As I said the other day, I’m going to be asking a few questions about cap-and-dividend. Today’s question is about public investment.

As people around here have heard a million times by now, climate policy is a three-legged stool: carbon pricing, public investment, and regulation/regulatory reform. All of these will be necessary given the size and urgency of the problem.

C&D doesn’t include anything from the regulatory leg (which is why Joe Romm criticizes it), but I want to focus on the investment leg. I’m working here on the presumption that we need something on the order of $15-$50 billion of green investment a year (maybe more) to boost energy R&D, retrofit millions of buildings, improve and expand the electrical grid, build public transit and rail systems, and directly incentivize efficiency and clean energy (carrots!).

Carbon pricing and public investment are often yoked together: When people talk about taxing carbon (or auctioning permits under cap-and-trade), they frequently talk about using the revenue for green investments. By returning all the revenue to citizens on a per capita basis, however, C&D forgoes that revenue. In fact, C&D contains no provision for public investment at all.

What should we make of this?

I have had trouble getting a clear sense of what C&D advocates think about it. I’ve heard three sorts of responses, all of which are problematic.

Response one: So what?

Sometimes C&Ders talk like a price on carbon is sufficient — that the comparative market advantage clean tech gains via the carbon tax will be enough to incentivize a shift to green. No need for additional "carrots."

A variant is to cast the lack of investment as a virtue. Indeed, this is what makes a fully refunded carbon tax attractive to some conservatives — it doesn’t put money in the hands of government bureaucrats, which as we all know are myopic, corrupt, and stupid. This helps explain why arch-conservative Bob Corker (R-Tenn.) sponsored a cap-and-dividend amendment to the Lieberman-Warner bill last year.

Response two: We’ll skim some revenue

Another response, which James Boyce offered on the call [mp3], is that auction revenues will be so enormous — possibly up to $200-300 billion a year — that it won’t be hard to peel off enough of it to spend on green energy and still have the vast bulk left over. Later in the call he said something similar about assistance for particularly hard-hit communities (think coal miners).

This is problematic. Once you start dipping into a pot of revenue that huge, are you not opening Pandora’s Box? If constituency X sees constituency Y getting money, how does that not set off a lobbying war and get you right back in the middle of the special-interest muck that brought down Lieberman-Warner?

It’s possible that you could set up a program that fully refunds the bottom 60-70 percent of consumers and sets aside enough money to invest in a green economy. But once you start doling out the revenue here and there, you rapidly lose the system’s vaunted simplicity and transparency.

Response three: Get investment revenue somewhere else

The idea here is that you leave C&D a simple, transparent, free-standing program and get your money for green investment from other sources. One frequent idea, offered by Boyce on the call, is that the money could come from redirecting current fossil-fuel subsidies, which depending on how you count add up to around $50 billion a year. Another, championed by our own Gar Lipow (and Jon Rynn), is to get the money from the bloated U.S. defense budget. Yet another is old-fashioned deficit spending — which is where the revenue for Obama’s initial stimulus package is coming from.

Now, deficit spending is fine in the midst of a downturn, but I take it as uncontroversial that we don’t want to be doing $50 billion in deficit spending every year for the next 40 years. That’s not a stable or reliable source.

You won’t find anyone more enthusiastic about cutting fossil fuel subsidies and military budgets than me, truly, but that’s problematic as well. One of the principle benefits of C&D, according to its backers, is that it’s politically viable. Voters can understand it; if it’s clear to them that they’ll be more-than-compensated for rising energy costs, they’ll support it. The broad support of ordinary voters will be enough to overcome the concerted resistance of fossil fuel and other industries.

I find that fairly dubious to begin with, but imagine if you told fossil-fuel companies not only that they’d face a stiff new tax, but that they’d lose tens of billions of subsidies on top of it. They would view it as the apocalypse — it would make the lobbying against Lieberman-Warner look like patty-cakes. Or what if you told the military, pro-military legislators, and the enormous defense industry that they’d be paying for a green economy because all the other revenue was being handed out to taxpayers.

You’d be directly taking on two of the largest, best funded, and most powerful lobbies in U.S. politics. You would take a politically dicey proposition and double, triple, quadruple the political difficulty.

Anyway, so that’s the question: What’s the Official C&D Advocate take on the need for green public investment and possible sources thereof under their program?