Edited by Janet E. Milne and Mikael S. Andersen
Chapter 12: The double dividend debate
Environmental taxes are of interest mainly because they can improve environmental quality efficiently (at the lowest cost). A potential positive side effect from a policy perspective is their revenue-raising potential. ‘Green tax’ revenues could be used in a variety of ways, such as for environmental cleanup or for research and development of clean energy technologies. But the most widely discussed potential use of environmental tax revenues relates to the ‘double dividend hypothesis,’ the idea that environmental tax revenues could be used to finance reductions in preexisting taxes. These tax changes are assumed to be ‘revenueneutral,’ meaning that reductions in revenue from preexisting taxes would be exactly offset by the increased revenue from environmental taxes. The notion of a ‘double’ or additional benefit is achieved because this kind of ‘tax swap,’ or ‘green tax reform,’ might lower the economic distortions from the preexisting revenue-motivated taxes. Indeed, a few observers have even raised the idea that, given this ‘revenue-recycling’ benefit, the need to justify environmental taxes on the basis of their environmental benefits may be less important (see, for example, Bovenberg 1999). It turns out, however, that the interactions between environmentally motivated taxes and preexisting revenue-motivated taxes are complex, and the economics research on this topic since the mid-1990s has been controversial and confusing.
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