Environmental tax reform: does it work? A survey of the empirical evidence

Environmental tax reform is the process of shifting the tax burden from emp loyment, income and investment, to pollution, resource depletion and waste. Can environmental tax reform produce a double dividend - help the environm ent without hurting the economy? This paper reviews the practical experienc e and available modeling studies. It concludes that when environmental tax revenues are used to reduce payroll taxes, and if wage-price inflation is p revented, significant reductions in pollution, small gains in employment, a nd marginal gains or losses in production are likely in the short to medium term, while investments fall back and prices increase. Results are less ce rtain in the long term. They might be more positive if models selected welf are instead of production indicators for the second dividend, and if severa l important variables, such as wage rigidities and the feedback of environm ental quality on production, were factored into simulations. (C) 2000 Elsev ier Science B.V. All rights reserved.