The Congressional Budget Office (CBO) thinks putting off efforts to reduce carbon dioxide emissions risks “catastrophic” losses for the United States’ economy and society. That’s according to a new report on the economic and environmental effects of a carbon tax CBO published Wednesday.

The CBO is the group of analysts tasked with modeling and projecting the consequences of Congress’ proposed laws, so that lawmakers can have some idea of what the likely consequences of their actions will be. You may recall the CBO from the big role its scores played in the debate over health care reform a few years ago. They’re a highly respected, methodologically cautious, and strictly nonpartisan outfit that’s widely viewed as the go-to authority for refereeing policy disputes in Washington.

With China on the verge of unilaterally putting a cap on its own carbon emissions, and with wide support for a carbon tax amongst voters, politicians, industry, economists and think tanks, the fact that CBO is using its position to highlight the risks of not addressing climate change is worth paying attention to.

Now, much of their report’s content wasn’t new. It projected that a price of $20 per metric ton on carbon dioxide emissions would bring in $1.2 trillion in revenues between 2012 and 2021, and cut emissions by roughly 8 percent over the same period, which came from work CBO did in 2011 (page 205). And the debate over what to do with the revenues from a carbon tax, which much of the report is dedicated to, is also familiar.

But one thing that is noteworthy is CBO’s blunt assessment that allowing climate change to continue unchecked could be very costly to both the United States and global society:

Climate change resulting from an increase in average temperatures is a long-term problem with global causes and consequences, including effects on humans and ecosystems. Significantly limiting the extent of future warming would require a concerted effort by countries that are major emitters of greenhouse gases. Nonetheless, U.S. efforts to decrease emissions would produce incremental benefits, in the form of incremental reductions in the expected damage from climate change.

Researchers have attempted to estimate the monetary value of the future damage from climate change associated with an increase in CO2 emissions in a given year — and thus the value of the benefits from a commensurate reduction in emissions — a measure referred to as the social cost of carbon (SCC)… Those values are highest when researchers attach significant weight to long-term outcomes and when they incorporate a small probability that damage from climate change could increase sharply in the future — causing very large, or even catastrophic, losses. Delaying efforts to reduce emissions increases the risk of such losses. Given the inherent uncertainty of predicting the effects of climate change, and the possibility that it could trigger catastrophic effects, lawmakers might view a carbon tax as a reflection of society’s willingness to pay to reduce the risk of potentially very expensive damage in the future.

Even CBO’s 2009 round-up of climate change science, which focused heavily on the uncertainty built into such projections, pointed out that the worst case scenarios for climate change “even if unlikely, would justify more stringent policies than would result from simply balancing the costs of reducing emissions against the benefits of averting damages from the expected or most likely degree of warming.”

As for the question of how to structure a carbon tax, the Center for American Progress’ Richard Caperton put forward a proposal last December for a tax of $25 per ton on carbon dioxide emissions from power plants. That ought to put us on a course to reduce those emissions by 17 percent from 2005 levels by 2020, and 80 percent by 2050, though the tax would ultimately need to be expanded to the entire economy. Caperton estimated the revenue from this tax — more limited than the one envisioned by CBO — would be in the vicinity of $55 billion annually. That could be split between the roughly $20 billion annually needed to fund research and development of clean energy, deficit reduction, and support for low-income Americans.

That last aspect is especially important, because on its own a price on carbon has a regressive effect, imposing more costs on the poor and the working class than the well-off. Reductions in the payroll tax, or refundable income tax rebates, would do the most good, mainly because they target support to the very people who would most need help shouldering higher energy costs. But CBO’s new report also found that a price on carbon would reduce overall growth slightly by reducing incomes throughout the economy, and by working through income taxes those two options would counteract that drag.

The Production Tax Credit — the key federal incentive for wind power — is a success story. Since the PTC was first enacted in 1992, the cost of wind power has fallen 90 percent, 75,000 people now work in the wind industry, and wind power is booming.

Yet, some people still think the PTC should be eliminated. Most interestingly, Exelon — the large Midwestern utility and power plant operator — has made ending the PTC its number one lobbying priority, claiming that the credit distorts markets. This would be scary. Fortunately, it’s not true.

The truth is that Exelon hopes to slow or halt expansion of wind power projects that can affect the bottom line of their nuclear power plants in the Midwest, and to achieve that objective they’re blaming wind and the PTC for market phenomena like negative pricing that are almost always caused by inflexible generation technology and transmission constraints.

This post will summarize Exelon’s position on the PTC, show where it falls short, and then point out that Exelon is more concerned about competition from wind power, in general, than the Production Tax Credit.

Why does Exelon say the PTC is distortionary?

Exelon’s argument hinges on two fundamental ideas. First, that the PTC causes negative prices; and second, that negative prices are bad for wholesale electricity markets.

Digging into this argument requires a little knowledge of how power markets work. In much of the country — including where Exelon’s nuclear plants are located — power is sold in competitive markets, at a “clearing price” set by an auction process. In general, the clearing price is set by the most expensive marginal resource needed to meet demand at a given time. This price is then given to all the generators providing electricity at that time. (For more on this, see Wind Power Helps to Lower Electricity Prices.)

Importantly, all power plants bid prices that reflect not just their fuel expenses and other operating costs, but also forgone revenues. For example, coal plant owners can sell the coal ash for industrial uses, and they take these lost sales into account when deciding how much they should charge for power from the plant. Wind power is exactly the same, only one of its lost benefits is a tax credit.

