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Environmental Tax Reform under Debt Constraint

Author

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  • Mouez Fodha
  • Thomas Seegmuller
  • Hiroaki Yamagami

Abstract

This article analyzes the impacts of Environmental Tax Reform (ETR) when the government is constrained not to increase the public debt-to-output ratio. We consider an overlapping generations model with pollution. Public spending for pollution abatement are financed by tax revenues and public debt. We show that keeping constant the public debt-output ratio is not an obstacle to attain a double dividend, i.e. an increase of both (i) environmental quality and (ii) aggregate consumption. First, if the capital stock is low and the pollution abatement is large enough, a successful ETR consists in a rise of the environmental tax, compensated by a decrease of the income tax. Secondly, we show that the environmental tax revenues may help reduce the public debt-output ratio. We give conditions (on the initial level of the environmental tax and the debt-output ratio) such that an increase of the environmental tax, budget-balanced by a decrease of the debt-output ratio may also achieve a double dividend. We conclude that public debt crisis should not compromise ETR, instead, environmental tax revenues could be part of the solution.

Suggested Citation

  • Mouez Fodha & Thomas Seegmuller & Hiroaki Yamagami, 2018. "Environmental Tax Reform under Debt Constraint," Annals of Economics and Statistics, GENES, issue 129, pages 33-52.
  • Handle: RePEc:adr:anecst:y:2018:i:129:p:33-52
    DOI: 10.15609/annaeconstat2009.129.0033
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    File URL: http://www.jstor.org/stable/10.15609/annaeconstat2009.129.0033
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    More about this item

    Keywords

    Environmental Tax Reform; Debt; Public Emission Abatement; Double Dividend; Overlapping Generations Model;

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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