A Supreme Court Victory for Climate and Free Markets

Power up. Or sometimes down.

Photographer: Luke Sharrett/Bloomberg

In a victory for both environmental and free-market principles, the Supreme Court has just made it easier for the U.S. to cut carbon emissions. Its decision rests on the proposition that the laws of supply and demand can be used to address climate change.

Some background: Imagine you manage a power grid. On most days, you have access to enough electricity to meet the demands of your customers. But during peak hours (say, a hot August afternoon), your grid needs a way to cope with a sudden jump in demand. You can’t increase supply quickly, so instead you try to reduce demand -- by paying big consumers (say, a widget factory) to use less power. This is a strategy called demand response.

From the perspective of a grid operator trying to avoid a brownout, a megawatt of electricity not consumed is just as helpful as an extra megawatt produced. For the environment, that unit of unused power is superior, because it doesn’t create any carbon dioxide or other emissions. And that’s on top of the benefits to ratepayers, who don’t need to pay the cost of building a new plant.

To encourage that kind of trade, the Federal Energy Regulatory Commission, which regulates wholesale power markets, issued a rule in 2011 saying that demand-response companies, which negotiate agreements with large electricity consumers to cut their use when necessary, should be paid the same amount of money per megawatt as traditional electricity generators. That rule is critical to enticing consumers to take part.

Generating companies didn’t appreciate the competition, and that’s where the Supreme Court comes in. The industry association sued, arguing that by encouraging electricity consumers not to use power during times of peak power demand, FERC was effectively regulating not just the wholesale market, but the retail market too -- which is in the hands of the states, not the federal government.

On Monday, the Supreme Court disagreed. For starters, as the decision notes, any regulation of the wholesale market is bound to affect the retail market. Moreover, court precedent has long given federal agencies discretion in deciding how to carry out their responsibilities when the letter of the law is unclear.

This ruling may hurt U.S. power generators, shares of which fell after it was issued. But U.S. energy policy must take into account larger concerns. There are plenty of obstacles -- technological, economic and political -- that prevent the U.S. from reducing emissions as quickly as it should, or from modernizing its energy market. The Supreme Court deserves credit for allowing the federal government to make progress on both fronts.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.