The Production Tax Credit offers eligible wind generators a tax credit worth $23 per megawatt hour for the electricity they produce. Since the fuel costs for wind power are zero and operational costs are low, wind turbines can theoretically offer to sell their power at a negative price (that is, they can make money even though they’re paying someone to take their power).

Where Exelon goes wrong is when they draw policy conclusions from these facts. Exelon believes that these negative prices are bad for wholesale electricity markets because they discourage investment in new generation. And, because all power plants operating get the same price, a negative price can force nuclear power plant owners to pay someone to take their power.

Where Exelon loses the plot

Exelon’s explanation of negative prices is generally correct, but it’s also incomplete. First, we need to look at how often wind is setting the power price.

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GE's new Brilliant 2.5 megawatt turbine. (Credit: GE)

According to Bloomberg, Warren Buffet’s MidAmerican Energy Holdings Co. is gearing up to drop $1.9 billion on new wind farms in Iowa. The investment might build as many as 656 new turbines by 2015, which would add as much as 1,050 megawatts of wind power capacity to the 2,285 megawatts the company already operates in the state.

The project could also herald a revival in American wind power in general. The anticipated expiration of the production tax credit for wind energy drove a spike in installations in 2012, then a lull into 2013, and finally an anticipated ramp up now that the credit was extended for another year by the fiscal cliff deal.

And because the new extension merely requires projects to start construction by the end of the year to qualify — projects previously had to actually come online by the end of the year to benefit from the credit — GE now expects the full force of the revival to hit in 2014:

Wind-farm developers including NextEra Energy Inc. (NEE) and Invenergy LLC may install 3,000 megawatts to 4,000 megawatts of turbines in the U.S. this year and as much as 7,000 megawatts next year, Anne McEntee, GE’s vice president of renewable energy, said today in an interview.

The U.S. added a record 13,124 megawatts of turbines last year, outpacing natural gas installations for the first time, as wind developers raced to complete projects ahead of the Dec. 31 expiration of the production tax credit. Denmark’s Vestas Wind Systems A/S (VWS) andSpain’s Gamesa Corp Tecnologica SA (GAM) also expect new orders to pick up by the third quarter.…

GE has received orders this year for more than 1,000 megawatts of wind turbines, including one from NextEra for 100.3 megawatts announced today for a Michigan wind farm and Invenergy’s 215-megawatt deal announced last week for a project in Texas.

Also coming down the pike for wind power is the new version of GE’s Brilliant — a 2.5 megawatt wind turbine, featuring new smart systems and accompanying storage capacity. With both its own sensors and access to the internet, the Brilliant can take in weather forecast data, grid system information, and supply and demand patterns, and use all that top adjust everything from electronics operations to its blade positions. Combined with a new height and an increase of rotor length to 120 meters, these changes boost the new Brilliant’s efficiency by 25 percent over the last model.

The batteries will boast 50 kilowatt-hours of storage a pop, and be hooked up to the turbines from a nearby ground pad. The batteries will store up excess power generated when the wind is blowing the strongest and the turbines are operating at peak capacity, then distribute the power during off hours. This smooths out the power supply from the wind farms, thus avoiding a lot of the disruptions and reliability issues that came along with the fact that the wind does not always cooperate with the needs of us humans.

All told, this would continue the roll wind power has already been on in the United States: 2012 saw the installation of wind capacity outpace all other forms of energy production, and the U.S. and China led the boom in global installations that same year.

Wind power had a banner year in 2012, accounting for more new generating capacity than any other resource. Despite the boom in cheap natural gas, 42 percent of all new capacity last year was actually from wind, which clocked in at 13,131 MW in new installations for the year.

The economics for wind power have only gotten more compelling, helped in no small part by the Production Tax Credit and the Investment Tax Credit creating strong investment incentives. This boom in wind power has begun to transform electricity markets across the country, creating significant net benefits for consumers and providing low carbon power to homes nationwide.

A new report from the consulting firm Synapse and Americans for a Clean Energy Grid found that increases in wind power in the PJM Interconnection could save consumers $6.9 billion per year out to 2026, along with 14 percent reductions in CO2.

The PJM Interconnection is the world’s largest competitive wholesale electricity market, serving 60 million customers across 13 states and the District of Columbia. Currently, wind provides about 1.5 percent of the electricity to PJM’s customers, and accounts for 3.4 percent of installed capacity. Based just on the Renewable Portfolio Standards in states within the PJM region, renewables must provide 14 percent of all electricity by 2026. It is likely that about 11 percent of this will come from new wind generation.

The report from Synapse uses the projections from meeting Renewable Portfolio Standards as a reference case, and then takes a look at the effects of doubling the amount of wind power required by statute in the PJM region out to 2026. By modeling the production costs and capital investments, the authors can ascertain what the difference is between these two cases for revenue requirements (and therefore, the impact on ratepayers). The big difference between these two cases is that in the reference scenario, natural gas composes the majority of new generation beyond what the state Renewable Portfolio Standard requires—and wind takes that market share in the other. This illustrates the shortsightedness of the “cheap natural gas” narrative that has become conventional wisdom in mainstream reporting. The cheaper bet, actually, is increasing deployment of wind.

The report finds that doubling capacity of installed wind, from 32.1 GW in the base case to 65.4 GW in the wind case, would create net savings of $6.9 billion per year. This is the result of savings from production costs amounting to $14.5 billion, and capital investment requirements of $7.6 billion. Remember that the capital investment numbers here represent the difference between what would be spent in the reference case ($17.4 billion) and what would be spent in the wind case ($25 billion).

The other benefit of more wind in PJM is lower wholesale prices. The report finds that the load-weighted average annual price for power drops from $80.27 per megawatt hour to $78.53 per megawatt hour.

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