The Federal Energy Regulatory Commission and the Merits of the Social Cost of Carbon

By Jackson Erpenbach*

The Federal Energy Regulatory Commission (FERC) is the lynchpin of the country’s vast network of interstate natural gas pipelines.[i] Recently, however, FERC’s pipeline review process has come under scrutiny in federal courts and has faced opposition from state governments.[ii] Moreover, there is growing evidence that FERC’s policies do not adequately account for future economic and environmental costs of pipeline expansions.[iii] In part due to these factors, FERC is in the process of reviewing its pipeline certification policy.[iv] FERC should use this opportunity to apply an explicit social cost of carbon (SCC) in its Environmental Impact Statements (EIS) for proposed pipeline projects.

Pipeline projects under FERC’s jurisdiction are being challenged at the federal and state levels.[v] Citing climate concerns, state governments, most notably New York, have attempted to block new pipelines.[vi] Further, national environmental groups have targeted proposed pipeline projects by organizing protests and filing legal challenges.[vii]

One such challenge, headed by the Sierra Club, stalled the certification of the Southeast Market Pipelines Project, a network of three interstate pipelines which could supply over one billion cubic meters of natural gas per day.[viii] In its August 2017 decision, the U.S. Court of Appeals for the District of Columbia Circuit rejected FERC’s environmental impact statement for the project because FERC failed to account for the greenhouse-gas emissions likely to result.[ix] After the court denied FERC’s motion for a rehearing in January 2018, FERC released an updated EIS which roughly calculated the project’s carbon footprint but refused to apply the SCC.[x]

The SCC is the calculated cost of climate change measured by the reduction in economic welfare resulting from each additional ton of carbon dioxide emitted.[xi] In the United States, the Interagency Working Group on Social Cost of Greenhouse Gases, established under President Obama, set the present SCC to between $36 to $47 per ton of carbon emitted.[xii] It remains to be seen whether FERC’s approach, refusing to apply the SCC to pipeline projects, will inoculate it from future legal battles.[xiii]

A larger national imperative looms behind challenges to pipeline policy: the transition toward a low carbon future. To avoid the most catastrophic effects of climate change, the United States must reduce its greenhouse gas emissions to 80 percent of 1990 levels by 2050.[xiv] This goal is technologically attainable, but will require a fundamental transformation of the U.S. energy system.[xv] Such a transformation, however, must overcome the nation’s entrenched, and still growing, fossil fuel infrastructure.[xvi] The sheer scale and value of fossil fuel extraction, transportation, and combustion assets risk locking the energy system into carbon dependency.[xvii] Continued reliance on carbon-intensive energy would be environmentally disastrous.[xviii]

Carbon lock-in also presents a lingering economic vulnerability. Fossil fuel assets will, in time, lose value as government regulations seek to address environmental risks and as market forces embrace renewable energy sources enabled by technological innovation.[xix] Assets risk becoming “stranded,” representing significant investments of capital which have little economic utility.[xx] The result could be a significant drag on growth with additional knock-on effects throughout the economy.[xxi]

Avoiding the worst effects of carbon lock-in requires a new, forward-looking approach from regulators, FERC chief among them, that accounts for the costs of stranded energy infrastructure.[xxii] Pipeline projects currently pending before FERC at this moment represent tens of billions of dollars in investment, not to mention the attendant environmental costs.[xxiii] FERC has the authority to deny pipeline certificates, making its determination of environmental impacts crucial.[xxiv]

As part of its revised pipeline certification policy, FERC should utilize the SCC, based on predicted emissions, as a mechanism to internalize the costs and properly weigh them against a project’s benefits. Use of the SCC figure is already legally justifiable under agency obligations when preparing an EIS and could provide a basis for pricing the cost of pipeline emissions.[xxv] This regulatory policy would approximate the effect of a targeted carbon tax.[xxvi] The environmental cost of a pipeline would be reflected on the front end, ultimately barring those projects whose benefits do not exceed their holistic costs.[xxvii]

At the present moment—legal, political, and environmental—FERC should reconsider its refusal to apply the SCC in its EIS for pipeline projects. Faced with opponents that accuse the agency of failing to properly measure the cost of pipeline projects, the SCC could provide a much-needed tone of credibility. Moreover, as the future brings ever more proposals for pipelines,[xxviii] FERC should apply the SCC to certify only those that serve the country’s economic and environmental interests.[xxix]

*Jackson Erpenbach is a junior editor with MJEAL. He can be reached at jerp@umich.edu.

 

[i] E.g., Matthew E. Oliver & Charles F. Mason, An Overview of Interstate Gas Pipeline Regulation in the United States, 39 Progress Econ. Res. (forthcoming 2018).

[ii] Gavin Bade, Chatterjee Blames National Environmental Groups for Delaying Pipeline Approvals, Utility Dive (Dec. 1, 2017), https://www.utilitydive.com/news/chatterjee-blames-national-environmental-groups-for-delaying-pipeline-appro/512103/.

