Taxation, Unemployment, and Growth: Dynamic Welfare Effects of “Green” Policies

This paper analyzes the effects of environmental tax reforms on a small, open economy. The labor market is characterized by union wage setting. The carbon tax acts as an implicit tariff, which gives rise to terms of trade gains. The terms-of-trade effect together with the union wage setting leads to a positive relationship between the capital-labor ratio and net foreign wealth. In the short run the disinvestments in real and financial capital give temporary room for higher consumption and instantaneous utility. The long run effect on instantaneous utility is more uncertain. A strong double dividend may exist.