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Markets, Externalities, and the Federal Power Act: The Federal Energy Regulatory Commission’s Authority to Price Carbon Emissions

Article revised for the Environmental Law Reporter

Electricity generation in the United States is one of the leading sources of greenhouse gas emissions.1 Those emissions cause severe climate change-related harms. Despite the severity of those harms, the Federal Energy Regulatory Commission, which regulates the interstate transmission and wholesale electricity markets, has avoided addressing the issue.

This article, excerpted from Davis Noll and Unel’s article in the NYU Environmental Law Journal, provides a comprehensive economic framework to show that addressing the CO2 externality through a carbon price falls within FERC’s authority to ensure an efficient market. Even though FERC is not an “environmental” regulator, FERC has long-standing authority to fix this market failure under its traditional role as an “economic” regulator. Consideration of CO2 emissions is not simply an environmental concern, but rather a core market concern that is integral to a functional and efficient market.