Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor
Chapter 1: Environmental fiscal reform and unemployment in Spain
The theoretical literature relevant to the relationship between environmental taxation and employment creation is centred on the suggestion by Pearce (1991) that environmental taxation could lead to a ‘double dividend’. The idea behind this suggestion is that environmental taxes not only produce improvements in the environment but also generate substantial amounts of government revenue. This new revenue allows governments to reduce the rates of other taxes in the economy while maintaining a constant level of total revenue and expenditure. As these other taxes are generally ‘distortionary’ (i.e. they interfere with the efficient functioning of markets), the reduction in their rates can be seen as improving efficiency and thus producing a second benefit from the adoption of environmental taxes. In this chapter we review the literature on the employment double dividend for Spain and add to it with some new analysis of our own that fills some important gaps in the literature. The chapter is structured as follows. Section 2 provides a theoretical discussion of the double dividend, analysing when we can expect to realise employment gains from a shift towards environmental taxes and when such gains are unlikely. Section 3 looks at the evidence for the double dividend for Spain and includes the results of a model we have developed for that country. Section 4 concludes with some reflections on where further research is needed and where the case for action is clear.
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