Carbon Tax as Double Dividend?

An often invoked (and controversially debated) proposition in environmental economics is that it would be better to alleviate the pressure from “distortionary” taxes (especially income taxes) and switch the burden to environmental taxation – e.g., a carbon tax. This sounds very reasonable – why should we tax what we want more of (labour, income), when we can tax what we want less of (e.g., pollution). This is also known under the name of a “double dividend” (dividend 1: the environmental impact; dividend 2: removal of distortions, especially in the labour market). But, reasonable and tempting as it sounds, this approach has its downsides. The main two are: the aspect of “distortionarity”, and the tradeoff between efficiency and revenue. Continue reading