We study an economy with free firm entry and unemployment due to firm-worke
r bargaining over each firm's surplus, and where firms cause pollution that
can be reduced by initial investments. An uncompensated increase in the po
llution tax reduces pollution but increases unemployment, implying a tradeo
ff between the two. When tax revenues are used to subsidize either firms' h
iring or investments, employment may also increase, creating a "double divi
dend" from the pollution tax. A pollution tax increase used to subsidize cu
rrent employment is always less effective than a hiring subsidy, and is tot
ally ineffective when subsidies equal pollution tax revenues for each indiv
idual firm. We show that the (hypothetical) pollution tax implementing the
first-best solution exceeds the Pigouvian tax. The second-best tax exceeds
this first-best tax when we have a double dividend, and is below it when we
do not.