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Green tax reform, endogenous innovation and the growth dividend

Author

Listed:
  • Christos Karydas

    (ETH Zurich, Switzerland)

  • Lin Zhang

    (City University of Hong Kong, Hong Kong)

Abstract

We study theoretically and numerically the effects of an environmental tax reform using endogenous growth theory. In the theoretical part, mobile labor between manufacturing and R&D activities, and elasticity of substitution between labor and energy in manufacturing lower than unity allow for a growth dividend, even if we consider preexisting tax distortions. The scope for innovation is reduced when we consider direct financial investment in the lab, or elastic labor supply. We then apply the core theoretical model to a real growing economy and find that a boost in economic growth following such a carbon policy is a possible outcome. Lump-sum redistribution performs best in terms of effciency measured by aggregate welfare, while in terms of equity among social segments its progressive character fails when we consider very high emissions reduction targets.

Suggested Citation

  • Christos Karydas & Lin Zhang, 2017. "Green tax reform, endogenous innovation and the growth dividend," CER-ETH Economics working paper series 17/266, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:17-266
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    References listed on IDEAS

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    More about this item

    Keywords

    Climate Policy; Green Tax Reform; Induced Innovation; Endogenous Growth; Numerical Modelling;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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