Abstract
<em>This paper focuses on the environmental, economic and budgetary impacts of a carbon tax in the presence of mixed recycling strategies and a detailed modelling of labor market conditions, both employment and involuntary unemployment. This focus matches the terms of the policy debate in many small energy-importing economies. The revenue-recycling policies that appear most promising are those that use carbon tax revenue to finance investment tax credits, reductions in social security contributions and reductions in personal income taxes. Although none of these mechanisms would individually lead to simultaneous improvements in the three margins, a mixture of the three would. Our sensitivity analysis suggests that labor markets conditions are a critical factor in determining the possibility of generating these positive effects. Ignoring labor supply responses, employment and unemployment effects leads to systematic underreporting of the three dividends and thereby undermines the political viability of environmental tax reform. </em>
Highlights
Concerns about the health of labor markets, economic growth and unsustainable levels of public indebtedness have been at the center of policy discussion in the European Union (EU)
This focus is intended to match the terms of the policy debate in many small energy-importing economies, in which environmental objectives are often perceived as clashing with the need to promote output growth and improve labor market conditions and occur in a context of serious concerns about public debt
We find that the realization of the second and third dividends crucially depends on the judicious use of the revenues generated by the carbon tax
Summary
Concerns about the health of labor markets, economic growth and unsustainable levels of public indebtedness have been at the center of policy discussion in the European Union (EU). Unemployment in the Euro area was 10.9% of the labor force in 2015. In Greece and Spain, unemployment rates have been substantially higher, 24.6% and 22.1%, respectively, while in Portugal and Italy, it has reached 12.5% and 12.0%. More generally, has been relatively weak, growing at an average annual rate of 0.7% in the Euro area between 2011 and 2015. In the same period Greece saw its economy contract at an average rate of 3.8% per year, Portugal at 0.9% and Spain at 0.1%. Public debt levels have reached historic levels during the period with public debt in Greece www.scholink.org/ojs/index.php/jepf
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