Ecological tax reform "has double dividend"

Comprehensive review of empirical studies supports claims by tax reform proponents

Ecological tax reform should indeed, as its supporters claim, deliver a "double dividend" of environmental and economic benefits, according to a review of virtually all empirical studies on the subject published recently in the journal Ecological Economics.

Benoît Bosquet of the World Bank synthesises results from 139 computer simulations from 56 studies of ecological tax reforms (ETRs). Virtually all the initiatives studied are in Europe. They almost exclusively concern shifting the burden of taxation from "goods" to "bads" through higher taxes on carbon or energy with countervailing cuts in employment taxes.

The simulations suggest cuts in carbon emissions (the environmental benefit) and marginal gains in employment (the main economic benefit). Other economic factors are more mixed - there can be marginal gains or losses in economic activity, a decrease in investments and a moderate increase in prices.

Though ETR is fast becoming a key part of European environmental policy making (ENDS Daily 24 August), Mr Bosquet notes that debate is continuing in the theoretical literature over whether it will, in fact, deliver double dividends. The author suggests an affirmative answer, while stressing that implications of particular ETRs can vary widely depending on their design and country-specific factors.

For example, using revenue gains from environmental taxes to reduce non-wage labour costs such as social security contributions should yield greater employment benefits than reducing personal income taxes, the literature suggests. According to some studies, even more jobs are created if social security contribution cuts are targeted at low-income workers.

The time-scale over which ETRs are modelled is also very important, says Mr Bosquet. Several types of economic impacts are predicted to become positive in the longer term after a short-term dip, while a negative impact on economic activity levels (GDP) is more likely in the longer term.

Distributional impacts of ETRs could be progressive or regressive in different countries. Studies suggest that poorer households will benefit more relative to richer ones in Italy and Spain, while the converse is particularly expected in Denmark, Ireland and the UK.

Follow Up:
Ecological Economics, published by Elsevier Science, tel: +31 20 485 3757. The paper is entitled: "Environmental tax reform: does it work? - A survey of the empirical evidence," Ecological Economics 34 (2000) 19-32.

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