Gradual green tax reforms

Green tax reforms have become an important tool not only in protecting the environment but also in bringing about a more efficient tax system. However, reforms often imply accepting sacrifices in the short-run and bring about the risk of potential political opposition. Within this framework, the debate on whether to implement green tax reforms in one-step or gradually becomes of great interest. In this paper, we use a dynamic general equilibrium model, calibrated to the Spanish economy, to evaluate different reforms that consist in increasing energy taxes and adjusting capital taxation in a revenue-neutral framework. Our findings show that, although an environmental dividend is always granted, the existence of an efficiency dividend depends on the type of reform, its size and how gradually it is implemented. Thus, one-step reforms that produce an efficiency dividend would imply large efficiency costs in the short-run. In this case, the reform could only produce efficiency gains in the short-run if it is implemented gradually, although such gains would end up disappearing in the long-run. ► We analyze different green tax reforms by using a dynamic general equilibrium model. ► We evaluate the role of the speed of adjustment comparing gradual versus one-step tax reforms. ► We find that the speed of adjustment is as crucial as is the size and type of reform.