This paper analyzes the environmental tax policy issues within an overlapping generations models framework. The objective is to analyze whether an environmental tax policy can respect the two equity principles simultaneously, the vertical as well the horizontal one. We characterize the necessary conditions for the obtaining of a Pareto improving shift when the revenue of the pollution tax is recycled by a change in the labor tax rate or by a change in the distributive properties of the labor tax. We show that, depending on the production function elasticities and on the heterogeneity characteristics of labor supply, an appropriate policy mix could be designed in order to leave each workers' class unharmed by the environmental tax reform. It will consist in an increase of the progressivity of the labor tax together with a decrease of the minimal wage tax rate.
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