Double Dividend Hypothesis Research Articles

A classroom game on a negative externality correcting tax: Revenue return, regressivity, and the double dividend

ABSTRACTThe concept of negative externality is central to the teaching of environmental economics, but corrective taxes are almost always regressive. How exactly might governments return externality-correcting tax revenue to overcome regressivity and not alter marginal incentives? In addition, there is a desire to achieve a double dividend in the use of externality-correcting taxes, that is, to use the revenue to offset existing distortionary taxes, such as those on labor that produce a dead weight loss. In this article, the authors explain a classroom game that was developed for students to understand the theory of externalities, taxation dead weight loss, and regressivity. Then, the problem helps students explore the actual design of a policy that satisfies the double dividend hypothesis and corrects for regressivity.

Çifte Kazanç Hipotezinin OECD Ekonomileri İçin Testi: Panel Eşbütünleşme ve Nedensellik Analizi

Environmental tax reforms have become more popular in recent years. The main reason for this situation is concern about global warming and climate change. Also, another problem that most countries have faced is the high level of unemployment. It has been known that environmental taxes are an efficient fiscal instrument to decrease environmental pollution for many years. On the other hand, double-dividend hypothesis that has entered the public finance literature in the recent time claims two benefits of environmental taxes. In addition to lowering environmental pollution, it also enhances employment level. The aim of this paper is to test whether this claim is valid, using panel cointegration and causality analyses for OECD countries from the 1994-2013 period. According to Panel VECM causality analysis results, it has only causality relationship from environmental taxes to environmental pollution in the short run in OECD economies while there are causality relationship from environmental taxes to environmental pollution and unemployment level in the long run. On the other hand, panel FMOLS cointegration results show that environmental taxes decrease both environmental pollution and unemployment level in OECD economies. Finally, country specific results found that double-dividend hypothesis is valid for 14 OECD economies.

Validity of double dividend hypothesis in EU-15 countries

The increases in climate change, biological diversity loss, ecosystem degradation, effects of chemical pollution on the human health, scarcity of the sources, energy and water security have been experienced in the world in recent years together with globalization and the sharp increases in the mass production. In this regard, especially developed countries have begun to implement the policies such as environmental tax reforms to overcome these problems. This study examines the impact of environmental tax reforms on both environment and employment in EU-15 countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, United Kingdom) during the period 1995-2012 by using panel cointegration and Panel FMOLS tests. We found that the double dividend hypothesis was valid in EU-15 countries.Keywords: double dividend hypothesis, environmental tax reform, panel data analysis

Water taxation and the double dividend hypothesis

Abstract The double dividend hypothesis contends that tax policies which are aimed at protecting the environment can potentially yield other benefits for the economy. However, empirical evidence of the potential impacts of environmental taxation in developing countries is still limited. This may be partly due to the limited use of environmental tax policies in economic and environmental management in many of these countries. This paper seeks to contribute to the literature by exploring the impact of a water tax in a developing country context, with Uganda as a case study. Policy makers in Uganda are exploring ways of raising revenue by taxing environmental goods such as water. Whereas their primary focus is to raise revenue, this study is aimed at demonstrating how taxes on environmental goods can potentially yield other benefits beyond addressing a country׳s fiscal needs. This study employs a computable general equilibrium model to shed light on the impact of a water tax policy when a tax is accompanied by a plough-back scheme of the same magnitude. We seek to establish whether a water tax policy that is accompanied by a revenue plough-back scheme can induce more growth, employment and industry output. Whatever the degree of regressivity resulting from the tax, it is possible to design a policy that benefits the economy. The policy was also checked for sustainability using a long-run water demand scenario. The results show that water demand remains more or less on the same trajectory and in fact, a higher level of dividends is realized.

Double dividend hypothesis: Can it be validated by carbon taxation swap with payroll taxes?

