Abstract
– The theory of “double dividend effects”
plays an indispensable role in an Environmental Tax Reform. This theory states
that one “green dividend” and one “blue dividend” will be achieved if a reform
of levying an environmental taxation is implemented. Even though this theory
has been challenged and questioned by some economists, the double dividend
effects have been depicted and analyzed in some countries. In China,
environmental taxation is one of the powerful economic leverages of building a resource-conserving
and environment-friendly society. The levy of environmental taxation has been a
certain tendency. Despite the fact that the application of the “double dividend
effects” theory has faced some constraints in China,
the theory can still provide some ideas and urge us to combine the environmental
tax reform with the reform of the overall tax system proceeding from China’s actual
conditions. At last some advice is given regarding the enlightenment of the environmental
tax reform in China.
Key
words – double dividend, environmental
taxation, tax reform
I.
Introduction
Some economists have explained that
an environmental tax reform (ETR henceforth) consists of imposing a tax on
pollution emissions (e.g.CO2 or SO2) and recycling the
revenue collected from the pollution emissions by reducing other distorting
taxes. Then the public revenue will remain unchanged. This is the so-called double dividend effect, that is, one
environmental improvement (the green
dividend) and one deduction in fiscal distortions (the blue dividend). In this case, the environmental benefits are
obtained, so are the non-environmental welfare. It is accepted that
opportunities to get a double dividend typically arise when there exist some
market failures or some imperfections in the tax system. When an environmental
policy is needed, we should use a benefit-cost analysis as an instrument to
compare the environmental benefits and the economic costs produced from this
policy. It is acknowledged for us that it is not that easy to evaluate the
environment benefit because this benefit is hard to be measured in market
value.
According to Mooij (1999), there is
a consensus among all the authors regarding the definition of the green dividend,
but there are fierce disputes on different opinions on the blue dividend. There
are three different versions for the theory of “double dividend effects”. The weak double dividend explains that the
social welfare is higher when an environmental tax is compensated by reducing a
distorting tax rather than by a lump-sum transfer. A strong double dividend happens, apart from the environmental
improvement, when the non-environmental welfare is greater after performing the
reform than before. The third one is the employment
double dividend, which we can acquire if the employment level rises after
the reform in comparison with the condition before the reform.[1]
II.
The
Literature on the Theory of Double Dividend Effects
Before the
appearance of the concept of the “double dividend effects” in an environmental
taxation, in the article of A
Contribution to the Theory of Taxation, Ramsey (1927) proposed to solve one
problem: a given revenue is to be raised by proportionate taxes on some or all
uses of income, the taxes on different uses being possibly at different rates;
how should these rates be adjusted in order that the decrement of utility may
be a minimum? Besides, Ramsey only considered a purely competitive system
without foreign trade and ignored the distribution and considerations arising
from the differences in the marginal utility of money to different people. He
stated that the effect of taxation is
to transfer income firstly from individuals to the State, and then back again
to rentiers and pensioners in part. The transfers will slightly alter the
demand schedules in a way depending on the incidence of the taxes and the
manner of their expenditure. At last he came up with a conclusion and
demonstrated that in collecting an infinitesimal revenue by proportionate taxes
on given commodities the taxes should be such as to decline in the same
proportion the production of each commodity taxed.[2]
Based on the theory of Ramsey, Sandmo (1975) integrate the theory of
optimal taxation with Pigovian principle. Pigou (1920) first introduced that when externalities
are present, indirect taxation can be used as a tool for counteract negative
external effects correcting inefficiencies in the competitive allocation of
resources, namely the Pigovian taxes.[3]
In Sandmo’s
opinion, taxes on commodities that do
not involve external effects introduce distortions of their own and raise the
familiar problem of second-best theory, i.e. since the remaining conditions for
Pareto optimality are not satisfied, the imposition of a tax on the externality-generating
commodity reflecting the marginal social damage may no longer be optimal.[4] While
Buchanan (1969) claimed a different idea. He argued that the Pigovian tax may
in fact reduce efficiency if the externality-generating commodity is produced
by a monopolist. Buchanan seems to draw the conclusion that the Pigovian tax
solution is only applicable under ideal competitive conditions.[5]
The studies
discussed above are engaged in the characteristics of the optimal taxation,
which lays a steady foundation of the double dividend. It is David Pearce
(1991) who creates the term of “double dividend effects”. Pearce pointed out
that an environmental tax can correct a
distortion, namely the externalities arising from the excessive use of
environmental service.[6] In his
article of The role of Carbon Taxes in
Adjusting to Global Warming, it is expounded that this kind of
environmental taxation(carbon tax) can be used by government to adopt a
fiscally neutral stance, using revenues raised from the carbon dioxide to
finance reductions in distorting taxes such as income tax or corporation tax.
