Are carbon taxes a viable option?
According to Sen. John Kerry, no.
Thank you for the calculations. This is excellent.
One point of clarification, re “As I understand, Ken would have the entire cost of wind power subsidized from the carbon fee revenue.” If $100/MWh wind power is competing against $50/MWh fossil fuels, then wind would only need a $50/MWh subsidy (not $100/MWh) to be cost competitive. So the $10/MWh carbon fee could actually support 0.46 TWh of wind power (not 0.23), nearly 12 percent of total U.S. generation. The total increase in national generation cost would be about $23 billion (not $11.5 billion), corresponding to a retail rate increase of almost 6 percent (not 3 percent).
The $23 billion cost is unrelated to the choice of policy instrument — it is simply the technology cost of replacing 12 percent of U.S. fossil fuel generation (at $50/MWh) with wind energy (at $100/MWh). That money has to come from somewhere. When wind energy is one or two percent of total generation, the money can come from government financing (grants or tax credits), but probably not when it gets up to 10 or 20 percent. The problem with government subsidies, like “cash for clunkers”, is that the subsidy ends when the cash runs out. With financing derived from carbon pricing, the financing source is depleted only as carbon is phased out.
At current growth rates, it would take perhaps another decade for new wind energy to reach the 12 percent level, at which time the costs will probably be significantly below $100/MWh, and may have attained grid parity. (PV is also quickly catching up with wind.) Of course, we would like to accelerate that transition, not just in the U.S., but globally. New-source subsidies are primarily intended to facilitate low-carbon energy expansion in the early phase of this transition.
The key point that I hope you (and your readers) recognize is this: An initial carbon fee of $10/tCO2, with revenue recycling, will give renewables approximately a $10/MWh price advantage over coal; whereas new-source subsidies, financed by carbon fees starting out well below $10/tCO2, could provide new renewables a price advantage on the order of $100/MWh immediately — not ten years from now.
If low-carbon energy prices do not come down, as expected, then high technology costs will lead to increasing electricity rates as low-carbon energy gains market share. In this case, a minor fraction of revenue might appropriately be used to sustain particularly disadvantaged consumers; but giving relief to poor people is not the same as distributing most or all carbon revenue to all consumers regardless of need.
Regarding energy conservation incentives, one of the most-cited examples of pricing impacts on conservation is high gas prices. But the conservation incentive from gas prices is already well in excess of $200/ton (and rising), far higher than any contemplated carbon price. Clean-vehicle technology is limited more by lack of efficient financing incentives than by lack of a carbon price. But pricing instruments such as appliance feebates could also create targeted incentives for energy efficiency.
Regarding NG substitution for electricity, new-source subsidies are based on emission performance, not technology type, so new NG generation would gain an immediate price advantage over coal, as would renewables.
Regarding “giving a boost to wind power developers that greatly exceeds their needs,” again, the policy is technology-neutral, and the $50/MWh subsidy that wind power now gets from government subsidies and tax credits may be difficult to sustain as wind energy gains significant market share. Also (responding to your first observation), RPS standards, like cap-and-trade, are more “brittle” than pricing instruments in the sense that they impose a predetermined target no matter how high the cost, and do not provide incentives for exceeding the target no matter how low the cost. (On that point, I think you might agree.)