You should look at the output Rails is sending to your browser. You'll find no mention of a favicon, as you're not actually outputting anything.
favicon_link_tag is a plain old Ruby function. It returns a value, which is a string, containing the HTML markup for a link tag to your favicon. You're taking that value, and throwing it away.
You need to output that value, and in ERB, you do that with <%=, not <%.
Replace your <% favicon_link_tag ... %> with <%= favicon_link_tag ... %> and you'll find that you suddenly have a <link rel="shortcut icon" ... /> appearing in the HTML being output by your Rails app.