Environmental Fiscal Reform and the Double Dividend: Evidence from a Dynamic General Equilibrium Model

Abstract

An environmental fiscal reform (EFR) represents a transition of a taxation system toward one based in environmental taxation, rather than on taxation of capital, labor, or consumption. It differs from an environmental tax reform (ETR) in that an EFR also includes a reform of subsidies which counteract environmental policy. This research details different ways in which an EFR is not only possible but also a good option that provides economic and environmental benefits. We have developed a detailed dynamic CGE model examining 101 industries and commodities in Spain, with an energy and an environmental extension comprising 31 pollutant emissions, in order to simulate the economic and environmental effects of an EFR. The reform focuses on 39 industries related to the energy, water, transport and waste sectors. We simulate an increase in taxes and a reduction on subsidies for these industries and at the same time we use new revenues to reduce labor, capital and consumption taxes. All revenue recycling options provide both economic and environmental benefits, suggesting that the "double dividend" hypothesis can be achieved. After three to four years after implementing an EFR, GDP is higher than the base case, hydrocarbons consumption declines and all analyzed pollutants show a reduction.

Can Environmental Tax Policy Really Help to Reduce Pollutant Emissions? An Empirical Study of a Panel ARDL Model Based on OECD Countries and China

“…In addition to some literature confirming the effect of an environmental tax on pollutant reduction [21][22][23][24], there is also some literature concerning the positive effects of environmental tax rates and specific environmental taxes on emission reduction. Rapanos et al confirmed that an environmental tax in Greece would curb carbon dioxide emissions when the tax rate reached the highest level in the European Union [32].…”

Environmental Tax Reform and the “Double Dividend” Hypothesis in a Small Open Economy

“…Real after-tax wage The marginal excess burden (MEB) is used to measure the welfare effects of environmental taxes. According to Keller [19], Mooij [20], Freire-González [21] and Freire-González and Ho [22], the excess burden of environmental taxes is calculated by compensating variation. Compensating variation (CV) is the transfer income that households must receive to maintain their initial utility when policy shocks occur.…”

Regional Aspects of a Climate and Energy Tax Reform in Norway—Exploring Double and Multiple Dividends

“…Analyses on double dividends using CGE models at the national level have been performed widely; some references are summarized in Table 1. One example, Freire-González and Ho [23], found a double dividend, but it occurred first after three to four years after implementing the tax reform. Furthermore, Freire-Gonzalez [17] reviewed 40 such studies and found the presence of an environmental dividend in all and a double dividend in over half of the studies.…”