International Factor Movements, Environmental Policy, and Double Dividends
International Factor Movements, Environmental Policy, and Double Dividends
The main purpose of environmental taxes is “to get the prices right.” Emissions taxes signal the scarcity of environmental resources to their users and thus help to internalize negative environmental externalities. The idea dates back to 1920 and was taken up by modern environmental economics in the late 1960s; since that time environmental economists have tried to persuade politicians to introduce this incentive-compatible instrument as an efficiency-enhancing substitute of the still predominant command and control approach. However, environmental taxes are still the exception rather than the rule in environmental regulation. This has led economists to search for other arguments in favor of the introduction of environmental taxes. Are there additional dividends to be gained from an environmental tax reform? This chapter looks at the link between unemployment and environmental tax reforms, focusing on an open economy endowed with fixed quantities of labor and capital. After describing a basic model of interjurisdictional competition, the chapter discusses a revenue-neutral environmental tax reform and considers its welfare and employment effects. It then looks at optimal environmental policies in first-best and second-best situations.
Keywords: environmental taxes, tax reforms, open economy, labor, capital, unemployment, interjurisdictional competition, welfare
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