Assessing the double dividend of a third-generation environmental tax reform with resource substitution

Abstract

Taxes often face public opposition, which hinders their implementation since people envision them as costs without a return. Taxes on emissions are one of the most common instruments to tackle environmental problems. If their revenues are used to subsidize renewables, and a double dividend is achieved, public opposition may decrease. Focusing solely on total emissions and total output to measure the first and the second dividend of a combination of policies may be misleading. Indeed, total emissions may increase with economic growth, but relative emissions may decrease, indicating the generation sector’s desired decarbonization. Hence, a wider group of indicators can provide a better insight into the desirability of environmental policies. Our work discusses alternative indicators for the first and the second dividends in the context of a third-generation Environmental Tax Reform (ETR) where emissions tax revenues are used to finance renewable energy sources. The results of our simulation model highlight the relevance of the choice of the indicators for each dividend. Considering alternative indicators provides a better insight into policy impacts. If emissions per output indicate the environmental dividend and consumers’ utility/welfare indicates the economic dividend, the ETR always provides a double dividend. If we choose the traditional indicators, the ETR may not seem particularly interesting. However, with alternative indicators, which still reflect crucial aspects of the environment-economy relationship, the ETR is desirable. Hence, we argue that the attractiveness of a certain ETR and its double dividend should be evaluated under a broader range of indicators.