Environmental tax reform: does it work? A survey of the empirical evidence

Environmental tax reform is the process of shifting the tax burden from employment, income and investment, to pollution, resource depletion and waste. Can environmental tax reform produce a double dividend — help the environment without hurting the economy? This paper reviews the practical experience and available modeling studies. It concludes that when environmental tax revenues are used to reduce payroll taxes, and if wage-price inflation is prevented, significant reductions in pollution, small gains in employment, and marginal gains or losses in production are likely in the short to medium term, while investments fall back and prices increase. Results are less certain in the long term. They might be more positive if models selected welfare instead of production indicators for the second dividend, and if several important variables, such as wage rigidities and the feedback of environmental quality on production, were factored into simulations.