From shadow to green: Linking environmental fiscal reforms and the informal economy

The paper examines the 'double dividend' hypothesis in Spain, arguing that shifting the tax burden from labour to carbon can improve both environmental and economic outcomes. By incorporating the shadow economy into its model, the authors find that reducing labour taxes increases the demand for formal labour, encouraging workers to move from the informal sector to the formal economy. This transition increases official GDP and overall welfare. The study concludes that the potential welfare gains from such reforms are higher in countries with larger initial shadow economies and higher unemployment rates.

• Recycling CO2 tax revenues to reduce labour taxes (TaxL) leads to significant welfare gains, whereas using revenues for lump sum transfers (LST) or reducing capital taxes (TaxK) results in welfare losses. For a 15% reduction in CO2 emissions, the TaxL scenario increases welfare by 2.89%, while LST and TaxK decrease it by 0.91%.
• A labour tax reduction funded by CO2 taxes reduces both official and real unemployment and shrinks the shadow economy. In a scenario with a 15% CO2 reduction, official unemployment drops from 20% to 16.5%, and the shadow economy decreases from 20% to 14.5% of GDP.
• The inclusion of the shadow economy in the analysis reveals additional economic benefits not captured in standard models. Compared to a model with fixed mobility between formal and informal labour, incorporating this mobility adds an estimated 1.5% to welfare and 6.1% to official GDP.
• The magnitude of welfare gains from environmental fiscal reform is positively correlated with the initial size of the shadow economy and the unemployment rate; countries with higher initial inefficiencies stand to gain more from these reforms.
• The effectiveness of the reform depends heavily on the substitutability between formal and informal labour. Higher substitutability allows workers to move more easily into the formal market, thereby increasing welfare gains.
• A CO2 tax induces economic restructuring by shifting activity from carbon-intensive sectors (Energy, Industry, and Transport) toward less intensive sectors like Services.
• Beyond CO2 reduction, the proposed tax reforms reduce other local pollutants, providing additional economic benefits through avoided damages to health, agriculture, and buildings. For a 15% CO2 reduction, total avoided damage is estimated between 0.3% and 1.1% of GDP in the TaxL scenario.

APA

González-Eguino, M., Markandya, A., & Escapa, M. (2012). From shadow to green: Linking environmental fiscal reforms and the informal economy. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20120402093314521866890.pdf

Chicago

González-Eguino, Mikel, Anil Markandya, and Marta Escapa. From shadow to green: Linking environmental fiscal reforms and the informal economy. Basque Centre for Climate Change, 2012. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20120402093314521866890.pdf.

Wikipedia

{{cite report |last1=González-Eguino |first1=Mikel |last2=Markandya |first2=Anil |last3=Escapa |first3=Marta |title=From shadow to green: Linking environmental fiscal reforms and the informal economy |publisher=Basque Centre for Climate Change |date=March 2012 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20120402093314521866890.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{gonzlezeguino2012from, author = {González-Eguino, Mikel and Markandya, Anil and Escapa, Marta}, title = {{From shadow to green: Linking environmental fiscal reforms and the informal economy}}, institution = {Basque Centre for Climate Change}, year = {2012}, month = mar, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/20120402093314521866890.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }