Double Dividend in an Endogenous Growth Model with Pollution and Abatement

This paper discusses wether by implementing an environmental tax reform, a government may achieve a double dividend. We consider the simplest endogenous growth model (AK model) and include a negative environmental externality in the utility function. Pollution flow can be reduced by means of private abatenment activities. There is a predetermined non-optimal level of public spending financed by environmental taxes and pre-existing taxes on income and consumption. The major contribution of the paper is to show that, under this simple framework, a double dividend may arise if tax reform consists of substituing environmental tax for income tax, in such a way that the government budget constraint holds in a present value sense.