As you and Matt say, the problems arise when governments get money hungry. A heuristic like putting the money into the regulated industry might prevent that, in which case it’d be desirable. I’m not sure that where you put the money really matter though. Governments need to be seen to be doing something, and they need money to spend to do stuff. Increasing revenues is always going to be attractive to a politician who doesn’t make a living off being a perk-buster.

True, that is a good policy rule of thumb. However, the purpose of the tax is to set the right relative price so the allocation of resources is correct, not necessarily to improve investment in new technology.

It may be possible that reducing distoritionary taxes (eg income taxes) from the proceeds of a pigovian tax is more socially efficient, in which case thats what we should do.

However, given the bounded rationality of institutions, in this case government, I like the idea of a rule of thumb where we use the funds from a pigovian tax to fund investment or public good work in the industry it was taken from – that way we don’t end up with a government that uses the pigovian tax as a revenue gathering device.

And this idea of putting taxes back into something other than cleaner technology seems out of whack. If you take the strting point that there is a market failure because the cost of emissions (carbon) is not borne by the producer, then surely the proceeds of the tax should also be directed at that failure rather than being given back as a general rebate.