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date: 12 February 2025

Environmental Policy and the Double Dividend Hypothesislocked

Environmental Policy and the Double Dividend Hypothesislocked

  • Antonio M. BentoAntonio M. BentoUniversity of Southern California

Summary

Since the 1990s, the so-called double-dividend debate—that is, the possibility that swaps of newly environmental taxes for existing distortionary taxes such as taxes on labor or capital could simultaneously improve environmental quality and reduce the distortionary costs of tax system—has attracted the attention of policymakers and academics. And while prior to the 1990s environmental economics as a field was not ready to inform this debate, scholars quickly moved to incorporate insights of the theory of second-best from public economics to inform the discussion. The result was a substantial advancement of the field of environmental economics, with the evaluation of the welfare effects of alternative policy instruments relying on general equilibrium models with pre-existing distortions.

Initially, scholars casted substantially doubt on the prospects of a double dividend, and suggested that environmental tax reforms would not reduce the distortionary costs of the tax system. This is because studies documented that the tax-interaction effect dominated the revenue-recycling effect. That is, newly environmental taxes interact with pre-existing distortions in labor markets. And even when the revenues of environmental taxes are used to cut the rate of the labor tax, the environmental tax reform exacerbates, rather than alleviate, pre-existing distortions in labor markets. Throughout the 2000s and in more recent decades, the literature has documented many instances where a double dividend is more likely to exist, including in the context of developing countries.

Subjects

  • Policy, Governance, and Law
  • Sustainability and Solutions
  • Quantitative Analysis and Tools
  • Environmental Economics

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