Presents the paper "Tax Deductions, Environmental Policy, and the "Double Dividend" Hypothesis," written by Ian Parry and Antonio Bento in May 1999 for the World Bank. The authors find that incorporating tax-favored consumption in models of environmental tax swaps may overturn key results from earlier studies.

Recent studies find that environmental tax swaps typically exacerbate the costs of the tax system and therefore do not produce a double dividend. This paper extends previous models by incorporating tax-favored consumption goods. In this setting, the efficiency gains from recycling environmental tax revenues are larger because preexisting taxes distort the consumption bundle, in addition to factor markets. A genuine double dividend is then found.Parry and Bento find that incorporating tax-favored consumption in models of environmental tax swaps may overturn key results from earlier studies. In particular, a revenue-neutral pollution tax (or auctioned permits) can produce a substantial double dividend by reducing both pollution and the costs of the tax system. The second dividend arises because the welfare gain from using environmental tax revenues to cut labor taxes is much larger when labor taxes also distort the choice among consumption goods. Indeed (ignoring environmental benefits), the overall costs of a revenue - neutral pollution tax are negative in the benchmark simulations, at least for pollution reductions up to 17 percent, and possibly up to 42 percent.In addition, Parry and Bento show that the presence of tax-favored consumption may drastically increase the efficiency gain from using (revenue-neutral) emissions taxes (or auctioned emissions permits) rather than grandfathered emissions permits.This paper - a product of Infrastructure and Environment, Development Research Group - is part of a larger effort in the group to study regulatory policies in a second-best setting. The authors may be contacted at [email protected] or [email protected].

A rigorous and innovative approach for integrating environmental policies and fiscal reform for the U.S. economy. Energy utilization, especially from fossil fuels, creates hidden costs in the form of pollution and environmental damages. The costs are well documented but are hidden in the sense that they occur outside the market, are not reflected in market prices, and are not taken into account by energy users. Double Dividend presents a novel method for designing environmental taxes that correct market prices so that they reflect the true cost of energy. The resulting revenue can be used in reducing the burden of the overall tax system and improving the performance of the economy, creating the double dividend of the title. The authors simulate the impact of environmental taxes on the U.S. economy using their Intertemporal General Equilibrium Model (IGEM). This highly innovative model incorporates expectations about future prices and policies. The model is estimated econometrically from an extensive 50-year dataset to incorporate the heterogeneity of producers and consumers. This approach generates confidence intervals for the outcomes of changes in economic policies, a new feature for models used in analyzing energy and environmental policies. These outcomes include the welfare impacts on individual households, distinguished by demographic characteristics, and for society as a whole, decomposed between efficiency and equity.

Recent studies find that environmental tax swaps typically exacerbate the costs of the tax system and therefore do not produce a "double dividend". We extend previous models by incorporating tax-favored consumption goods (e.g. housing, medical care). The efficiency gains from recycling environmental tax revenues are therefore larger because pre-existing income taxes distort both consumption decisions and factor markets. In this setting a revenue-neutral emissions tax (or auctioned permits) produces a double dividend. Moreover, the overall costs of environmental tax swaps are negative, for modest emissions reductions. The efficiency gains from emissions taxes over grandfathered permits are also much larger than previously recognized.

A comprehensive analysis of an environmental tax reform where people are taxed on pollution and the use of natural resources instead of on their income, this book looks at the challenges involved in implementing this tax reform across Europe.

This open access book evaluates, from an economic perspective, various measures introduced in Japan to prevent climate change. Although various countries have implemented such policies in response to the pressing issue of climate change, the effectiveness of those programs has not been sufficiently compared. In particular, policy evaluations in the Asian region are far behind those in North America and Europe due to data limitations and political reasons. The first part of the book summarizes measures in different sectors in Japan to prevent climate change, such as emissions trading and carbon tax, and assesses their impact. The second part shows how those policies have changed the behavior of firms and households. In addition, it presents macro-economic simulations that consider the potential of renewable energy. Lastly, based on these comprehensive assessments, it compares the effectiveness of measures to prevent climate change in Japan and Western countries. Providing valuable insights, this book will appeal to both academic researchers and policymakers seeking cost-effective measures against climate change.