Abstract

It has often been claimed that there will be a ‘double dividend’ from the introduction of environmental taxes. Not only will it improve the quality of the environment by substituting taxes that actually improve the allocation of resources for taxes that distort it but there will also be another social gain in addition to the primary one. The chapter takes a critical look at three notions of the double dividend—a more efficient tax system, a lower rate of unemployment, and a lower marginal cost of public funds. In all three cases, it is found that a double dividend is a real possibility, but there is no guarantee that it will actually occur. The analysis identifies the conditions under which green tax reforms are likely to be successful with respect to each of the three dividends.