This paper is concerned with the proficiency assessment of the environmental tax reform to tackle the pollution and simultaneously decrease the tax burden of pre-existent labor taxation. In comparison with mainstream literature, we focus exclusively on the reduction of the tax distortions that affect labor demand, using the revenues generated by environmental levies. Our starting point is the double dividend hypothesis with respect to the environmental taxation. The main objective of this paper is to validate the second dividend hypothesis, hence testing the carbon taxation ability to reduce harmful effects of taxes on inputs such as labor. Following the trajectory of the double dividend hypothesis, the paper examines the potential of carbon taxation enactment accompanied by the payroll tax cuts in order to lower the efficiency costs of these pre-existent distortionary taxes. The feasibility of tax swap mechanism between environmental and payroll taxation is verified through estimating and comparing their efficiency costs. The results obtained from empirical analysis confirm that there is a high potential of swapping these taxes and implementing offsetting measures, where the efficiency costs of payroll taxation are considerably larger than of environmental taxation. Hence, we conclude that there is “enough room” for this tax swap mechanism to take place which would have a two-folded outcome – environment protection improvement and decreasing the efficiency costs of the fiscal system. Given the fact that the efficiency costs of environmental taxes are considerably lower (both in absolute and percentage values), than payroll taxation in the EU, it is possible to apply payroll tax cuts and consequently increase the ratio of environmental taxation. DOI: http://dx.doi.org/10.5755/j01.ee.26.1.8399

Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax

This paper extends the Mirrlees (1971) model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities. Using general utility structures and exploring both linear and non-linear taxes, it is demonstrated that the optimal second-best tax on an externality-generating good should not be corrected for the marginal cost of public funds, since it equals one in the optimal tax system. In the optimum, distortions of income taxes are equal to marginal redistributional gains. If the government does not have access to a non-distortionary marginal source of finance, the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution. The optimal second-best corrective tax is then either higher or lower than the Pigouvian level. The findings in this paper generalize and amend prior results based on representative-agent models, shedding new light on the weak double-dividend hypothesis, and on the welfare gains of recycling revenue from environmental taxes.

Double Dividend Hypothesis: Can it Occur when Tackling Carbon Emissions?

The paper focuses on the double dividend hypothesis occurrence in case of carbon taxation enactment. Our assessment questions the conditional occurrence of the hypothesis, where environment improvement and the reduction of tax distortions depend not only on the design of carbon taxes but also on the complementary measures implemented to enhance their efficiency. This paper takes into consideration previous proposals to reduce labor taxation in order to strengthen double dividend hypothesis and aims to point out the risks of such measures, for they could endanger the process of pollution abatement. Due to this fact, the paper proposes another set of alternative measures to boost carbon taxation efficiency.

Economic implications of reducing carbon emissions from energy use and industrial processes in Brazil

This study assesses the economy-wide impacts of cutting CO2 emissions on the Brazilian economy. It finds that in 2040, the business-as-usual CO2 emissions from energy use and industrial processes would be almost three times as high as those in 2010 and would account for more than half of total national CO2 emissions. The current policy aims to reduce deforestation by 70 percent by 2017 and lower emissions intensity of the overall economy by 36–39 percent by 2020. If the policy were implemented as planned and continued to 2040, there would be no need to cut CO2 emissions from energy use and industrial processes until 2035, as emissions reduction through controlling deforestation would be enough to meet the voluntary carbon mitigation target of Brazil. The study also finds that using the carbon tax revenue to subsidize wind power can effectively increase the country's wind power output if that is the policy priority. Further, it finds evidence supporting the double dividend hypothesis, i.e., using revenue from a hypothetical carbon tax to finance a cut in labor income tax can significantly lower the GDP impacts of the carbon tax.

