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Increasing taxes on ‘bads’ and reducing them on ‘goods’: A double dividend hypothesis of carbon taxation

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  • Malhotra, Gurleen Kaur
  • Dubey, Amlendu
Abstract
We analyse the effect of adoption of a carbon tax on the effective labour tax rates using a difference-in-difference framework in which we incorporate staggered treatment adoption and account for heterogeneous causal effects. We use data on 143 countries during 1985–2018. We conduct our analysis using DID estimation developed by Borusyak et al. (2024) and Callaway and Sant’Anna (2021) followed by sensitivity analysis and placebo tests. We find that enacting a carbon tax on an average lowers the labour tax rate by 1.32 % points. In country-specific analysis we find that carbon tax implementation is reducing labour tax by around 3.57 % for Sweden and Norway, however, the effect is insignificant for Denmark. Our findings indicate that implementing a carbon tax can help to reduce the tax burden on labour. Countries experiencing substantial welfare losses due to their present tax structure might implement carbon taxes as a means to mitigate these losses.

Suggested Citation

  • Malhotra, Gurleen Kaur & Dubey, Amlendu, 2025. "Increasing taxes on ‘bads’ and reducing them on ‘goods’: A double dividend hypothesis of carbon taxation," Journal of Policy Modeling, Elsevier, vol. 47(1), pages 118-133.
    • Handle: RePEc:eee:jpolmo:v:47:y:2025:i:1:p:118-133
    DOI: 10.1016/j.jpolmod.2024.11.002
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    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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