Recycling of carbon/energy taxes and the labor market

This paper provides a quantitative assessmet of a cost shift from labor to energy by means of a carbon/energy tax. The analysis utilizes a general equilibrium model for the European Community, placing the emphasis on the modeling of labor supply. The paper highlights the importance of the feedback from an induced increase in labor demand to wage formation. It shows that the goals of CO₂ reduction and improved employment are complementary, provided the reduction in labor costs financed by the carbon/energy tax is not offset by increased wage claims. Under this condition, reduced CO₂ is consistent with an increase in GDP.