Title: Ecological tax reform and the double dividend of ecological sustainability and low unemployment: an empirical assessment

Authors: Philip Lawn

Addresses: Faculty of Social Sciences, Flinders University, GPO Box 2100, Adelaide, SA 5001, Australia.

Abstract: Ecological Tax Reform (ETR) is a policy designed to tax such |bads| as resource depletion and pollution and to reduce tax impositions on such |goods| as labour and income. The aim of ETR is relatively straightforward: (1) taxing depletion and pollution should decrease the rate of resource throughput per unit of economic activity and relieve any growing pressure on the natural environment; (2) reducing tax rates on labour and income should encourage the employment of labour and reward value-adding in production. For these reasons, many observers believe that ETR has the capacity to deliver the double dividend of ecological sustainability and low unemployment. Some ecological economists are quite comfortable with the positive employment effect of ETR but are not altogether confident that conventional ETR measures will result in ecological sustainability. They argue that sustainability is essentially a throughput problem, yet market prices – and this includes tax-adjusted resource prices – are an allocative instrument with the limited capacity to induce greater resource use efficiency. Despite the logical benefits of a more efficient allocation of natural resources, ecological economists believe that, left unchecked, efficiency gains are likely to be overwhelmed by the scale impact of increased economic activity (the |Jevons| effect|). As such, tax-adjusted prices cannot prevent the intensity of environmental stress from eventually exceeding sustainable limits. To achieve ecological sustainability, many ecological economists believe it is necessary for an ETR package to include a separate policy instrument in the form of quantitative throughput controls that must be based on ecological rather than economic criteria. With the ecological economic position in mind, this paper reveals the ETR performances of four nations – Sweden, Denmark, The Netherlands, and Finland. Using CO₂ emissions as an indicator of environmental stress, it appears in all four cases that significant efficiency increases have eventuated (as represented by the ratio of real GDP to CO₂ emissions). The employment impact of reduced income and labour taxes is much harder to discern but, importantly, total CO₂ emissions have either changed very little (Sweden and Denmark) or have markedly increased (The Netherlands and Finland). This evidence cautiously supports the ecological economic position and raises doubts as to whether conventional ETR measures can achieve ecological sustainability and, furthermore, the promised double dividend.

Keywords: ecological tax reform; carbon dioxide emissions; efficiency; Jevons’ effect; ecological sustainability; low unemployment; Denmark; Sweden; Netherlands; Finland.

DOI: 10.1504/IJEWE.2006.011754

International Journal of Environment, Workplace and Employment, 2006 Vol.2 No.4, pp.332 - 358

Published online: 20 Dec 2006 *

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