Abstract
The rebound effect requires a rethink of revenue recycling. It is this that this paper offers an alternative to mitigate this effect. Specifically, we adapt and extend the consumption-neutral tax reform of Haibara (Journal of Globalization and Development, 8, 1–11, 2017) to include pollution externalities. Unlike a revenue-neutral tax reform, this reform increases welfare irrespectively of the level of intercommodity tax distortions. With consumption-neutral schemes, exogenous energy efficiency improvements induce higher taxes on the dirty good consumption. Such tax hikes improve welfare more than would be the case in their absence. Consumption-neutral reforms can translate economic costs into a negative rebound effect and increase the first dividend. The double dividend is welcome but need not be a policy priority.
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