The effects of carbon taxation on economic growth and employment

Angela Köppl and Margit Schratzenstaller

Chapter 8 in Handbook on Economic Growth and the Environment, 2026, pp 190-214 from Edward Elgar Publishing

Abstract: Potential negative macroeconomic effects of carbon taxes have been debated right from the beginning. This underlines the importance of the question of whether carbon taxation is detrimental for growth and employment and how potential negative macroeconomic effects could be mitigated. The chapter first summarizes the literature exploring the impact of carbon taxation on GDP and employment. Generally, the effects of carbon taxes on GDP are found to be moderate, particularly if revenues are recycled. Second, it reviews and synthesizes empirical findings regarding the double dividend hypothesis, which postulates that recycling carbon tax revenues through decreasing other, more distortive, taxes could simultaneously yield environmental and economic benefits. Furthermore, it discusses more broadly the growth implications of different revenue recycling options and potential trade-offs regarding other relevant impact dimensions. While lump-sum transfers are the most progressive recycling option, they are not very conducive to growth. Tax reductions are more growth-friendly but tend to exacerbate the regressive effects of the carbon tax.

Keywords: Carbon Taxation; Macroeconomic Impact; Growth; Double Dividend Hypothesis; Revenue Recycling; Lump-Sum Transfers (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035322589
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