Environmental Fiscal Policies and the Double-Dividend Hypothesis: A Dynamic CGE-OLG Analysis in Tunisia

The nexus between environmental sustainability and economic growth poses a considerable challenge for developing economies. Environmental fiscal policies offer potential solutions, yet their efficacy remains underexplored in nations such as Tunisia. This study examines the implications of these policies and identifies the conditions for achieving the double-dividend hypothesis in Tunisia. Using a dynamic computable general equilibrium model with overlapping generations (CGE-OLG), calibrated with Tunisian economic data, we investigate how these policies can facilitate the decoupling of economic growth from environmental degradation. Our simulation results demonstrate that reallocating environmental tax revenues to non-environmental public expenditures while allowing the pollution abatement budget to fluctuate with economic activity fails to generate a double dividend for the economy. However, under fiscal neutrality, redistributing these revenues to the pollution abatement sector achieves a double dividend: (i) an environmental dividend, represented by an appreciable improvement in environmental quality indicators by 1.8%, and (ii) an economic dividend, reflected in a notable increase in life-cycle consumption patterns for skilled and unskilled workers of 2.89% and 0.56%, respectively. These results suggest that a revenue-neutral environmental fiscal reform focused on developing the pollution abatement sector could effectively decouple Tunisia’s economic growth from environmental degradation while enhancing sustainable development. The results offer critical guidance for policymakers seeking to implement environmental fiscal reforms in Tunisia and similar developing nations.