Carbon Pricing: The Best Way to Achieve the Power Grid of the Future

When the electricity system fails, the consequences can be deadly. The 2021 outages in Texas due to extreme cold are estimated to have killed more than 100 people, while burdening ratepayers with $37.7 billion in excess energy costs. As climate change accelerates, this sort of disruption is likely to become more common, with extreme weather events growing in frequency and severity.

Thoughtful climate policy must take seriously the importance of building an energy system that can supply power to all customers at all times at reasonable cost. As a new report from the Climate Leadership Council argues, the most efficient way to achieve the twin goals of rapid decarbonization and increased grid reliability – at least cost – is an economy-wide carbon price.

It’s important to pick the right policy now because the process of decarbonizing is starting to put its own stresses on the grid.

Electrification will help cut emissions but will make an increasing share of the economy dependent on a reliable electric system. As Americans begin to rely on electricity not just for air conditioning, computing, and lighting, but also for heating, transportation, and possibly even other services like manufacturing and aviation, pressure on the grid will rise commensurately.

Moreover, reducing power sector emissions will mean relying more on energy resources that cannot operate at all times. Wind and solar cannot provide power twenty-four hours a day, and the zero-carbon technologies that would balance the intermittent nature of renewables and fill the gap, such as battery storage, are not deployed at the level necessary to meet demand.

A carbon price would meet these challenges in several ways.

First, putting a price on carbon pushes new capacity where it is needed most. A carbon price works within the existing incentives of the energy system, encouraging utilities to meet demand at least cost. As a result, utilities will look to add zero-carbon capacity where it can serve the most people, and in so doing, displace the most greenhouse gas emissions. In contrast, some subsidy-based policies reward electricity providers for generating a kilowatt-hour of zero-carbon electricity anywhere, not necessarily where it is needed.

Second, a carbon price pushes on all available levers of decarbonization. The price would reward any method of abating a ton of greenhouse gas emissions, be it through renewable power generation, coal-to-gas switching, or efficiency improvements. This incentivizes companies to find ways to reduce emissions that make the most economic sense in the short term while waiting for technologies like advanced nuclear and utility-scale battery storage to mature.

Third, the reliable signal of a carbon price will encourage utilities to do the sort of long-term planning that deep decarbonization will require. Transmission infrastructure, for instance, will be vital to the energy transition but takes years to build out. A steadily escalating carbon price will encourage utilities to make this sort of long-term investment in a clean and reliable grid.

As the United States moves to a carbon-free energy system, it will be vital to put policies in place that ensure reliability, and a carbon price will do just that.

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