Eakinomics: Carbon
Pricing
Guest authored by Ewelina Czapla,
AAF's Director of Energy Policy
Carbon pricing has seen increased interest from regulators recently. Last
week, the Federal Energy Regulatory Commission (FERC), an independent agency
headed by a bi-partisan panel of commissioners, hosted a technical conference
regarding “Carbon Pricing
in Organized Wholesale Electricity Markets.” The full-day
conference focused on states’ adoption of mechanisms to price carbon dioxide
emissions. These practices fall within the FERC’s jurisdiction when states
belong to organized wholesale electricity markets, such as regional
transmission organizations or independent system operators (RTO/ISO).
Historically, states have taken the lead in implementing mechanisms,
particularly cap and trade programs, to reduce emissions. The conference
served as an opportunity for the FERC to determine the federal government's
role in the adoption of carbon pricing mechanisms moving forward. As you can
imagine, the many expert panelists who participated provided nuanced and
highly technical insights throughout the eight-hour duration of the
conference, but one thing seemed clear: Panelists pointed to a carbon price
as the most effective way to reduce emissions.
Earlier in September, a subcommittee of the Commodity Futures Trading
Commission, another independent agency headed by a bi-partisan panel of
commissioners, issued a report discussing the risks climate change poses to
financial markets. They found that instituting an economy-wide carbon price
is necessary for financial markets to best allocate resources to activities
that reduce greenhouse gas emissions. The report didn’t suggest a pricing
mechanism but did make it clear that establishing it “is the job of
Congress.” The Clean Economy Jobs and Innovation Act recently passed in the
House makes no mention of carbon pricing, however. Instead, while the bill
seeks to spur innovation and fund technological development to address
climate change, it comes with additional regulatory burden.
Instituting a carbon tax as a pricing mechanism would not only set the price
on carbon that we need but would also remove regulatory burden. As the
namesake of Eakinomics has written,
“A well-designed carbon tax would replace the regulatory approach. It would
involve federal pre-emption of carbon regulation under the Clean Air Act,
Clean Water Act, Endangered Species Act, National Environmental Policy Act,
and myriad other laws. The fact that carbon-intensive products would be
relatively more expensive would give incentives to shift away from those
products and to innovate products that have lower carbon content. If you have
no faith in the power of economic incentives — that is, if you are part of the
progressive left — you will not believe that the carbon tax will really work.
Those politics say that it is better to have the carbon tax and the
regulatory approach.”
As the Senate considers the Clean Economy Jobs and Innovation Act and
legislators plan on how to address climate change in the future, it should
consider the relative benefits of a carbon price compared to top-down
regulations.
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