Is ‘fiscal greening’ good for the economy?

The ‘double dividend hypothesis’ posits that a twofold benefit can be reaped with a single policy instrument: introduction, or extension, of environmental taxes. In the first place ‘fiscal greening’ can help reduce pollution, while secondly the revenues from environmental taxes can be used to scale back distortionary taxes on labour (income tax) and capital (corporate tax). The second ‘dividend’ is not environmentally-related bur comes, rather, in the form of increased employment or a more efficient tax system, for example.

It can be queried to what extent this hypothesis is backed up by theoretical and empirical arguments or evidence. This study shows there are no compelling reasons for levying environmental taxes over and above the external costs. However, there may be second-order arguments justifying higher environmental taxes. This may be the case, for example, when labour markets are working suboptimally (frozen wages) and/or wage costs are high. The present, exploratory study did not establish if such situations hold in the Netherlands. Whether or not ambitious environment policies should be pursued is an issue separate from the question of whether there is a ‘double dividend’. At the same time, the literature on such a dividend can certainly help ensure that environment policies are designed as efficiently as possible.