Double Dividend with Trade Distortions: Analytical Results and Evidence from Chile

The double-dividend debate evolves around the possibility (or not) of substituting environmental taxes for more distortionary taxes to reduce both pollution degradation or damages (the first dividend) and the excess burden of existing taxes (the second dividend). This debate tends to center on labor market distortions, but this paper shifts the focus to trade and environmental distortions. Specifically, Beghin and Dessus empirically explore the trade/environment double-dividend with an applied general equilibrium model of the Chilean economy. Findings suggest that swapping environmental taxes for trade distortions in Chile does indeed improve welfare. Furthermore, the swap would pay for itself under the assumption of separable pollution damages from market-good consumption.