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Modelling the transition to sustainable economic structures

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Assessing tax recycling and the labour market

In evaluating the use of taxes and other policies for curbing carbon emissions or other environmental problems, it is necessary that the impact of such a policy is deemed efficient and equitable. A paper published as part of the TRANSUST project, turns its attention to the issue of tax recycling and the labour market and derives interesting results.

Climate Change and Environment icon Climate Change and Environment

Analysing and designing models of sustainable economic structures can help policy analysis in the long run. Currently, the transition to innovative economic structures poses a major challenge to economic policy design. Raising the importance of questions such as, which economic structures are able to support long-term economic welfare without creating burdens on social, economic and environmental resources? Much literature has been published on environmental taxes and their ability to mitigate environmental problems. Collecting revenue from carbon taxes is broadly considered to be a necessary measure and has contributed to European policy that aims to mitigate the effects of climate change. A team of researchers based in the Cambridge, United Kingdom, sought to examine the impact of the labour market condition and tax recycling in various mitigation scenarios. Their investigation considered models of employment demand and changes in social security contributions. They reviewed much of the literature on revenue recycling and reported quantitative results from meta-analysis of the costs of mitigating climate change. The use of revenues from carbon taxes were found to be an important influence on the costs. They concluded that those models that treat the labour market explicitly are associated with higher product substitution and the modelling of dynamic behaviour of economies. Furthermore, their investigation showed that in the case of tax recycling, the form of taxation has an impact on the cost of a carbon tax as measured by loss of the gross domestic product (GDP). When applied to the existing TRANSUST project models they concluded that these do not include the labour market explicitly. Nevertheless, they found that social security recycling produced the extra benefit of stimulating the labour market, thereby reducing overall distortions.

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