The Double Dividend Hypothesis in a CGE Model: Specific Factors and Variable Labour Supply*

In this paper we use a Computable General Equilibrium (CGE) model to examine the Double Dividend (DD) hypothesis. Using the general equilibrium GTAP model data for Australia and the UK, we incorporate endogenous production taxes to achieve targeted abatement policies in the production of energy goods (coal, oil, gas, petroleum, electricity). Following Bento and Jacobsen (2007), we examine the role played specific factors in the production of energy goods. In particular, we employ a novel approach to model the impact of specific factors on the existence and magnitude of the DD. We also incorporate endogenous labour supply, which allows us to illustrate the size of the labour market effect of targeted abatement policies. Our results indicate that with abatement tax revenue offset by reductions in other government distortions, we can identify which specific forms of revenue recycling yield a DD. For Australia we find that the magnitude of the DD is significantly larger when we employ the specific factor characterisation of an economy and we recycle the revenue through reductions in consumption taxes. However, we find no evidence of a DD for Australia when we employ income tax as the recycling instrument. Finally, we find virtually no evidence of a DD for the UK for either recycling instrument regardless of the specific factors characterisation we employ.