As many governments around the world consider carbon taxes (and other forms of carbon pricing), a common question is what to do with the revenue they generate. A growing number of jurisdictions are using at least some revenue to enhance climate change mitigation efforts. This paper explores different options for using carbon tax revenues to help achieve climate goals. The analysis focuses on the State of Washington, where several bills pending before the State Legislature would establish some form of carbon tax, with differing indications for how revenues should be spent.

A key question for mitigation investments is whether to try to maximize nearterm impact by focusing on the lowest-cost options, regardless of the sectors or technologies involved, or pursue strategic mitigation investments based on broader policy objectives (related or unrelated to climate change). The authors consider that question and related issues of funding program design and implementation.

Drawing on lessons from existing GHG mitigation funding programs around the world, they discuss six pitfalls to avoid: overpaying for emission reductions, going off target, failing to make a difference, biased baselines, setting the wrong precedents, and failing to build up an adequate supply. The assessment suggests that a successful Washington program should: (1) be strategic about how funds are invested; and (2) build as much as possible on existing efficiency, clean energy, and transportation programs. Such an approach could help to avoid those common pitfalls and ensure a sufficient supply of investment options from the program’s outset.

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