Intergenerational effects of a green tax reform for a more sustainable social security system

Abstract

Green tax reforms are popular in some circles not only because of their direct effect on reducing pollution but also because their revenue capacity may allow to reduce other more distortionary taxes. Despite their potential benefits, the political implementation of green tax reforms is not straightforward. Changes in environmental taxes have different intergenerational effects which need to be taken into account when considering their political support among a country’s population. In this paper, we analyze the economic and intergenerational welfare effects of introducing a green tax reform to ameliorate the Spanish social security system. We consider two types of energy taxes: an energy-consumption tax and an energy input tax. We find that both types of reforms are favored by young individuals, but rejected by older generations. The number of generations supporting the reform depends crucially on the disutility that individuals derive from pollution, suggesting that an increase in environmental awareness may be needed for green tax reforms to be politically viable.