Funding energy efficiency: earmarked environmental taxes versus system public benefit charges?

This article seeks to understand the differential treatment by examining the fiscal and governance effects, economic efficiency, impacts on equity, and political economy of environmental taxes and network-delivered energy charges relative to a default case of funding through government budgets. A system public benefit charge (SPBC) provides steady and often substantial funding for energy efficiency programs or other socially beneficial spending. Another advantage is the opportunity to tailor the funding source to program design and adapt spending to the demand for sectoral programs. The criticisms relate more to how the funds are used than to the collection mechanism itself. In general, the view of classical economists is that earmarking of environmental taxes reduces economic efficiency by creating distortions in the marketplace. A compromise between economic efficiency and political economy might be partial earmarking. One approximate way to prevent overspending and static inefficiency is to set the SPBC charge at a level that will collect the external costs of electricity consumption.