Thanks for the clarification, Devon. I understand the points about Pigouvian taxation, etc. (to a reasonable approximation; I'm not an economist), but seem to have misread Jesse's intent with regard to theory vs. practice. And thanks for noting that "...a politically constrained carbon price will tend to reduce emissions at the margin"--though I would quibble with the word "tend"!
Regarding your second point, my choice of words ("supply" and "demand") was unfortunate, as I was not making an economics argument. I intended to say merely that the availability of funds, even if they are earmarked in law, is no guarantee that they will be used--or used wisely--for innovation-related purposes. Whereas, demand driven by rising carbon prices *will* ensure *some* innovation (with higher prices driving more innovation). I don't dispute (as I note above) that government investment in the innovation cycle has produced some dramatic results (though I would note the economics argument that investment in more basic research, with less appropriability due to attendant knowledge spillovers, produces greater social benefit).
On further reflection, I believe that Jesse's core point deals with the double dividend. Not being familiar with the original economics argument, I can't say much on this, but I am sympathetic with his argument. I would note that Fullerton and Metcalf (apparently not in the bibliography to which Jesse links) conclude that one can't make any general statement about the double dividend (i.e., using proceeds to reduce distortionary taxes versus using them to invest in something that produces a social good); rather, one must looks at the specifics of each case. (Fullerton, Don, and Gilbert E. Metcalf. “Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing.” Chicago-Kent Law Review 73 (1998 1997): 221.)
On breakthroughs: We need some, for sure, and I fully agree that nothing we're doing now will produce any. However, I'm a big believer in the law of small beginnings. The various policies--market and non--that countries and other jurisdictions are putting in place--at an increasing pace, I might add, the U.S. notwithstanding--along with the innovation that *is* occurring, makes breakthroughs more likely in the future. I offer no references from either economics or political science for this opinion!
Still, I'm not sure I *do* agree with your last point. Innovation must be financed, certainly. But the purpose of emissions trading or a carbon tax is to raise the relative prices of carbon-intensive fuels and raw materials. I believe that choices about investment should be made separately, with due attention to technical financial considerations (whether public or private finance). If it turns out that the "best" source of funds is revenue from a carbon tax, fine.