Gradually, influenced by the statement in this article, many European
countries started to establish committees for environmental taxation research,
just in order to improve the environmental situations and reduce the rate of
unemployment. However, there are still fierce debates about whether the double
dividend effects exist. The first one who questioned the double dividend
effects is Bovenberg and de Mooij (1994). They noted that even though the
revenues raised through the environment taxes are used for cutting the
distortionary taxes, environmental taxes do not relieve, but to some degree deteriorate
the preexisting tax distortions. As remarked by Bovenberg and de Mooij, it is
likely for an environmental tax to produce further economic (non-environmental)
distortions. If another distorting tax is declined as compensation, there are
two opposite effects. These two effects, namely the revenue-recycling effect and the tax-interaction effect, will induce an ambiguous result, depending
on how distorting the tax to be eliminated is.[7] The
revenue-recycling effect means that the government can take good advantage of
the revenues collected from environmental taxation to compensate the revenue
deduction in decreasing the labor income tax, thus there will be a growth in
labor supply and the rate of unemployment will be lower than before. The
tax-interaction effect indicates that if the environmental taxes are levied
upon the products whose production period is accompanied by pollution, the
prices of these products will increase, leading to the decrease in the
effective purchasing power of the labor. When the elasticity of labor supply is
positive, the supply of labor will decrease. To make it more detailed, if we
reduce a very slightly distorting tax; there may not be enough welfare
improvement that can be used to compensate the distortion introduced by the
environmental tax, hence giving a final negative impact on the
non-environmental welfare. This reasoning can be analyzed the other way round:
if a negative overall effect on welfare is provided through the ETR, we can
give a conclusion that the tax that has been declined is less distorting than
the environmental tax. Namely, we can imply that if the revenue-recycling
effect is smaller than the tax-interaction effect, there will be no double
dividend effects. On the contrary, if the revenue-recycling effect plays a
vital role, double dividend effects exist. Bovenberg and Van Der Ploeg (1994)
designed a general equilibrium model and introduced revenue-neutral when adjusting the labor supply. They concluded
that there are no double dividend effects in the model.[8]
Furthermore, Parry (1995) expatiated that under the believable hypothesis,
partial equilibrium models do not take the interactions between environmental
taxes and previous distortions into consideration. In this case, there will be
double dividend effects in the partial equilibrium models, but not in the
general equilibrium models. It is obvious that the environmental tax falls on
labor income at last. Therefore, the emission taxes and labor taxes will
distort the labor market in a similar way. While, as the environmental taxes
distort the relative prices between polluting and non-polluting products as
well, labor taxes are more efficient in the view of levying the tax.
Eventually, the tax-interaction effect will outweigh the revenue-recycling
effect. There is a larger loss in the non-environmental welfare if the
environmental tax is imposed. Namely, we cannot achieve the double dividend
effects.[9]
Based on de Mooij (2000)’s article
of Environmental Taxation and the Double
Dividend[10], Lans Bovenberg
summarized that concerning the controversial debate on the blue dividend, the green
dividend, that is, a better environment, is still a very overwhelming reason to
introduce an environmental tax.
III.
The Empirical Research of the Double Dividend Effects
Almost all the economists hold the
same view that a green dividend exist. What’s more, it is likely that a weak
double dividend also exist. But when it comes to the strong double dividend and
the employment double dividend, there are different opinions on whether we can
find them in our actual society.
In recent years, most economists
have gradually started to integrate the Computable General Equilibrium (CGE
henceforth) into their empirical researches. Researches on whether the strong
double dividend and the employment double dividend can be obtained or not
through the environmental taxation have been carried out for the sake of the
potential benefits from the taxes for the policy-making.
