The effects of employment of various age groups due to a budget neutral shift from labour to environmental taxes in EU countries

Abstract

This study investigates the effects of employment of different age groups due to a budget-neutral shift from labour to environmental taxes (referred to as Environmental Fiscal Devaluation, EFD) within the EU economies, focusing on different age groups. Using the local projection method, the research provides empirical evidence that shifting tax burdens to energy taxes, carbon taxes, and pollution levies significantly enhances labour market performance, particularly for younger workers. The impact of EFD is shown to be more pronounced in countries with flexible labour market regulations, suggesting that institutional contexts play a critical role in maximizing employment gains. The results further reveal that the positive effects of EFD are more substantial during periods of economic expansion compared to recessions. These findings contribute to ongoing debates on green budget reforms and emphasize the importance of complementary labour market reforms to fully realize the benefits of environmental tax shifts. The study offers valuable insights for policymakers aiming to design tax policies that support both environmental objectives and economic growth without compromising employment.