FERC clarifies how it will treat carbon pricing in organized wholesale markets

This week FERC issued a policy statement clarifying how it will consider market rules proposed by regional grid operators that seek to incorporate a state-determined carbon price in organized wholesale electricity markets.

The policy statement explains that wholesale market rules incorporating a state-determined carbon price can fall within the Commission’s jurisdiction under section 205 of the Federal Power Act (FPA). It presents a framework for the Commission to exercise its jurisdiction when it reviews any future proposals under FPA section 205 while making clear that the Commission will evaluate any proposal based on the facts and circumstances presented in each proceeding.

Finally, the policy statement does not indicate a preference for carbon pricing over any other state policy. It affirms that whether and how a state chooses to address greenhouse gas emissions is a matter exclusively within that state’s jurisdiction.

Carbon pricing has emerged as an important market-based tool in state efforts to reduce greenhouse gas emissions, including in the electricity sector. Twelve states now impose some version of carbon pricing, with numerous additional states considering them. Various entities, including regional grid operators, are examining approaches to incorporating state-determined carbon prices into wholesale electricity markets.

During FERC’s September 2020 technical conference on carbon pricing, participants identified a range of potential benefits from incorporating state-determined carbon pricing into the wholesale markets, including the development of technology-neutral, transparent price signals within the markets.

Gregory Wetstone, President and CEO of the American Council on Renewable Energy (ACORE) reacted to the news. “Today’s policy statement demonstrates an understanding by FERC leadership that the economic design of our nation’s wholesale energy markets is inseparable from our climate reality. Pricing carbon not only sends market signals to emitting resources that they should retire, but also drives investment in new, low-carbon resources by helping them compete,” he said in a written statement.

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