Environmental Tax Reform, Economic Growth, and Unemployment in an OLG Economy

This paper develops an overlapping-generations model characterized by endogenous growth, unemployment, and pollution. The paper focuses on the replacement ratio, which measures the proportion of after-tax work earnings replaced by unemployment benefits, and considers a replacement-ratio-neutral reform in which the environmental tax is devoted to cutting the employees' rate of contribution to unemployment insurance. Under this reform, (i) the growth rate is increased, the unemployment rate is unchanged, and pollution is decreased; (ii) there is a trade-off of nonenvironmental utility between current and future generations; and (iii) when the reform is associated with an intergenerational transfer from the young to the old, the nonenvironmental utility of every generation can be improved.