Performing an environmental tax reform in a regional economy. A computable general equilibrium approach

Abstract

We use a Computable General Equilibrium model to simulate the effects of an Environmental Tax Reform in a regional economy (Andalusia, Spain). The reform involves imposing a tax on CO₂ or SO₂ emissions and reducing either the Income Tax or the payroll tax of employers to Social Security, and eventually keeping public deficit unchanged. This approach enables us to test the so-called double dividend hypothesis, which states that this kind of reform is likely to improve both environmental and non-environmental welfare. In the economy under analysis, an employment double dividend arises when the payroll tax is reduced and, if CO₂ emissions are selected as environmental target, a (limited) strong double dividend could also be obtained. No double dividend appears when Income Tax is reduced to compensate the environmental tax.