.
Experts were asked to send comments to FERC prior to the conference (available in the event details). During the conference, each expert gave an opening speech and then the FERC commissioners put questions to the panelists. There is an audio recording of the conference available, and I've added the approximate times of each speaker to a copy of the agenda here.
The first panel dealt with general legal issues that may arise under the Federal Electricity Act if the Commission is presented with a proposal to integrate a carbon price set by a state (or group of states) into a regional transmission system operator / independent system for market design Operator (ISO) ".
Most of the panellists were lawyers and their comments mainly concerned the limits of the Commission's powers. In my opinion, the comments submitted by Professor Rossi were the best summary of the responses. The following questions were raised by FERC: Does the Commission have any legal authority under the Federal Power Act (FPA) to implement carbon pricing in the electricity markets? How can the inclusion of a government-set carbon price in an RTO / ISO market be fair, reasonable and not overly discriminatory or preferential? how to deal with proposals from RTOs / ISOs to include costs associated with participating in state or regional cap-and-trade programs; whether the potential interest rate impact resulting from the integration of carbon pricing into the RTO / ISO markets is fair, reasonable and not excessively discriminatory or preferential; and legal implications under the FPA related to the implementation of a carbon price.
In my opinion, all the participating panellists agreed that carbon pricing is the most efficient approach to reducing carbon emissions and that if FERC is implemented nationwide, there is no problem. Since it does not, the problem is how FERC deals with carbon pricing in different countries. The consensus in this body was that FERC is responsible for handling carbon prices. There was also a discussion about whether FERC should respond to issues raised by carbon pricing in various areas, or whether FERC should go proactive and impose a carbon pricing outside of its legislative competence. Roy Shanker's comments described this problem. My impression is that reactivity has fewer legal hurdles, but the proactive approach would face a lot more legal challenges.
Overview of the mechanisms of carbon pricing and interactions with RTO / ISO markets
The aim of the second panel was to “provide a common understanding of (1) how RTO / ISO markets currently incorporate carbon prices set by government and regional initiatives (i.e. government managed carbon prices) and (2) Carbon pricing mechanisms are under development that consider a greater role for RTOs / ISOs in managing a carbon price set by a government or regional initiative and how such mechanisms intersect with RTO / ISO markets. "
The panelists at this session had technical backgrounds. They agreed that the carbon pricing options were a worse alternative. The various options include renewable portfolio standards that require energy providers to provide their customers with a certain minimum amount of electricity from eligible renewable sources, renewable energy certificates, and direct subsidies for certain renewable sources. Dr. Joe Bowring of PJM Interconnection stated, “The government renewable energy programs in PJM are not coordinated, generally inconsistent with PJM market design or prices, have very different goals, have very different implicit prices for carbon and carbon are not transparent about prices and quantities ”. Dr. Stanford's Frank Wolak described the economic benefits of pricing fossil-fueled "brown generation" rather than subsidizing renewable "green generation". Of particular concern to all panellists, including network operator spokespersons in New England and New York, was that alternatives to carbon pricing could raise concerns about the adequacy of network resources.
Considerations for market design
Two panels looked at "the operational and market issues that arise when RTOs / ISOs attempt to integrate carbon pricing into their energy and ancillary services markets". The panels also presented “Perspectives from both market design experts (on ways to integrate carbon pricing into RTO / ISO markets) and market participants (on how carbon pricing affects their participation in the RTO / ISO markets could affect) ".
There were 12 people on these bodies: four from RTO / ISO organizations, three from manufacturing companies, three from trade organizations, one academic and one for industrial customers. I thought Dr. William Hogan has well expressed the shared concerns of this panel. Everyone agreed that emissions leakage was a problem, but others also raised the issue of economic leakage, where the increased costs within the controlled area cause businesses to move to unaffected areas. Another aspect of the economic leakage was described by Chris Parker in the closing panel: “If a generator in Utah ran in an organized market based on its marginal cost for a given shipping period, but only failed due to a different money's policy of the other state has an illegal extraterritorial effect. "
Conclude the roundtable discussion
At the time of the round table discussion, I had enough that I did not hear this passage. The statements of each participant can be viewed. My impression is that, unsurprisingly, all of the speakers at the round table were biased to support the interests of their company, state, or organization. As a result, her comment was predictable.
The ultimate problem is that everyone agreed that a carbon price is the most efficient and effective way to reduce carbon, but they also recognized that carbon prices work better for a national price for carbon, and others pointed out that should also apply in all sectors. Since this is not possible, FERC needs to figure out how to deal with fragmented carbon policies.
This conference could anticipate the future direction of FERC and carbon pricing. My impression is that if this conference is any indication, FERC is unlikely to prevent a jurisdiction from adopting a carbon pricing system. Note that there are other jurisdictions that would no doubt contest this interpretation. I also understood that FERC is probably not empowered to set up a national carbon pricing system itself. That would require legislative power.
While there have been some suggestions that fragmented carbon policies are not the best solution, there has been no discussion of the spatial and sectoral limit at which carbon prices would function so badly that it should not be taken into account. There have been many instances where the speakers were unfamiliar with or did not address the practical issues with carbon pricing that I discussed last spring. Many attendees were motivated to support carbon pricing because of their biased interests, and I don't think they necessarily align with the best interests of the public.
Additionally, I think there is a big gap between the theory that setting a price will actually make the desired shift to zero-emission power generation and the real world. Several speakers suggested that the carbon price required for these changes would have to be much higher than the current values of the social cost of carbon. I believe this is true and if it does then there is a fundamental problem. The social costs of carbon represent the negative external effects of climate change due to today's CO2 emissions. If the price of switching to renewable energy exceeds this cost, then the theory is that switching to renewable energy is not cost-effective. Logically, the CO2 tax revenue should be invested elsewhere. It would be better to spend it on research and development to find an emission-free alternative and invest the money to make society more resilient than ineffectively reducing social costs.
Roger Caiazza blogs for the New York Pragmatic Environmentalist about energy and environmental issues in New York. This is his opinion and not the opinion of any of his previous employers or any other company he has been associated with.