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FERC claims carbon pricing would improve the “efficiency” of wholesale markets but does not explain how. Fortunately, in March 2020, the left-leaning Institute for Policy Integrity (IPI) published a 60-page report that clearly articulates the rationale underpinning the Commission’s proposal.

As the prospects for a nationwide carbon price have waned, FERC has begun to change from a sleepy backwater to a central player in climate policy, said Jason Gundlach, a senior attorney at New York University School of Law’s Institute for Policy Integrity who co-authored a report on carbon pricing. “There’s a recognition that FERC is going to be a major fulcrum in any energy transition policy,” he said.

The idea sounds great on the surface: incentivize the delivery of clean energy when demand is highest. However, a recent study co-authored by researchers from Columbia University, New York University, and the clean energy non-profit WattTime challenges the effectiveness of such programs. The study found that “[t]he Clean Peak Standard provides weak incentives for pollution abatement” and that the policy in Massachusetts “is roughly as effective as a $1 carbon tax.”

Sylwia Bialek, an economist who specializes in energy markets at the New York University School of Law's Institute for Policy Integrity, said carbon pricing — as opposed to state clean energy mandates — allows for greater precision in rooting out emissions. "If I give subsidies to wind and solar, they might compete with each other and not push out coal or gas," she said in a recent interview. "But if I put a carbon price on fossil fuel generators, I will account for how polluting those are."

According to Bethany Davis Noll and Burcin Unel of the Institute for Policy Integrity, the Commission has embraced “market efficiency” as the primary measure of just and reasonable rates. It relies on market mechanisms to set wholesale energy prices, and its regulatory agenda is mainly aimed at promoting competition and economic efficiency in energy markets. The problem, Davis Noll and Unel say, is that energy markets have completely failed to account for the environmental and social cost of carbon emissions. Given FERC’s obsession with promoting economic efficiency, its reluctance to address such a glaring inefficiency is puzzling, Davis Noll and Unel argue. Like others before them, they suggest that an agency-imposed surcharge on the wholesale price of high-carbon energy—a “carbon adder”—could be a workable fix.

This podcast—featuring Dr. Burcin Unel, Energy Policy Director at the Institute for Policy Integrity—discusses how information, or lack thereof, can affect the cost-effectiveness of the transition to a clean and distributed energy future. It then outlines how new modeling tools that can take into account information asymmetries can help policymakers design better policies.

“Existing law has evolved over a century of fossil fuel use and the development of existing infrastructure,” said Justin Gundlach, an attorney at the Institute for Policy Integrity, a nonpartisan think tank. “There is a lot of work to be done identifying where New York's Climate Leadership and Community Protection Act and existing law need to either be amended or reinterpreted.”

Had FERC taken up NERA’s arguments, it would not only have upended the legal basis for net metering programs but would also have severely hampered ongoing efforts by numerous states to develop programs that value [distributed energy resources] with greater accuracy,” the Institute for Policy Integrity at New York University School of Law said

A mysterious group has asked the Federal Energy Regulatory Commission to kill net metering. FERC should say no – not because net metering should last forever, but because states, not the feds, have the tools needed to reform it.

While states are right that new FERC rules will needlessly increase costs and be a drag on clean energy, they shouldn’t rush to exit electricity markets yet. States could meet their climate goals while retaining the benefits of markets by pursuing another option: carbon pricing.