Environmental Tax Reform and the “Double Dividend” Hypothesis in a Small Open Economy

Zhibo Zhou, Weiguo Zhang, Xinxin Pan, Jiangfeng Hu and Ganlin Pu
Additional contact information
Zhibo Zhou: College of Economics and Management, Southwest University, Chongqing 400715, China
Weiguo Zhang: College of Economics and Management, Southwest University, Chongqing 400715, China
Xinxin Pan: College of Economics and Management, Southwest University, Chongqing 400715, China
Ganlin Pu: School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, China

IJERPH, 2019, vol. 17, issue 1, 1-21

Abstract: In this paper, we build and analyze a general equilibrium model to evaluate the effects of environment tax reform on a small open economy in a “suboptimal environment” with existing tax distortions. We then use the macroeconomic data from the Chongqing Municipality in China to conduct simulations to empirically test our analytic results. Our main findings include the followings. First, an increase in environmental tax rate can effectively reduce the use of polluting consumer goods by households as well as investment in polluting factors by enterprises. Hence, an increase in environmental tax rate can improve environmental quality and obtain “environmental dividend”. Second, an increase in environmental tax rate can negatively impact employment, family income and economic growth. Hence, there is no “non-environmental dividend” effect. Third, an increased environmental tax rate has both substitution effect and income effect on household consumption. On the one hand, it motivates households to substitute polluting consumer goods with clean consumer goods. On the other hand, it lowers the total consumption level of households. Fourth, we show that the “double dividend” hypothesis on environmental tax is invalid. And the optimal environmental tax under the suboptimal environment is lower than the Pigouvian tax rate. Finally, we discuss the policy implications of our results.

Keywords: environmental taxes; double dividend hypothesis; small open economy; employment; economic growth (search for similar items in EconPapers)
JEL-codes: I I1 I3 Q Q5 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.mdpi.com/1660-4601/17/1/217/pdf (application/pdf)
https://www.mdpi.com/1660-4601/17/1/217/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jijerp:v:17:y:2019:i:1:p:217-:d:302697

Access Statistics for this article

IJERPH is currently edited by Ms. Jenna Liu

More articles in IJERPH from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().