From shadow to green: Linking environmental fiscal reforms and the informal economy

In the past few decades many papers have analysed in some depth different environmental tax reforms and the double dividend hypothesis, i.e. the possibility of improving not only the environment but also the economy through the reduction of distortions in the tax system. However, such studies have not modelled the effects of the presence of a shadow economy, even though informal markets account for a significant and growing part of GDP in many developed economies. This paper analyses this important link using a Computable General Equilibrium model for the case of Spain, with historically high unemployment rates and a large informal economy. Since the informal labour is not taxed, when the green tax is introduced and the tax on formal labour is reduced, the pre-existing non-environment-related inefficiency of the tax system is remarkably reduced. Our analysis shows that if the distortions created by the shadow economy are considered, the case for an environmental tax reform where revenues are used to reduce labour taxes is strengthened and the possibility to find a double divided is more likely. Our sensitivity analysis also shows that these results can also be extrapolated to some extent to other countries with different sizes of the shadow economy or different labour market conditions.

The Double Dividend hypothesis in a CGE model: Specific factors and the carbon base

We use a Computable General Equilibrium model to empirically examine the Double Dividend (DD) hypothesis. Using the GTAP model data for Australia, we examine three environmental taxes on the production of energy goods. Following Bento and Jacobsen (2007), we examine the role played by specific factors in the production of energy goods. Our results provide support for the existence of a strong DD in Australia when revenue is recycled through reductions in consumption taxes. The strong DD is larger when the share of specific factors is higher, and is much more pronounced when carbon taxes are charged on the production (origin-based accounting) rather than the usage (destination-based accounting) of carbon. These results draw attention to the importance of the definition of the carbon base and have implications for the scale of carbon leakage.

Are Green Taxes a Good Way to Help Solve State Budget Deficits?

States are increasingly turning to environmental taxes as a means of raising revenue. These taxes are often thought to generate a double dividend: an environmental dividend stemming from the environmental improvement, and an economic dividend resulting from use of the revenue from environmental taxes to reduce other distortionary taxes (e.g., income or sales taxes). We review the economic literature on the double-dividend hypothesis, and show explicitly that the conditions under which the second dividend exists are less likely to hold when the amount of revenue that would be raised by an optimal environmental tax is small relative to the tax revenue from other taxes. We then present estimates of the potential revenue that could be raised from two environmental taxes in Connecticut. The results suggest that, because of their small tax base, environmental taxes are likely to have limited potential to raise revenue to finance state government budget deficits and/or reduce other distortionary taxes. Overall, environmental taxes could still generate significant gains for society if they lead to significant improvements in environmental quality. However, without more evidence of the existence of a double dividend, states should not try to justify these taxes on the basis of raising revenue more efficiently.

A New Approach to Double Dividend Hypothesis of Environmental Taxes: Focused on the Effects of the Labor Market

A New Approach to Double Dividend Hypothesis of Environmental Taxes: Focused on the Effects of the Labor Market

Green tax reforms and habits

Using a dynamic general equilibrium model, we explore the role of habit formation when analyzing green tax reforms under the double dividend hypothesis. We assume increases in energy taxes and adjust capital taxation in a revenue-neutral framework to evaluate the effects on welfare. Since the existence of an environmental dividend is uncontroversial, we mainly focus on the efficiency dividend. Our findings show that, when taxes on household energy consumption increase, habits and transitional dynamics alter household decisions, and change the efficiency dividend. However, when the tax increase is on energy used as an input, reform always induces a welfare cost in terms of efficiency. In this case, habits play a less important role.

Uncertainty and the double dividend hypothesis

ABSTRACTThis paper examines the double dividend hypothesis in the presence of labour income uncertainty. Empirical evidence shows that uncertainty over labour income is particularly significant in developing, while not negligible in developed countries. Under uncertainty, and assuming incomplete capital markets, the tax system plays a role in providing social insurance, and a green tax reform influences its effectiveness. We show that the increase in environmental tax reduces consumption risk, while the balanced budget decrease in labour income tax increases income risk. We find that the total welfare effect of a green tax reform differs substantially from the case of certainty. The critical parameters determining the existence of a second dividend are the lump-sum transfers, the relative substitutability of the two goods for leisure, and the initial tax rates relative to their optimal that determine also the response of labour supply to a change in the tax mix.

