On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions

Pereira, Alfredo and Pereira, Rui (2016): On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions.

Abstract

This paper focuses on the environmental, economic and budgetary impacts of a carbon tax in the presence of mixed recycling strategies and a detailed modelling of labor market conditions, both employment and involuntary unemployment. This focus matches the terms of the policy debate in many small energy-importing economies. The revenue-recycling policies that appear most promising are those that use carbon tax revenue to finance investment tax credits, reductions in social security contributions, and reductions in personal income taxes. Although none of these mechanisms would individually lead to simultaneous improvements in the three margins, a mixture of the three would. Our sensitivity analysis suggests that labor markets conditions are a critical factor in determining the possibility of generating these positive effects. Ignoring labor supply responses, employment and unemployment effects leads to systematic underreporting of the three dividends and thereby undermines the political viability of environmental tax reform.

• Item Type: MPRA Paper
• Language: English
• Keywords: Carbon Taxation; Economic Effects; Budgetary Effects; Dividends; Optimal Recycling Mix; Dynamic General Equilibrium; Endogenous Growth; Endogenous Unemployment.
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; H - Public Economics > H6 - National Budget, Deficit, and Debt > H62 - Deficit ; Surplus; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O44 - Environment and Growth; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy

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