Employment and Output Effects of Climate Policies

Recently academic work has been put forward that argues for a great
urgency to implement effective climate policies to stop global
warming. Concrete policy proposals for reducing CO2 emissions have
been developed by the IPCC. One of the major instruments proposed
is a carbon tax. A main obstacle for its implementation, however,
are concerns about the short-term effects on employment and output.
In order to miti-gate possible negative effects of enviromental
taxes on output and employment, several European countries have
introduced so-called environmental tax reforms (ETR) 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.