Uncertainty and the Double Dividend Hypothesis

This paper examines the double dividend hypothesis in the presence of labour income uncertainty. Empirical evidence shows that uncertainty over labour income is particularly significant in developing, while not negligible in developed countries. Under uncertainty, and assuming incomplete capital markets, the tax system plays a role in providing social insurance and a green tax reform influences its effectiveness. We show that the increase in environmental tax reduces consumption risk while the balanced budget decrease in labour income tax increases income risk. We find that the total welfare effect of a green tax reform differs substantially from the case of certainty. The critical parameters determining the existence of a second dividend are the lump sum transfers, the relative substitutability of the two goods for leisure and the initial tax rates relative to their optimal that determine also the response of labour supply to a change in the tax mix.

Green taxes and double dividends in a dynamic economy

This paper examines a revenue neutral green tax reform along the lines of the double dividend hypothesis. Using a dynamic general equilibrium model calibrated to the US economy, we find that increasing gasoline taxes and using the revenue to reduce capital income taxes does indeed deliver both types of welfare gains: from higher consumption of market goods (an efficiency dividend), and from a better environmental quality (a green dividend), even though in the new steady state environmental quality may worsen. We also find that, given the available evidence on how much households are willing to pay for improvements in air quality, the size of the green dividend is very small in absolute magnitude, and much smaller than the efficiency dividend.

Ricardian rents, environmental policy and the ‘double-dividend’ hypothesis

Recent studies on the so-called double dividend hypothesis find that environmental tax swaps exacerbate the costs of the tax system and therefore do not produce a double dividend. We extend these models by incorporating a fixed-factor in the production of the polluting good and, therefore, allowing Ricardian rents to be generated in the economy. In this setting, an environmental tax reform with revenues used to cut pre-existing labor taxes can produce a double dividend. Moreover, the overall costs of environmental tax swaps are negative up to 11 percent of emissions reductions, suggesting the potential for a strong double dividend and confirming that environmental taxes should be part of the optimal tax system.

Příspěvek k problematice optimálního zdanění

This paper is focused on the theory of optimal taxation applied to environmental regulation. The first part summarizes the current state of knowledge in this field, especially it concentrates on the so called double dividend hypothesis. The second part of the paper defines the concept of triple dividend in transport, which is modelled in the normative neoclassical framework. Based on econometric estimation, we calibrate a model and empirically investigate this hypothesis on the Czech data.

Double dividend hypothesis, golden rule and welfare distribution

This paper analyzes the double dividend issues within the framework of overlapping generations models. We characterize the necessary conditions for obtaining a double dividend, i.e. an improvement of environmental and non-environmental welfare when the revenue from the pollution tax is recycled into a change in the labor tax rate. We show that, depending on the initial capital stock and on the intertemporal elasticity of substitution, conditions may be defined to simultaneously allow (i) the obtaining of a long-term double dividend, (ii) the economy to move closer to the modified golden rule and (iii) in the short term, an improvement in the welfare of the two present generations.

Green tax reforms for industrial transformation: overcoming institutional inertia with consumption taxes

Economic incentives such as environmental taxes can create attractive markets for environmentally sound products and process technologies. Many European countries have a long tradition with environmental taxes but recent figures indicate that the share of green tax revenues in the EU-15 GDP is slightly declining. This is surprising since several governments had declared they would gradually shift the fiscal burden from labour to pollution. This paper tries to explain the fiscal inertia by analysing the role of the taxation base, fiscal neutrality, government failure with respect to the use of economic instruments and the dependence of government budgets on consumption-driven economic growth. We conclude that the initial focus on the double dividend hypothesis has strongly limited the impact of green taxes. A green tax reform based on consumption taxes that are differentiated according to the environmental impact of products could be more effective and efficient. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.