Domestic Environmental Policy and International Factor Mobility: A General Equilibrium Analysis

This paper studies the conditions under which a green tax reform not only benefits the environment but also enhances the efficiency of the tax system. The focus is on the consequences of international factor mobility for the scope of a double dividend. The investigation of the double-dividend claim is based on a general equilibrium model of a stylised small open economy. The simulations of equal-yield tax reform scenarios indicate that an environmental tax on consumption yields a double dividend because the tax burden is partly shifted to transfer income, domestic capital or foreign labour. By contrast, with a tax on energy input the double-dividend claim fails, since the tax burden is mostly borne by domestic labour, resulting in an increase of the distortion in the labour market.