I tried three times to post my response to the other Dan. Maybe the embedded links caused your spam filter to reject it. (But I’m not trying to sell anything!) If you search Grist for “Carbon Taxes” (sort by newest) it should pop up (“Are Carbon Taxes a Viable Option” 11/20/2009).

Regarding Charles’ comment #31, he was rebutting my suggestion in #26, paragraph 2, that recycled revenue be used only to preserve energy affordability by low-income consumers. Paragraph 3 in #26 suggested an alternative way to neutralize carbon taxes’ regressivity: Make other taxes or utility rates more progressive. This would not require diversion of carbon pricing revenue.

The “dividends” referred to in paragraph 4 are basically energy production subsidies. To the extent that increased energy prices are regressive, subsidized energy prices would be progressive.

Rather than trying to re-post my entire response to #29, I will just restate one paragraph:

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.

I’m not sure why your comment #32 asked for a response to paragraph 3 of your comment #26. Charles already responded in his comment #31. I agree with Charles, although I would not argue for 100% revenue recycling. I prefer the way James put it in comment #5 – “substantial revenue recycled to households.”

Regarding paragraph 4 of your comment #26, you state that “Consumers would derive their dividends in the form of affordable clean-energy prices, rather than cash handouts.” How would you quantify the “dividends”? Wouldn’t most of the “dividends” go to those that use the most energy? Your response to these questions may be in the response that you believe has been blocked. I hope you try again to post it.

Dan Rosenblum (CTC Co-Director)

What is your perspective on paragraphs 3 and 4 in Comment #26?

[Note: My response to Dan's Comment #29 was blocked, but I cross-posted it on my Grist author page.]

You wrote:

If the purpose of revenue recycling is to protect low-income consumers who cannot afford energy price increases … (in Comment #26).

Actually, that’s not the primary purpose of revenue recycling. Rather, the primary purpose is to provide the most universally fair carbon fee system imaginable, in order to (i) create the political wherewithal to maximize the pace and slope of the carbon fee ramp-up, and (ii) maximize fairness as an end in itself.

A supportive criterion for revenue recycling is to minimize the carve-outs, giveaways, exemptions, etc., in order to be able to (i) preserve revenue recycling, and (ii) forestall the subsidization of suboptimal allocations or investments under the banner of decarbonization.

To rephrase my first point (so it’s not too cryptic): American society doesn’t seem politically capable of choosing to protect only, the bottom 20%, say. The temptation to move the bar to include the bottom 20.1%, or 20.2% … 80%, is too strong.

Perhaps seeing 100% revenue recycle in this light might help it make more sense to you.

Best,

Charles (co-director, CTC)

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% of total U.S. generation. The total increase in national generation cost would be about $23B (not $11.5B), corresponding to a retail rate increase of almost 6% (not 3%).

The $23B cost is unrelated to the choice of policy instrument — it is simply the technology cost of replacing 12% 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% 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/MWh, 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, 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. 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, in response to your first observation, RPS standards, like cap-and-trade, are more “brittle” than pricing instruments because 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.)

Total U.S. electricity generation = 4 billion MWh/year (or 4 B MWh/y; approximately)

50 percent of electricity is from coal (2 B MWh/y) with a carbon intensity of about one tonne carbon dioxide (tCO2) per MWh; yielding 2 BtCO2/y. A fee of $10/tCO2 would cost $20B/year and would add about $10/MWh to the typical wholesale price of coal power of $50/MWh (marginal costs of coal power are less than this, but $50 is okay for this illustration).

About 20 percent of U.S. electricity is from natural gas (0.8 B MWh/y) with a carbon intensity of about 0.4 tCO2/ MWh (assuming combined cycle plants rather than simple cycle); yielding 0.32 BtCO2/y. A fee of $10/tCO2 would cost $3.2B/year. The cost of generating power from natural gas depends on the price of gas, which has fluctuated considerably in the last year (high of more than $10 per million Btu to about $4/MMBtu). For now, let’s assume a wholesale price of $60/MWh; which would correspond to a gas price of about $5/MMBtu.

A carbon fee would add nothing to the cost of nuclear power (about 20 percent of total electricity) or hydropower (about 7 percent of total electricity) or renewables (about 3 percent of total).

So, the carbon fee would initially collect about $23.2B/year ($20B from coal and $3.2B from gas).

Ken suggests that this revenue be used entirely to subsidize new wind (and maybe other renewables). Electricity from wind typically costs about $100/MWh. Currently, wind generators get about $20/MWh from the federal government production tax credit (PTC). They get another $20 to $30 per MWh from renewable energy credits (RECs), resulting from state-government-imposed renewable portfolio standards (RPS) (or they get an equivalent benefit by selling to a utility that is required to meet an RPS). They may also get other state or local incentives designed to promote renewable. So, the electricity costing $100 to produce can compete with other power produced at $50 to $60 per MWh through the current governmental incentives of $40 to $50 per MWh.

