The double dividend: Can “green taxes” help the environment and the economy?
With the U.S. economy faltering and with concerns about climate change growing stronger, policy makers may be tempted to look to "green taxes" for solutions to both economic and environmental problems.
A study by an Indiana University economist and two colleagues suggests the strategy could work -- but it's likely to do more good for the economy than for the environment.
The study, "Green taxes and double dividends in a dynamic economy," was published in the Journal of Policy Modeling. Its authors are Gerhard Glomm, chairman of the Department of Economics at IU Bloomington; Daiji Kawaguchi of Hitotsubashi University in Japan; and Facundo Sepulveda of the University of Santiago, Chile.
The study investigated what would happen if the U.S. increased gasoline taxes by 10 percent -- a "green tax" -- and used the increased revenue to reduce capital income taxes, which deter investment and cause a drag on productivity.
"Potentially, you get two dividends: the green dividend from cleaning up the environment, and this efficiency dividend from creating more incentives for capital investment," Glomm said.
He said research suggests the public is more likely to accept a green tax if it's part of a shift that's revenue neutral, with an increase in one tax used to pay for a decrease in another. The problem is, increased investment resulting from a reduction in capital income taxes would lead to more consumption of fuel. Factories could operate longer hours. Consumers' disposable income could increase and consequently they could buy bigger cars and take longer trips. They could pollute more.
The efficiency dividend could cancel out the green dividend.
"In principle, the effect could go either way," Glomm said.
He and his colleagues used an economic forecasting model calibrated to the U.S. economy to find out what would happen. Compared to previous studies, they write, their calibration better matches gasoline pricing factors and accounts for individuals' willingness to pay for an improved environment. Their analysis also better incorporates changes that take place in the transition from one tax system to another.
"It turns out," Glomm said, "you get both the green dividend and the efficiency dividend. But it turns out the (environmental) welfare gains are relatively small."
That's partly because increased investment and economic activity will generate pollution, Glomm said. And it's partly because there's only so much the public will tolerate when it comes to implementing green taxes.
"Most of the evidence points to a relatively low willingness to pay for cleaner air," he said, pointing out that people discount the value of improvements that will happen in the future, compared to costs they face today.
What are the lessons for policy makers? Glomm said the study suggests it is possible to use an increase in gasoline taxes to deter polluting activities. And it's possible to recycle the revenue to reduce distortions in the tax system.
In other words, he said, you can use tax policy to get the double dividend. "You just have to be smart about it."
