Transitions to a Sustainable Future
The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development
Edited by Valentina Bosetti, Reyer Gerlagh and Stefan P. Schleicher
Chapter 7: Revenue Recycling and Labour Markets: Effects on Costs of Policies for Sustainability
Terry Barker, Sebastian De-Ramon and Hector Pollitt 7.1 INTRODUCTION This chapter considers how the treatment of revenues from environmental taxes and charges affects the results from models that are designed to address economic aspects of sustainability (Barker, 2004), such as mitigation of climate change. Normally, all the models explicitly or implicitly recycle the revenues from taxes or charges. This form of recycling can be by lump-sum transfers to consumers, a form chosen to minimise the theoretical effects of the transfer on the economy (often implicit in the analysis) or by explicit reduction in a burdensome tax or charge, for example employers’ social security charges. The chapter identifies the importance of the form of revenue recycling as a factor in reducing the estimated macroeconomic costs of climate change mitigation, using results from published meta-analyses of the costs as published in the literature, and a comparison of TranSust model results. The chapter begins by reviewing the literature covering more specific econometric and quantified studies of the effects of revenue recycling using large-scale economic models. The treatment of the labour market in the modelling is shown to be important in any study of revenue use because it affects the outcome for employment and inflation, especially if the revenues are recycled by way of reductions in employment taxes. It appears that the use of active revenue recycling in the models (as opposed to lump-sum recycling by default) is one of the most important factors in reducing costs, so the treatment of revenue recycling is...
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