The International Yearbook of Environmental and Resource Economics 2005/2006

The International Yearbook of Environmental and Resource Economics 2005/2006

A Survey of Current Issues

New Horizons in Environmental Economics series

Edited by Henk Folmer and Tom Tietenberg

The Yearbook provides a comprehensive overview of cutting-edge issues in environmental and resource economics.

Chapter 6: The double-dividend hypothesis of environmental taxes: a survey

Ronnie Schöb

Subjects: economics and finance, environmental economics, environment, environmental economics

Extract

Ronnie Schöb* 1 INTRODUCTION In the early 1970s, environmental awareness grew and environmental protection started to climb up the political agenda. Right from the beginning of the greening of politics, the idea of taxing polluting activities dating back to Pigou (1920) has been taken up in the political discussion. It was widely accepted that environmental taxes are an efficient instrument to protect the environment, superior to the classical environmental policy instruments of command and control. The enthusiasm for environmental taxes gained momentum with the double-dividend hypothesis. Tax revenues from environmental or green taxes can be used to cut other taxes. This can reap a second dividend as it reduces the distortion due to other taxes. The weak form of this hypothesis indicates that tax revenues from a revenue-neutral green tax reform can be used to cut other distorting taxes thus lowering the non-environmental efficiency cost of the green tax reform. The strong form of the double dividend asserts that a green tax reform not only improves the environment but also increases non-environmental welfare, i.e. it reduces the total deadweight loss of the tax system. If the latter holds, a green tax reform would be a so-called ‘no-regret’ option: even if the environmental benefits are in doubt, an environmental tax reform may be desirable (Bovenberg, 1999, p. 421).1 The weak form of the double-dividend hypothesis is widely accepted among economists. One implication of this form is that if there is a general consensus about an environmental...

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