Green Taxes: A Note on the Double Dividend and the Optimal Tax Rate

The simplest pedagogical tools are employed to clarify that there is a double dividend from shifting the tax policy towards green taxes only if taxes were not set optimally before the environmental concern was put on the agenda. In general a single or less than single dividend cannot be ruled out. The note revisits the result of Sandmo (1975) that the second best optimal tax on a dirty commodity can be interpreted as being composed of a fiscal and an environmental part, and shows how the latter can be derived from a simple cost-benefit trade-off.