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Environmental Taxes and the Double Dividends Hypothesis: Did You Really Expect Something for Nothing?

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  • Don Fullerton
  • Gilbert E. Metcalf

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Abstract

The double-dividend hypothesis' suggests that increased taxes on polluting activities can provide two kinds of benefits. The first is an improvement in the environment, and the second is an improvement in economic efficiency from the use of environmental tax revenues to reduce other taxes such as income taxes that distort labor supply and saving decisions. In this paper, we make four main points. First, the validity of the double-dividend hypothesis cannot logically be settled as a general matter. Second, the focus on revenue in this literature is misplaced. We demonstrate that three policies have equivalent impacts on the environment and on labor supply. One of those policies raises revenue from the environmental component of the reform, another loses revenue, and a third has no revenue associated with it. Third, what matters is the creation of privately-held scarcity rents. Policies that raise product prices through some restriction on behavior may create scarcity rents. Unless those rents are captured by the government, such policies are less efficient at ameliorating an environmental problem than are policies that do not create rents. Finally, we distinguish between two types of command and control regulations on the basis of whether they create scarcity rents.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 9706.

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Date of creation: 1997
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Handle: RePEc:tuf:tuftec:9706

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Citations

Blog mentions

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  1. Energy Efficiency Doesnâ??t Work
    by Yves Smith in Naked capitalism on 2011-10-17 21:26:04
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Cited by:
  1. Bowen, Alex, 2012. "'Green'growth,'green'jobs and labor markets," Policy Research Working Paper Series 5990, The World Bank.
  2. Gilbert E. Metcalf & Sergey Paltsev & John Reilly & Henry Jacoby & Jennifer F. Holak, 2008. "Analysis of U.S. Greenhouse Gas Tax Proposals," NBER Working Papers 13980, National Bureau of Economic Research, Inc.
  3. Bas Jacobs & Ruud A. de Mooij, 2011. "Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second-Best Pigouvian Tax," CESifo Working Paper Series 3342, CESifo Group Munich.
  4. Alain L. Bernard & Marc Vielle, 1998. "Un exemple d'utilisation : le coût de politiques de réduction des gaz à effet de serre," Économie et Prévision, Programme National Persée, vol. 136(5), pages 33-48.
  5. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer, vol. 6(3), pages 421-443, August.
  6. Oladosu, Gbadebo & Rose, Adam, 2007. "Income distribution impacts of climate change mitigation policy in the Susquehanna River Basin Economy," Energy Economics, Elsevier, vol. 29(3), pages 520-544, May.
  7. Gilbert E. Metcalf, 2009. "Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 63-83, Winter.
  8. Coxhead, Ian, 2000. "Tax Reform and the Environment in Developing Economies: Is a Double Dividend Possible," Staff Paper Series 431, University of Wisconsin, Agricultural and Applied Economics.
  9. Brian R. Copeland & M. Scott Taylor, 2003. "Trade, Growth and the Environment," NBER Working Papers 9823, National Bureau of Economic Research, Inc.
  10. Taheripour, Farzad & Khanna, Madhu & Nelson, Charles, 2005. "Welfare Impacts of Alternative Public Policies for Environmental Protection in Agriculture in an Open Economy: A General Equilibrium Framework," 2005 Annual meeting, July 24-27, Providence, RI 19317, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  11. Don Fullerton & Inkee Hong & Gilbert E. Metcalf, 1999. "A Tax on Output of the Polluting Industry is Not a Tax on Pollution: The Importance of Hitting the Target," Discussion Papers Series, Department of Economics, Tufts University 9908, Department of Economics, Tufts University.
  12. Gilbert E. Metcalf, 1998. "A Distributional Analysis of an Environmental Tax Shift," NBER Working Papers 6546, National Bureau of Economic Research, Inc.
  13. Alex Bowen, 2012. "‘Green’ growth, ‘green’ jobs and labour markets," Grantham Research Institute on Climate Change and the Environment Working Papers 76, Grantham Research Institute on Climate Change and the Environment.
  14. Carlo Carraro & Gilbert E. Metcalf, 2000. "Behavioral and Distributional Effects of Environmental Policy Introduction," NBER Working Papers 7648, National Bureau of Economic Research, Inc.
  15. Pablo Serra & Daniel Hojman, 2000. "A Note on the Optimality of the Cash Flow Tax," Documentos de Trabajo 83, Centro de Economía Aplicada, Universidad de Chile.
  16. Sang-Ho Lee & Iltae Kim, 2000. "Self-Selection and Optimal Nonlinear Effluent Charges," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(1), pages 1-14, May.
  17. Brian R. Copeland & M. Scott Taylor, 2001. "International Trade and the Environment: A Framework for Analysis," NBER Working Papers 8540, National Bureau of Economic Research, Inc.

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