F. J. Andre (2003) used the CGE
model to evaluate the environmental and economic effects of an ETR in a
regional economy (Andalusia,
Spain). In this
paper, four simulations are made, by combining the introduction of a tax on CO2
or SO2 emissions with a reduction in the income tax or in the
payroll tax of the employers to Social Security. The revenue collected from
such a tax is recycled by reducing payroll tax or income tax in a way that the
public deficit remains unchanged. Considering their results, among the four
simulations, the SO2/Income
tax combination is the most plausible from a regional point of view, while
the CO2/payroll tax
combination is the most plausible from a national point of view. They also
concluded that the income tax reform is more successful concerning
environmental effects, but imposes higher economic costs, while the income tax
reform has slighter environmental effects, but does not appear to have any cost
in terms of non-environmental welfare.[11]
Shiro Takeda (2006)
employed a CGE approach using a multi-sector dynamic general equilibrium model.
The model has 27 sectors and goods (eight goods generate carbon emissions) and
covers 100 years (from 1995 to 2095). This model incorporates
capital income tax, labor income tax, capital tax, labor
tax, and consumption tax. He summarized several results. He explained in his
article that the weak double dividend occurs in any cases. This means that the
policy that uses revenues collected from emission gases to finance reduction in
pre-existing distortionary taxes is more efficient than the policy that returns
all the revenues back to households in lump-sum. What’s more, the strong double
dividend does not arise from reductions in labor and consumption taxes, but it
arises from reductions in capital tax.[12]
IV.
The Influence of the Double Dividend Effects
The environmental tax reform is not
a negligible part in the overall tax system. The aim of levying the environmental
taxation is mainly to reduce the damage resulting from the pollution to the
environment. There is no doubt that this tax will impact the tax burden of
polluting industries and firms, forcing the firms to improve their
technologies. In summary, there are some key points in the view of the double
dividend effects.
(1)
The
quality improvement of the productive resources. It
is known for us that our natural environment is not only a public good, but
also a vital factor which affects productive resources. The levy of
environmental taxation raises the government revenue; simultaneously it will
provide a better environment. It promotes the quality of the labor, capital and
land indirectly.
(2)
A
complement to the current tax system. There
is a difference between the rich people and the working class in the
requirement of the environment quality. The high-income families will ask for a
better environment, which is not a necessity for the poor. An environmental tax is imposed and the better natural
surroundings will follow. It is certain that the rich will be satisfied with an
environmental tax. At the same time, the poor will enjoy the better air. In
this case, a higher environmental tax is a complement to the low-progressive
tax system. Therefore, the tax will lessen the distortion to the labor. The
effective tax rate on labor income is decreased, which will stimulate more
labor supply.
(3)
Re-distribution
in different labor income levels. As the
unemployed labors do not need to shoulder the income tax, we can say that they
will not benefit from the reduced income tax. Hence, the tax burden will be transferred
through the environmental taxation from the employed labors to the unemployed
ones. This is the re-distribution.
(4)
Enhancement
in economic efficiency. The environmental
taxation forces a polluting firm to change their production methods for the
sake of technical innovation. The efficiency of consuming the productive
materials will increase, which is a trend to a higher productivity for the firm
itself, and most importantly, the whole society.
V.
The
Enlightenment of the DDE in China
As a developing country, China is
enjoying its rapid industrialization. But the environmental problems are very
serious. In the view of double dividend effects, the environmental tax reform
can not only accumulate the money for environmental protections, but can also
correct the market failure. Meanwhile, there is continuous stimulation to the polluting
firms. The theory of double dividend effects is a powerful push to place the
ETR into practice. But the target of levy of environmental taxation cannot be
set as a source of government revenue, lest we will encounter a more grievous
tax distortion. The environmental taxation is just a way to mitigate the
serious environmental problems and enforce a green production.
VI.
Conclusion
Some countries have experienced fateful
breakthrough and success in the application of environmental taxation. This is
regarded as a landmark in the history of their tax systems. The theory of
double dividend effects has been a hot topic focused by the whole world step by
step. This paper is based on this theory and summaries the literatures and the
recent empirical researches in this field. Furthermore, the influence of double
dividend effects is explicated and some suggestions are presented according to the
existing situations in China.
Reference:
A.C. Pigou, The Economics of Welfare (4th Edition). London: Macmillan, 1932.
Bovenberg, A. L. (1999) “Green Tax Reform and the Double
Dividend: An Updated Reader’s Guide”, International Tax and Public Finance,
Vol. 6, pp. 421–443.
Bovenberg, A. L. and R. A. de Mooij(1994),
Environmental Levies and Distortionary Taxation, American Economic Review,
84, 1994:1085-1089.
