Environmental Taxes and the Double Dividend Hypothesis: a Survey and Critique

The double dividend effect comes in many forms but, in a general sense, it is the notion that both the state of the environment and the employment level of the country can be improved with a specifically designed fiscal package that incorporates a carbon tax of some form but has a neutral effect on the fiscal position of the country. The conclusions on a double dividend effect are mixed with most authors suggesting that it does not occur. This argument then becomes one of a more general environment-employment tradeoff that is theorised to exist. The literature on the double dividend effect and the environment-employment tradeoff has come solely from a neoclassical perspective of the economy. This paper surveys the existing literature focussing on the models used and conclusions drawn. The major drawback of the models used is that they are not macroeconomic models and do not include a consideration for the impact of an environmental tax on the distribution of income. This closes policy options available to obtain a double dividend. The paper leads into a companion paper that uses a Kaleckian model of growth and distribution. By using the alternative economic paradigm many policy alternatives are discovered that achieve a double dividend.