The Death of the Pigovian Tax? Policy Implications from the Double-Dividend Debate

Abstract

Recently, economists appear to have abandoned a central precept of environmental policy: optimal environmental taxes are equal to marginal environmental damage (MED). As a consequence of labor market distortions, optimal environmental taxes are now generally argued to typically lie below MED, and given realistic policy constraints on optimal tax reform, sometimes well below MED. This new consensus is reflected in over a dozen papers published without rebuttal in prestigious economics journals, in important survey articles, and in policy-oriented manuscripts. How was it possible that such a radical transformation of economic thinking occurred with essentially no debate in the literature? (JEL Q21)