We consider an overlapping generations model with pollution. Public spending for pollution abatement are …nanced by tax revenues and public debt. We show that keeping constant the public debt-output ratio is not an obstacle to attain a double dividend, i.e. an increase of both (i) environmental quality and (ii) aggregate consumption.
First, if the capital stock is low and the pollution abatement is large enough, a successful ETR consists in a rise of the environmental tax, compensated by a decrease of the income tax. Secondly, we show that the environmental tax revenues may help reduce the public debt-output ratio. We give conditions (on the initial level of the environmental tax and the debt-output ratio) such that an increase of the environmental tax, budget-balanced by a decrease of the debt-output ratio may also achieve a double dividend.
We conclude that public debt crisis should not compromise ETR, instead, environmental tax revenues could be part of the solution.
Chaire Economie du Climat
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