Recycling energy taxes : impacts on a disaggregated labour market

This paper analyses the impacts of energy taxes whose revenue is recycled to reduce gross wages and increase employment. The main novel feature of this paper, is the attempt to assess the effectiveness of this fiscal reform by using a labour market model in which both skilled and unskilled workers are used in the production process. This segmentation enables us to compare a policy which aims at reducing unskilled workers’ wages, as in the original Delors’ White book, with a policy in which the environmental fiscal revenue is used to reduce the gross wage of all workers. Moreover, two policy scenarios will be considered. A non-co-operative one in which each country determines the optimal domestic energy tax to achieve a given employment target and a co-operative one, in which the energy taxes are harmonised to equalise marginal abatement costs in the EU and in which the employment target is set for the EU. Our results show that: Ži. an employment double dividend can be achieved in the short run only, even if a trade-off between environment and employment always exists; Žii. the effect on employment is larger when the fiscal revenue is recycled into all workers’ gross wages rather than into unskilled workers only; Žiii. a co-operative policy leads to even larger benefits in terms of employment provided that an adequate redistribution of fiscal revenues is adopted by EU countries