This is the submitted version of the article:
Klein, Franziska; Bergh, Jeroen C. J. M. van den. «The employment double
dividend of environmental tax reforms : exploring the role of agent behaviour and
social interaction». Journal of Environmental Economics and Policy, Published
online 15 Sep 2020. DOI 10.1080/21606544.2020.1819433
This version is available at https://ddd.uab.cat/record/235183
under the terms of the license
The employment double dividend of environmental tax reforms:
Exploring the role of agent behaviour and social interaction
Franziska Klein
a
*, Jeroen van den Bergh
a,b,c
a
Institute of Environmental Science and Technology, Universitat Autònoma de
Barcelona, Spain
b
ICREA, Barcelona, Spain
c
School of Business and Economics & Institute for Environmental Studies, VU
University Amsterdam, The Netherlands
It has been long debated whether environmental tax reform (ETR), i.e. a revenue-
neutral shift of the tax burden from labour to carbon emissions, can have a double
dividend, in terms of climate and economic goals. So far this question has been
addressed in public finance and environmental economics using models with
rational and representative agents. Here we examine the relevance of deviating
from these standard behavioural assumptions. Our motivation is that research from
other fields indicates that impacts of both environmental and income taxation on
households are sensitive to behavioural biases, such as habits, imitation or status
seeking. A related feature is that consumers and firms are heterogeneous with
respect to many characteristics, some of which are crucial for the distributional
effects of a tax reform. We combine insights from social psychology and
behavioural, evolutionary and labour economics to identify behavioural cases in
which the impacts of an ETR is likely to differ significantly from those in the
traditional framework. Our findings show that households’ time use patterns and
the distinction between extensive and intensive labour supply are relevant and
deserve more attention.
Keywords: bounded rationality; carbon tax; climate policy; heterogeneity.
*Corresponding author. Edifici Z, UAB Campus, 08193 Bellaterra, Barcelona.
Tel.: +34 935 868 641. E-mail address: franziska.klein@uab.cat.
1. Introduction
With anthropogenic climate change likely exceeding the goals set by the international
community in Paris 2015, the need for comprehensive climate policies and their
appropriate assessment is more urgent than ever. A revenue-neutral tax shift away from
labour and towards carbon dioxide (CO
2
) emissions, i.e. an environmental tax reform
(ETR), is widely considered as such a policy. So far the analysis of ETRs has largely
taken place within the domain of public finance and environmental economics relying
much on computable general equilibrium (CGE) and macro-econometric models. These
tend to focus on representative or average and rational behaviours of consumers and
firms.
Here we discuss how considering different types of behaviour, social interactions
and heterogeneity of firms and households results in a richer understanding of the
mechanisms underlying, and outcomes of, environmental tax reforms. Bounded
rationality and non-market social interactions explain how information and innovations
diffuse. This is relevant as an ETR is supposed to trigger low-carbon innovations and
transitions. Recent studies on ETRs are increasingly paying attention to heterogeneity
(e.g., Aubert and Chiroleu-Assouline, 2019; Fullerton and Monti, 2013; Jacobs and de
Mooij, 2015; Jacobs and van der Ploeg, 2019; Rausch and Schwarz, 2016). This allows,
among others, to more accurately account for distributional impacts of the policy.
However, heterogeneity is often limited to only one dimension, or where studies go into
more detail, there is a disconnect with the macro level.
This study offers a critical review of modelling practices to evaluate the impacts
of environmental tax reforms. We examine whether and how a heterogeneous population
of boundedly-rational and socially-interacting firms and households can affect the
mechanisms of environmental tax reforms, and thus outcomes in terms of relevant
economic and environmental indicators. To this end, we synthesise the results from the
traditional literature in public finance with insights from behavioural and evolutionary
economics, adding observations from labour economics and studies on time use. In the
last decade, behavioural economics has come to be seen as particularly important in the
context of environmental and energy policies (Allcott and Mullainathan, 2010;
Gsottbauer and van den Bergh, 2011; Shogren and Taylor, 2008). Evolutionary
economics is relevant as it can offer insights about how the combination of multiple,
heterogeneous agent populations affects climate policies. We offer an explorative study
aimed at assessing important model elements or assumptions that deserve investigation.
The result can serve as an input to subsequent quantitative model and policy studies
focusing on a particular element or assumption in more detail.
In this study we focus on the so called ‘employment double dividend’ (EDD),
denoting a reduction in both environmental pressure (notably CO
2
emissions) and
unemployment, given the limited space we have available. The EDD is highly dependent
on decision making and thus particularly interesting from a behavioural perspective. It
harmonises two goals that are often presented as being conflicting, namely emissions
reduction (an environmental goal) and employment (an economic goal).
We will evaluate outcomes under distinct sets of behavioural assumptions with
respect to these two dividends. Our analysis follows a three-step procedure. First, we
identify the main mechanisms through which an ETR is commonly assumed to culminate
in an employment double dividend in existing economic models. Second, we critically
review central modelling assumptions. Third, we examine double-dividend outcomes for
a number of cases combining relevant behaviours, heterogeneity and social interactions
of agents, making use of the mechanisms identified in step two to illustrate how policy-
makers can benefit from increased realism of economic models.
