Funding energy efficiency earmarked environmental taxes versus system public benefit charges

Energy efficiency can improve energy security, reduce greenhouse gas (GHG) emissions, promote economic growth and create jobs. However, market failures and other barriers have caused a pattern of underinvestment in energy efficiency, forcing governments to undertake policy interventions. Funding for these policy interventions may come from several sources, including government budgets, earmarked environmental taxes, and charges on network-delivered energy (gas and electricity).

Classical economic theory holds that the government appropriations process is the most efficient way to allocate public funds among competing policy priorities. For this and other reasons the earmarking of environmental taxes to fund energy efficiency has received criticism from economists. In contrast, a different kind of earmarking, namely the funding of energy efficiency with network-delivered energy charges (sometimes called system public benefit charges or wires and pipes charges), has received a more positive support. This paper seeks to understand this differential treatment by examining the fiscal and governance effects, economic efficiency, impacts on equity, and political economy of the two fund-raising systems relative to a default case of funding through government budgets.

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