In the following Figure, it can be seen that the drop in CO2 emission from the new power plants is dramatic when the CO2 cost moves from $25 to $40 per ton. The cost of electricity including the CO2 charge will increase, as shown in the Figure. Though not insignificant, the increase amounts to about 15 to 18%, a condition which may be alleviated by the consideration that the CO2 charge is partly an investment in a Public Benefits Fund, owned by and applied for the public.
This dramatic reduction in CO2 emission can happen without any tax subsidies to solar/wind power (it naturally benefits from the CO2 cost by virtue of its zero CO2 emission.) In contrast, without severe caps imposed, the current cap-and-trade method will likely end up with only incremental changes to CO2 emissions and will not lead to the rapid introduction of new technologies which could have difficulties in overcoming the initial market entry barriers. Furthermore, with UDI-ism, the additional cost to electricity consumers due to the CO2 charge goes into a Public Benefits Fund, which can be a source of consumer savings for social public good, e.g., to subsidize the cost of electricity for low-income consumers, to invest in environmental cleanups, etc.
In comparison, emission trading is a market mechanism that adds to the cost of electricity by the cost of emission allowance certificates purchased by electricity producers. The profits, presumably going to the green power plants, are uncertain. These projections are unlikely to enable investors of green power plants to get financing to build such plants, hoping to pay back the loans from the uncertain future value of emission certificates. With the UDI-ism approach, the cost of CO2 can be viewed as a global climate control variable, like the Central Banks’ discount rates are control variables to influence the various economies. The CO2 cost can be raised or lowered to achieve the desired amount of global CO2 emissions by influencing the market mix of the various types of power plants. Its control objective would be to balance the price of electricity and the amount of global or regional CO2 emissions. The money collected into the PBF can be directly used for environmental protection and cleanup, further producing more public benefits. In contrast, the current approaches for global climate rely on CO2 emission caps, trading of emission credits, mandatory renewal portfolio standards and tax subsidies for green technologies. These approaches may create distorted incentives and are not holistic. However, they are realities to be dealt with in power system planning, and must be recognized in performing holistic planning for the transmission grid.
What I don't understand from Mr. Lee's comments is how his so-called "charge" amounts to anything but a tax. While directing the proceeds from such a "charge" to a Public Benefits Fund may look different than a general tax being directed to a General Fund, one need only look at the fate of such "special purpose" funds such as those levied against the tobacco companies or Exxon in the wake of the Valdez accident. However well-intentioned, the great bulk of the money ended up addressing general revenue needs at whatever level of government they operated.
Again, this is not to say I think a carbon tax is bad public policy; many CEO's of large generators agree that it would be the best approach. However as we all know what is rational from a public policy perspective (and makes sense to both large generators and small optimization companies) seldom what flies on Capitol Hill.
I should say, my comments are based only on the information based on Mr. Lee's brief post. I would be interested in knowing more about the "UDI-ism" proposal referenced in the same. I am also curious about what is behind the apparent step change in both electricity cost and CO2 reduction that occurs at around $22/ton. Is there a threshold that makes full-scale sequestration and capture economically viable, or a cross-over point where existing coal-fired plants are replaced (as is occurring in Europe) with new gas-fired or other low-CO2 generation alternatives?
The same perception will apply to a carbon tax. Consumers of electricity will see the electric bill rise, and may entertain the thought that the government will use that money to do something about the environment. But there is little sense of ownership or control over the use of that fund, even if, as Peter Spinney said, it is earmarked as a Public Benefits Fund.
What is needed is an accounting system to track and report the "investment" by the individual electricity consumers into this Public Benefits Fund. This is an idea of Tier 2 Assets in the concept of UDI-ism. Air is a public asset owned jointly by all inhabitants of the earth. Payments by individuals into the carbon public benefit fund are individual investments into the common asset of Air. Control over the use of this fund should reside locally in the geographical region where the same carbon charge policy is applied. Government officials may not use this fund without polling the owners of this fund. In this mechanism, use of the money stays with the payers of the carbon charge.
Imagine what this can do in a global context where some nations implement a carbon charge and other nations do not. A nation that implements it can keep track of the total investment that the nation's residents have put into the Air asset. The carbon charge will have its effects on that nation's CO2 emissions. That contributes to the reduction of the global CO2 emissions. Nations that come late to the global carbon table will face the facts that they are behind the other nations in the investment in the global air asset. Therefore, data will be available to make a rational cost and benefit allocation among the nations for their contributions to the common problem.
This global accounting system can remove the objection of one country doing more than other in solving the global problem. The fact that the carbon charge stays within a country for its levy and disposition means that local autonomy is kept. Each nation can move forward at its pace. The CO2 price may be regulated or determined by each nation according to its economic, regulatory or market system.
Each country's setting of its CO2 price becomes a regulatory control variable which can be used to affect the pace of CO2 reduction.
"Effect of CO2 Cost on Generation Mix with Oil Price at $60/bbl" and "Effect of CO2 Cost on Generation Mix with Oil Price at $90/bbl".
The analysis of the generation mix in these two diagrams was based on the classical screening curve approach which compares the total annual cost of the various generation options when they are plotted as a function of annual capacity factor. It ignores existing generation mix and it ignores tax subsidies. Thus it considers intermittent wind generation in competition with coal and combustion turbines. At zero CO2 cost, and no tax subsidy and no Renewable Portfolio Standards, wind does not compete economically. At a high enough CO2 price, the penalty on the electricity cost produced by coal and combustion turbines start to make wind economical. This phenomenon occurs at a certain break point of CO2 price. Depending on the cost assumptions about the capital and operating costs of the various competing generation alternatives, these economic generation mix curves would change. But the key observation was that wind has the biggest effect on reducing CO2. If the CO2 price is set high enough, it will be able to compete naturally, without tax subsidy and mandates.
But the problem is not just the CO2 price alone. The problem is also technological. Wind can be made to produce firm capacity if it is paired with energy storage of the right characteristics and cost. The screening curves I showed made the assumption that wind paired with energy storage can be possible at an equivalent capital cost of $5000/kW of firm capacity. Whether this is feasible or not remains to be studied and assessed. However, if this cost target can be achieved, then wind can be a firm source of energy and be competitive without tax subsidy, if a suitable CO2 charge is applied.