Taxation, Pollution, Unemployment and Growth: Could there be a "Triple Dividend" from a Green Tax Reform?

The paper develops a model of endogenous economic growth, where sustainable growth is driven by private capital accumulation and productive government spending on education and pollution abatement. The economy is distorted by pollution externalities in production and consumption; by taxes and transfers, and by union monopoly power creating involuntary unemployment. Within this framework we analyse the effects of various "green" tax policies on pollution, unemployment, growth, and consumer welfare. Among other things we highlight the differences between pollution taxes which are levied for general revenue purposes and pollution taxes which are "earmarked" for financing expenditures on pollution abatement. We also investigate the effects of a switch in the policy regime from quantity control of pollution combined with "grandfathering" of pollution rights to regulation via emission charges. We find that such a regime shift has the potential to raise employment, growth and welfare without damaging the environment, because emission charges improve the efficiency of the tax system by serving as an indirect method of taxing away pure profits.