On the Efficiency of Green Tax Reforms to Reduce CO2 Emissions

Abstract

According to the double-dividend hypothesis, the introduction of carbon taxes is expected to both reduce carbon dioxide emissions and the distortions of the existing tax system. Contrary to the common belief that emissions will decrease, this paper points out that an increase of carbon dioxide emissions due to the introduction of carbon taxes within a green tax reform cannot be ruled out in general. To determine the effect of such a green tax reform on the environment one has to take account of the possible feedback effects of all accompanying measures taken by a government. In the case of a revenue-neutral green tax reform, these may be tax rate cuts for at least one non-polluting good. Simulations show that an increase of carbon dioxide emissions due to a revenue-neutral introduction of carbon taxes might occur in an empirically relevant range of parameters.