Double-Dividend Hypothesis and Competitiveness: A Critical Examination

Developing ecotaxes for a populous country such as India is a challenge due to complexities of economic activities and information non-availability. The pressing question addressed here is regarding sustaining its growth while preserving environment. It is normally difficult to achieve these goals simultaneously, and thus the trade-off seems inevitable at first glance. This is also the case with ecotaxes as the inefficiencies related to the levy of this tax could result into costs that may even outweigh the environmental gains. This complex issue has been delved in this chapter. Cost on the economy and its agents have been studied at two levels, first the impact on the economy as a whole for which three indicators have been utilised: GDP, wages of the workers and emissions/degradation into/of the environmental resources. Second, the effect on the taxed sectors has also been studied through the change in their export competitiveness. The other related issue that has been analysed is whether the revenue generated from the levy of ecotax could be recycled back into the system to attain the additional dividend (or the double dividend) by reducing the inefficiency from the levy of ecotax. In order to supplement the analytical framework, a guarded simulation exercise is undertaken here. The outcomes from the simulation exercise at both 5 and 10% tax rates using the E-SAM framework are that the revenue recycling did generate double dividend as there were cost savings not in terms of increment in GDP but in terms of environmental improvement depicted through emissions of GHGs, wastewater discharge and land degradation. The trade-off between the preservation of environmental quality and economic growth could be overcome via revenue recycling. The effect of ecotaxes on competitiveness of the polluting sectors and the wages of the workers due to the change in export competitiveness was found to be minimal at both the tax rates.