[iii] See, e.g., Jessica Wentz & Michael Burger, Pipelines and Climate Change: New Cases on FERC’s Obligation to Assess Indirect Greenhouse Gas Emissions in NEPA Reviews, Climate Law Blog (Jan. 29, 2018), http://blogs.law.columbia.edu/climatechange/2018/01/29/pipelines-and-climate-change-new-cases-on-fercs-obligation-to-assess-indirect-greenhouse-gas-emissions-in-nepa-reviews/.

[iv] Cynthia Taub & Monique Watson, Understanding FERC’s Natural Gas Certificate Policy Review, Law 360 (Feb. 6, 2018), https://www.law360.com/environmental/articles/1009306/understanding-ferc-s-natural-gas-certificate-policy-review.

[v] Charles Hughes, Clear the Way for Pipelines, U.S. News & World Rep. (Oct. 19, 2017), https://www.usnews.com/opinion/economic-intelligence/articles/2017-10-19/states-need-to-clear-the-way-for-ferc-pipeline-approval.

[vi] Bade, supra note 2.

[vii] Bade, supra note 2; see also Adorers of the Blood of Christ v. Fed. Energy Regulatory Comm’n, No. 17–3163, 2017 WL 4310369 (E.D. Penn. Sept. 28, 2017) (considering a novel challenge to a pipeline based on the Religious Freedom Restoration Act).

[viii] Sierra Club v. Fed. Energy Regulatory Comm’n, 867 F.3d 1357, 1363 (D.C. Cir. 2017).

[ix] Id. at 1374.

[x] Fed. Energy Regulatory Comm’n, Southeast Market Pipelines Project Final Supplemental Environmental Impact Statement, FERC EIS 0279F, 8 (Feb. 5, 2018), https://www.ferc.gov/industries/gas/enviro/eis/2018/02-05-18-FEIS/02-05-18-FEIS.pdf.

[xi] William D. Nordhaus, Revisiting the Social Cost of Carbon, 114 PNAS 1518, 1518 (Feb. 2017).

[xii] John Lee, The Social Cost of Carbon and Its Impact on Enviro Law, Law 360 (Jan. 30, 2018), https://www.law360.com/environmental/articles/1007131/the-social-cost-of-carbon-and-its-impact-on-enviro-law. Unfortunately, President Trump disbanded the IWG by executive order in the spring of 2017. Exec. Order No. 13,783, 82 Fed. Reg. 16,093 (Mar. 31, 2017).

[xiii] Randall Rich, FERC Has Options If Court Pulls Pipeline Certificates, Law 360 (Mar. 8, 2018), https://www.law360.com/articles/1019826?scroll=1.

[xiv] James H. Williams et al., Pathways to Deep Decarbonization in the United States, v (Nov. 2015), James H. Williams et al., Pathways to Deep Decarbonization in the United States, Deep Decarbonization Pathways Project, v (Nov. 2015), http://deepdecarbonization.org/wp-content/uploads/2015/11/US_Deep_Decarbonization_Technical_Report_Exec_Summary.pdf.

[xv] Id. at vii.

[xvi] Emily Hammond & Jim Rossi, Stranded Costs and Grid Decarbonization, 82 Brook. L. Rev. 645, 646 (2017).

[xvii] Id.

[xviii] Id.

[xix] Id. at 647.

[xx] Id. at 651–52.

[xxi] Id. at 646; see Ryan Cooper, How the Carbon Bubble Will Pop, Wash. Post (Oct. 30, 2013), https://www.washingtonpost.com/blogs/plum-line/wp/2013/10/30/how-the-carbon-bubble-will-pop/?utm_term=.02fc546b67db.

[xxii] Hammond & Rossi, supra note 16, at 649.

[xxiii] Ellen M. Gilmer et al., The East Coast’s Pipeline Wars, Energy Wire (Nov. 27, 2017),

https://www.eenews.net/stories/1060067235.

[xxiv] Sierra Club, 867 F.3d at 1373.

[xxv] Michael Burger & Jessica Wentz, Downstream and Upstream Greenhouse Gas Emissions, 41 Harv. Envtl. L. Rev. 109, 178–79 (2017).

[xxvi] Jim Rossi, Carbon Taxation by Regulation, 102 Minn. L. Rev. 277, 279 (2017).

[xxvii] Cf. id. at 296–97; Hammond & Rossi, supra note 16, at 684.

[xxviii] See, e.g., Keith Goldberg, Trump Infrastructure Plan Would Spur Pipeline Projects, Law 360 (Feb. 13, 2018), https://www.law360.com/energy/articles/1011946/trump-infrastructure-plan-would-spur-pipeline-projects.

[xxix] Use of the SCC would align well with FERC’s rejection in January 2018 of Secretary Perry’s proposal to support nuclear and coal plants which can be read as a future-looking, and environmentally-attentive, decision. Catherine Traywick & Ari Natter, Regulators Reject Perry’s Plan to Help Coal and Nuclear Plants, Bloomberg (Jan. 9, 2018), https://www.bloomberg.com/news/articles/2018-01-08/perry-plan-to-help-coal-nuclear-plants-rejected-by-regulators.

 

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