7.3.3.1 Double Dividend
The potential for a double dividend arising from climate mitigation policies
has been extensively studied during the 1990s. In addition to the primary aim
of improving the environment (the first dividend), such policies, if conducted
through revenue-raising instruments such as carbon taxes or auctioned emission
permits, yield a second dividend, which can be set against the gross costs of
these policies.
The literature demonstrates theoretically that the costs of addressing greenhouse
targets with policy instruments of all kinds–command-and-control as well
as market-based approaches–can be greater than otherwise anticipated, because
of the interaction of these policy instruments with existing domestic tax systems.8
Domestic taxes on labour and investment income change the economic returns to
labour and capital and distort the efficient use of these resources.
The cost-increasing interaction reflects the impact that GHG policies can have
on the functioning of labour and capital markets through their effects on real
wages and the real return to capital.9
By restricting the allowable GHG emissions, permits, regulations, or a carbon
tax raise the costs of production and the prices of output, and thus reduce
the real return to labour and capital. If government revenues are to remain
unchanged, labour or capital tax rates have to be raised, exacerbating prior
distortions in the labour and capital markets. Thus, to attain a given GHG emissions
target, all instruments have a cost-increasing “interaction effect”.
For policies that raise revenue for the government (carbon taxes and auctioned
permits), this is only part of the story, however. These revenues can be recycled
to reduce existing distortionary taxes. Thus, to attain a given GHG emissions
target, revenue-generating policy instruments have the advantage of a potential
cost-reducing “revenue-recycling effect”, as compared to the alternative,
non-auctioned tradable permits or other instruments that do not generate revenue
(Bohm, 1998). In a simple, stylized representation of the economy, Bovenberg
et al. (1994) and Goulder (1995a, b) suggest that in only a few cases is the
tax interaction effect fully offset by the revenue-recycling effect. In theoretical,
numerical analyses, the “interaction effect” is found to be larger
than the “revenue-recycling effect” (Parry et al., 1999), which means
that the introduction of an environmental policy, regardless of the policy instrument(s)
used, has a net cost to the economy.10
It is also true, however, that under some circumstances the (cost-reducing)
“revenue-recycling effect” might exceed the (cost-increasing) “interaction
effect”. This could happen if, for example, the interaction effect was
small, for example because of a sufficiently inelastic labour supply, or if
some highly distortionary pre-existing taxes could be lowered.11
However, it is unclear whether the empirical findings of the interaction effect
are due more to the assumptions invoked for tractable general equilibrium analysis
than to real-world considerations (Kahn and Farmer, 1999).
In summary, all domestic GHG policies have an indirect economic cost from the
interactions of the policy instruments with the fiscal system, but in the case
of revenue-raising policies this cost is partly offset (or more than offset)
if, for example, the revenue is used to reduce existing distortionary taxes.
Whether these revenue-raising policies can reduce distortions in practice depends
on whether revenues can be “recycled” to tax reduction. See Chapter
6 for the policy relevance of these estimated effects and Chapter
8 for model-based empirical studies.
|