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date: 07 March 2021

Abstract and Keywords

One of the major instruments that has been proposed to stop global warming is a carbon tax.. A main obstacle for its implementation, however, are concerns about the short-term effects on employment and output. To mitigate possible negative effects, several European countries have introduced so-called environmental tax reforms, which are designed in a budget-neutral manner: Revenues from the tax can be used to reduce existing distortionary taxes or to subsidize less polluting activities. We apply this idea to a carbon tax scheme by performing a vector autoregression (VAR) with output and employment data of nine industrialized countries. We impose a simultaneous policy shock on the economy whereby a carbon tax is levied on high-carbon–intensive industries and the resulting tax revenue is redistributed to low-carbon-intensive industries. Impulse response analysis shows that such a policy allows for net gains in terms of output and employment.

Keywords: Global Warming, Employment Effects, Vector autoregression, Environmental Taxes and Subsidies, Environment and Growth

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