As I understand, Ken would have the entire cost of wind power subsidized from the carbon fee revenue. So, we could produce 0.23 billion MWh per year of electricity from wind. This is about 6 percent of the total U.S. electricity generation.

The effect of all of this would be to decrease coal-fired electricity by 0.23BMWh per year. At $50/MWh, costs would decrease by something less than $11.5B (we wouldn’t save the entire $50/MWh because we would just be reducing marginal costs, which are less than total costs and typical sale price). At the same time, we would pay about $23B in carbon fees (the fee would be a bit less than the $23.2B mentioned above because, in the process of adding wind, we would decrease our use of fossil fuel electricity; thereby decreasing revenue from carbon fees).

The net effect is that we would add about $11.5B to our total electricity bill (i.e., consumers would pay $23B to cover fees minus $11.5B in reduced coal electricity costs). The current retail price of electricity is typically about $100/MWh. This includes $50 to $60 for generation, plus $30 for transmission and distribution, plus $10 for miscellaneous utility expenses. For 4 billion MWh/year, that comes to $400B per year.

The carbon fee of $10/tCO2 would yield an approximate increase of 2 or 3 percent in the retail expenditures for electricity (i.e., $11.5B added to $400B). For this, we would get about 6 percent of our electricity from wind.

Now, for some observations: First, many states have already imposed renewable portfolio standards that would increase renewable electricity from the current low values of about 3 percent of total electricity to 20 percent of total electricity. The Waxman-Markey bill would extend this requirement nationwide. In this regard, the 6 percent of electricity from wind that we could expect from Ken’s approach is less favorable to the wind industry than current legislation would provide.

Second, the increase in electricity rates of only 2 or 3 percent resulting from Ken’s plan is probably not sufficient to induce much new conservation. A gradual increase in carbon fees to a value of $100 per tCO2, as proposed by the Carbon Tax Center, would provide the strong incentive for energy conservation that we need.

Third, in Ken’s proposal, there would be no relief to poor people to help make up for the 2 or 3 percent increase in electricity prices because the revenue from fees would be channeled entirely to wind power plant developers and operators.

Fourth, the 10-year phase-in of a $100 per tCO2 fee, as proposed by CTC, would increase the cost of coal-derived electricity by about $100/MWh, which is more than sufficient to induce growth in the wind power industry. That industry seems to be already growing rapidly with subsidies amounting to only $40 to $50 per MWh.

Fifth, in the CTC’s proposal of moving toward a $100/tCO2 fee, everyone will see a big increase in their electricity costs. That sends the desired price signal. It promotes a shift away from coal and it aggressively promotes conservation. Giving most of the collected revenue back to individuals on a basis that is independent of their individual electricity consumption will prevent undue suffering that would otherwise be caused by the steep increase in power prices.

Sixth, in addition to promoting renewables, the carbon fee proposed by CTC will encourage a rapid substitution of natural-gas-derived electricity for coal-derived electricity. A fee of something less than $100/tCO2 would cause a shift from coal to natural gas. That would cause a higher use of already-installed combined-cycle power plants that are currently operated only during daytime.

Other than giving a boost to wind power developers that greatly exceeds their needs, I don’t see much merit in Ken’s proposal.

You have entirely mischaracterized the “kind of thing” that I am advocating, which is net subsidies for actual energy production (not for research or demonstration projects or good intentions, etc.), based on emissions performance (not based on technology type or any other politically-biased cherry-picking criteria).

You also have still not resolved, and are evading, this fundamental question: What impact would subsidized clean-energy production have on consumer costs and regressivity? “Revenue recycling” cannot be justified while this question remains unresolved.

To the extent that recycling some carbon pricing revenue to low-income consumers is justified, you have not justified the recycling of most or all revenue, or the recycling of some revenue to high-income consumers.

If you like subsidies, Waxman-Markey & Kerry-Boxer are your bills. Hidden, volatile, regressive carbon tax collected by Wall St, letting the E&C and EPW Committees bypass the appropriations process and dole out funds as they see fit. Some good stuff, but mostly payola.

The bills include a “wires charge” on existing fossil fuel generated electricity that would be dedicated to funding CCS. Sounds like the kind of thing you’re advocating. Not me.

So, why not subsidize “green” energy with carbon tax revenue?

1) A competitive market would pick technology winners (including efficiency and behavior changes that conserve energy) far better than Congress. Congress picked losers like the nuke or corn-to-ethanol programs — and now those industries are dependent on special rules and regular infusions of government largess. Coming attraction: billions poured into CCS regardless of whether it will work cost-effectively.

2) British Columbia’s carbon tax is popular and survived what amounted to a referendum in part because EVERYONE gets his or her share of the revenue garnering widespread support and eliminating regressivity. Stephane Dion lost his bid for Prime Minister of Canada in part because his proposed carbon tax turned out not to be revenue-neutral as advertised.

3) Republicans and fiscal conservatives, e.g., Rep. Inglis and Sen. Corker won’t go for a carbon tax if it’s a way to increase government spending. But Inglis has been actively pressing for a revenue-neutral carbon tax.