Pollution, factor taxation and unemployment

When consumers choose between clean and dirty goods and the labour market c lears, a green tax reform may not bring about a double dividend in the sens e of increasing environmental quality and increasing employment. However, w hen firms choose between clean and dirty factors of production, and when th ere is unemployment, such a result is very likely to occur. The paper inves tigates a model of a monopolistic firm where labour and energy are factors of production and trade unions negotiate the wage rate, accepting some unem ployment as a result of aggressive wage demands. It is shown that, in such a framework, a green tax reform will boost employment provided it does not increase the net-of-tax wage rate by too much. This is the case when the el asticity of substitution between labour and energy is greater than one, equ al to one or not too far below one.