Bovenberg
and Van Der Ploeg (1994), Environmental Policy, Public Finance, and the Labour
Market in A Second Best World, Journal of
Public Economics, 55(3), and (1994):349-390.
Buchanan,
J. M.: External diseconomies, corrective taxes, and market structure. American Economic Review,59, 174-177,
1969.
F. J. Andre, M.A.Cardenetee, E.Velazquez (2005),
Performing an Environmental Tax Reform in a Regional Economy. A Computable
General Equilibrium Approach, The Annals of Regional Science, 39(2), 2005:375-392.
Fullerton, Don, and Gilberte, Metcalf (1998), Environmental Taxes
and the Double Dividend Hypothesis: Did you Really Expect Something for Nothing?,
Chicago-Kent Law Review 73(1),
1998:221-256.
Goulder, L. H. (1995) “Environmental Taxation and the
Double Dividend: A Reader’s Guide”, International Tax and Public Finance,
Vol. 2, pp. 157–183.
Mooij
RA(1999), The double dividend of an environmental tax reform. In: Van Der Bergh JCJM(ed) Handbook of
environmental and resource economics. Edward Elgar.
Nielsen, S. B., L. H. Pedersen and P. B. Sorensen (1995)
“Environmental Policy, Pollution, Unemployment, and Endogenous Growth”, International
Tax and Public Finance, Vol. 2, pp. 185–205.
OECD (2001) Environmentally Related Taxes in OECD
Countries: Issues and Strategies, Paris and Washington, D.C.
Ramsey, Frank P. (1927), A contribution to the Theory of
Taxation, The Economic Journal, Mar 1927, 47-61.
Parry, Ian W.H. (1995), Pollution Taxes and Revenue
Recycling, Journal of Environmental Economics and Management, 29,
1995:64-77.
Pearce. D. W(1991), The role of Carbon Taxes in Adjusting
to Global Warming, Economic Journal, July 1991,101,938-48.
Sandmo, Agnar (1967), Optimal Taxation in the Presence of
Externalities, Swedish Journal of Economics, 77, 1967:86-98.
Terkla, D. (1984), The Efficiency Value of Effluent Tax
Revenues, Journal of Environmental Economics and Management, 11,
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Tullock, G. (1967), Excess Benefit, Water Resource
Research, 3, 1967:643-644.
Wagner, T. (1998) “Limits and Cycles of Environmental
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Equilibrium Model of Environmental Tax Reforms and Pension Policy”, Journal
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[1] Mooij
RA(1999), The double dividend of an environmental tax reform. In: Van Der Bergh JCJM(ed) Handbook of
environmental and resource economics. Edward Elgar.
[2]
Ramsey, Frank P. (1927), A Contribution to the Theory of
Taxation, The Economic Journal, Mar.1927, 47-61.
[3] A. C. Pigou, The Economics of
Welfare (4th Edition). London: Macmillan, 1932.
[4] Sandmo,
Agnar (1967), Optimal Taxation in the Presence of Externalities, Swedish
Journal of Economics,77,1967:86-98.
[5] Buchanan, J. M.:
External diseconomies, corrective taxes, and market structure. American Economic Review,59, 174-177, 1969.
[6] Pearce.
D. W(1991), The role of Carbon Taxes in Adjusting to Global Warming, Economic
Journal, July 1991,101,938-48.
[7]
Bovenberg, A. L. and R. A. de Mooij(1994), Environmental Levies and
Distortionary Taxation, American Economic Review, 84, 1994:1085-1089.
[8] Bovenberg and Van Der
Ploeg (1994), Environmental Policy, Public Finance, and the Labour Market in A
Second Best World, Journal of Public
Economics, 55(3), and (1994):349-390.
[9] Parry,
Ian W.H. (1995), Pollution Taxes and Revenue Recycling, Journal of
Environmental Economics and Management, 29, 1995:64-77.
[10] Ruud A. de Mooij (2000), Environmental Taxation and the
Double Dividend, Amsterdam Elsevier Science BV, 2000, viii.
[11] F.
J. Andre, Performing an Environmental Tax Reform in a Regional Economy: A
Computable General Equilibrium Approach, The
Annals of Regional Science, 39(2), 2005:375-392.
[12] Shiro Takeda(2006), The Double Dividend From Carbon
Regulations in Japan,
http://park.zero.ad.jp/~zbc08106/research/double_dividend/double_dividend.pdf,1-32.
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