Employment effects of environmental taxes and subsidies

This paper presents a new perspective on environmental tax reform. Assuming that households prefer clean goods over dirty ones, we demonstrate that implementing taxes on dirty goods alongside subsidies for clean goods can lead to an increase in employment. This rise in employment is driven by enhanced purchasing power resulting from a greater decline in prices compared to wages, motivating households to work more. As for the environmental dividend, consumption of polluting goods tends to decrease. However, an unintended feedback effect emerges due to the increased purchasing power resulting from the positive impact of subsidies on employment and the consumption of non-polluting goods. If the two types of goods are not perfect substitutes, this rise in purchasing power can lead to greater consumption of polluting goods, thereby limiting improvements in environmental quality. Hence, while subsidy policies can be more acceptable due to the employment benefit, their efficiency is still questionable.