Carbon Taxation by Regulation

Abstract

This Article argues that, even though a carbon tax remains politically elusive, “carbon taxation by regulation” has begun to flourish as a way of financing carbon reduction. For more than a century, energy rate setting has been used to promote public good and redistributive goals, akin to general financial taxation. Various non-tax subsidies in customer energy rates have enormous untapped potential for promoting low-carbon sources of energy, while also balancing broader economic and social welfare goals.

While carbon taxation by regulation offers many benefits, regulators’ narrow fixation on consumer protection and economic goals has hobbled realization of its potential. In comparison to a national carbon tax, customer subsidies in regulation are piecemeal, isolated in focus, and fragmented. They also have not been sufficiently attentive to revenue shortfalls and burden allocation, important fairness and equity issues, or negative and positive jurisdictional spillovers. Using a carbon tax as a benchmark, this Article identifies some principles to help guide efforts to reform, recalibrate and scale up customer rate subsidies to promote low-carbon sources of energy. State and federal agencies can better promote efficiency and social welfare in modern energy markets by aligning customer rate subsidies with the same principles that would inform optimal design of a carbon tax.