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Environmental Taxation, Inequality and Engel’s Law: The Double Dividend of Redistribution

  • David Klenert
  • Gregor Schwerhoff
  • Ottmar Edenhofer
  • Linus Mattauch
Article

Abstract

Empirical evidence shows that low-income households spend a high share of their income on pollution-intensive goods. This fuels the concern that an environmental tax reform could be regressive. We employ a framework which accounts for the distributional effect of environmental taxes and the recycling of the revenues on both households and firms to quantify changes in the optimal tax structure and the equity impacts of an environmental tax reform. We characterize when an optimal environmental tax reform does not increase inequality, even if the tax system before the reform is optimal from a non-environmental point of view. If the tax system before the reform is calibrated to stylized data—and is thus non-optimal—we find that there is a large scope for inequality reduction, even if the government is restricted in its recycling options.

Keywords

Environmental tax reform Double dividend Revenue recycling Inequality Distribution Non-homothetic preferences 

JEL Classification

D58 D62 E62 H21 H23 

Notes

Acknowledgments

The authors thank three anonymous reviewers for their encouraging and helpful comments. We further thank Ulrike Kornek and Jan Siegmeier, as well as the participants of the 2015 GGKP, the 2015 EAERE and the 2016 Tinbergen Institute conferences for insightful discussions.

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Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  • David Klenert
    • 1
    • 2
    • 3
  • Gregor Schwerhoff
    • 1
  • Ottmar Edenhofer
    • 1
    • 2
    • 3
  • Linus Mattauch
    • 1
    • 4
  1. 1.Mercator Research Institute on Global Commons and Climate Change (MCC)BerlinGermany
  2. 2.Potsdam Institute for Climate Impact ResearchPotsdamGermany
  3. 3.Department of Economics of Climate ChangeTechnical University of BerlinBerlinGermany
  4. 4.Institute for New Economic Thinking at the Oxford Martin School and Environmental Change InstituteSchool of Geography and the Environment, University of OxfordOxfordUK

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