Recycling energy taxes: impacts on a disaggregated labour market

This paper analyses the impacts of energy taxes whose revenue is recycled t o reduce gross wages and increase employment. The main novel feature of thi s paper, is the attempt to assess the effectiveness of this fiscal reform b y using a labour market model in which both skilled and unskilled workers a re used in the production process. This segmentation enables us to compare a policy which aims at reducing unskilled workers' wages, as in the origina l Delors' White book, with a policy in which the environmental fiscal reven ue is used to reduce the gross wage of all workers. Moreover, two policy sc enarios will be considered. A non-co-operative one in which each country de termines the optimal domestic energy tax to achieve a given employment targ et and a co-operative one, in which the energy taxes are harmonised to equa lise marginal abatement costs in the EU and in which the employment target is set for the EU. Our results show that: (i) an employment double dividend can be achieved in the short run only, even if a trade-off between environ ment and employment always exists; (ii) the effect on employment is larger when the fiscal revenue is recycled into all workers' gross wages rather th an into unskilled workers only; (iii) a co-operative policy leads to even l arger benefits in terms of employment provided that an adequate redistribut ion of fiscal revenues is adopted by EU countries. (C) 2001 Elsevier Scienc e BY. All rights reserved.