Environmental implications of non-environmental policies

This chapter seeks to understand the linkages between non-environmental polices and the environment, with a particular focus on taxation and subsidies. In order to understand the quite complex literature on this subject, we draw on the theory of the second best and the theory of optimal taxation. The thrust of the chapter is that there are multiple objectives and interactions among the various policies employed to meet them. In retrospect, one can always 'do better' in, say, improving efficiency and environmental quality without worsening the income distribution. What is interesting is to understand what the environmental impacts of the non-environmental policies have been and what lessons one can learn about the formulation of similar policies in the future. That is the central purpose of the chapter. Section 2 examines subsidies in agriculture and transport, as well as policies relating to trade liberalization, privatization, and public infrastructure investment. Section 3 is devoted specifically to energy subsidies. It reviews the results of partial- and general-equilibrium studies on energy subsidies, including environmental impacts (in particular, carbon emissions). Section 4 presents a general-equilibrium model in which energy subsidies and other taxes in the economy are reduced in a revenue-neutral fashion. Two important general-equilibrium effects, the revenue-recycling effect and the tax-interaction effect, are introduced in this section. Sections 5 and 6 continue the discussion of revenue-neutral fiscal policy changes, focusing on the substitution of environmental taxes for other taxes, in particular taxes on labor. This is the "double dividend" debate. Section 5 presents the theory, while Section 6 presents empirical evidence for the European Union. The latter section focuses primarily on employment effects, not welfare effects (the "employment double dividend" vs. "gross welfare dividend"). Section 7 summarizes the main points of the chapter.