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Recycling of eco-taxes, labor market Effects and the true cost of labor - A CGE analysis

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Abstract

Computable general equilibrium (CGE) modeling has provided a number of important insights about the interplay between environmental tax policy and the pre-existing tax system. In this paper, we emphasize that a labor market policy of recycling tax revenues from an environmental tax to lower employers’ non-wage labor cost depends on how the costs of labor are modeled. We propose an approach, which combines neoclassical substitutability and fixed factor proportions. Our concept implies a user cost of labor which consists of the market price of labor plus the costs of inputs associated with the employment of a worker. We present simulation results based on a CO2 tax and the recycling of its revenues to reduce the non-wage labor cost. One simulation is based on the market price of labor and the other on the user cost of labor. We found a double dividend under the first approach but not under the second one.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VIII (2005)
Issue (Month): (November)
Pages: 259-278

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Handle: RePEc:cem:jaecon:v:8:y:2005:n:2:p:259-278

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Keywords: market-based environmental policy; carbon taxes; double dividend; computable general equilibrium modeling;

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  1. Koebel, Bertrand & Falk, Martin & Laisney, Francois, 2003. "Imposing and Testing Curvature Conditions on a Box-Cox Cost Function," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(2), pages 319-35, April.
  2. Bovenberg, A.L. & Ploeg, F. van der, 1996. "Optimal taxation, public goods and environmental policy with involuntary unemployment," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73563, Tilburg University.
  3. Heinz Welsch, 1996. "Recycling of carbon/energy taxes and the labor market," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 8(2), pages 141-155, September.
  4. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
  5. Conrad, Klaus, 1983. "Cost prices and partially fixed factor proportions in energy substitution," European Economic Review, Elsevier, vol. 21(3), pages 299-312, May.
  6. Jorgenson, D.W. & Wilcoxen, P.J., 1991. "Reducing US Carbon Dioxide Emissions: The Cost of Different Goals," Harvard Institute of Economic Research Working Papers 1575, Harvard - Institute of Economic Research.
  7. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental taxes and labor-market distortions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-148753, Tilburg University.
  8. Olson, Dennis O. & Shieh, Yeung-Nan, 1989. "Estimating functional forms in cost-prices," European Economic Review, Elsevier, vol. 33(7), pages 1445-1461, September.
  9. S. Proost & D. Regemorter, 1995. "The double dividend and the role of inequality aversion and macroeconomic regimes," International Tax and Public Finance, Springer, vol. 2(2), pages 207-219, August.
  10. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545 Elsevier.
  11. Capros, P. & Georgakopoulos, P. & Zografakis, S. & Proost, S., . "Double dividend analysis: first results of a general equilibrium mode (GEM-E3) linking the EU countries," CORE Discussion Papers RP -1207, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Goulder Lawrence H., 1995. "Effects of Carbon Taxes in an Economy with Prior Tax Distortions: An Intertemporal General Equilibrium Analysis," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 271-297, November.
  13. Conrad, K & Schroder, M, 1991. "Demand for Durable and Nondurable Goods, Environmental Policy and Consumer Welfare," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 271-86, July-Sept.
  14. Ferris, Michael C. & Munson, Todd S., 2000. "Complementarity problems in GAMS and the PATH solver," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 165-188, February.
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Cited by:
  1. Copenhagen Economics, 2008. "Reduced VAT for environmentally friendly products," Taxation Studies 0025, Directorate General Taxation and Customs Union, European Commission.

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