Environmental taxes and the double dividend

This paper investigates the employment and welfare effects of an environmental tax reform, ie raising environmental taxes and using the revenues to cut labor taxes. The analysis reveals that such a reform does not necessarily raise employment: it may replace explicit labor taxes by higher implicit taxes on labor. However, employment may rise if the reform succeeds in shifting the tax burden away from workers to those outside the labor force. The paper explores also how distributional concerns affect optimal environmental taxes.