The effects of energy taxes on productivity and employment: The case of the Netherlands

Abstract

This paper examines the double dividend hypothesis introduced by Bovenberg and Van der Ploeg. By double dividend they mean that higher pollution taxes and lower taxes on labour would not only improve the environment but also boost employment. We investigate the effect of higher prices of energy and lower nominal wages - as a result of the shift in taxes away from labour - on employment, as well as the consequences on investment and productivity. The model used is a dynamic investment model based on a putty-clay vintage structure with three inputs (labour, capital and energy) producing output. The model is calibrated using data for the Dutch private sector for the period 1953 until 1989. Our main conclusion is that shifting taxes from labour towards energy, reduces economic activity, despite factor substitution.