This paper examines a revenue neutral green tax reform along the lines of the double
dividend hypothesis. Using a dynamic general equilibrium model calibrated to the US
economy, we find that increasing gasoline taxes and using the revenue to reduce capital
income taxes does indeed deliver both types of welfare gains: from higher consumption of
market goods (an efficiency dividend), and from a better environmental quality (a green
dividend), even though in the new steady state environmental quality may worsen. We also …