On the double dividend under imperfect competition

We investigate whether, and under which conditions, a revenue-neutral environmental tax reform may yield an employment double dividend, i.e., an improvement of environmental quality and an increase in aggregate employment. Using a model with two market imperfections - a rigid real wage and imperfect competition in one industry - we show that an employment dividend is plausibly obtained. However, for countries where labor taxes are high and households spend a large share of their income in favor of environmentally harmful consumption goods a double dividend can nevertheless not be obtained, for under these conditions environmental quality deteriorates.