Does a government environmental procurement policy yield a double dividend?

Philippe Quirion, CIRED

Keywords

Abstract

The largest part of the literature on macroeconomic effects of environmental policies deals with ecological tax reforms ÿ the so-called "double dividend" debate. Taxes, however, are far from being the most common policy instrument for protecting the environment. In particular, an instrument that still needs to be looked at is a switch in government expenditure from fossil fuel consumption to renewable energies, energy-efficiency expenditure, or simply goods and services featuring a low energy-intensity.

To quote Borg et al. (1998), "Government-related facilities are often the largest energy users in a country and the single most important customers for energy-using products and services".

This paper explores the macroeconomic consequences of such policy by utilising a theoretical general equilibrium model.

Its main peculiarity is a mixed industrial structure, with a composite good, produced with constant returns to scale, and a domestic natural resource (energy for instance), extracted with diminishing returns and which yields a differential (Ricardian) rent to its owners.

The government purchases natural resources and composite goods from private firms. We show that such policy increases employment. It also raises private consumption and welfare if the initial share of natural resource in public spending is smaller than that of private consumption, or if the difference is small enough.

This is likely to hold in most countries at least for energy. Households earning only rents are worse off while those earning only wage income are better off.