This Article argues that carbon taxation by regulation has begun to flourish as a way of financing carbon reduction, even as a full national carbon tax remains politically elusive. For more than a century, energy rate setting has been used to promote public good and redistributive goals, akin to general financial taxation. Nontax 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.
Though carbon taxation by regulation offers many benefits, regulators’ narrow fixation on consumer protection and economic goals in setting rates has hindered realization of its potential. Compared to a national carbon tax, customer subsidies in rate regulation are piecemeal, isolated in focus, and too fragmented to provide investor stability for low carbon infrastructure. They also have not sufficiently accounted for 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 principles to help guide efforts to reform, recalibrate, and scale up customer rate subsidies to better promote low-carbon energy sources. State and federal agencies can better advance efficiency and social welfare in modern energy markets by aligning customer rate subsidies with the same policy goals and principles that inform the optimal design of a carbon tax for energy production.