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Climate protection should use environmental policy instruments that raise revenues, which can be used, for instance, to cut labor taxes to alleviate unemployment in economies suffering from high and persistent unemployment. This paper elaborates the possibilities of an employment dividend of climate policies and shows the potential importance of such a second dividend for a comprehensive cost-benefit analysis of climate policy. It is argued that national attempts to reap such a double dividend may be bound to fail if resource suppliers can respond in a way that leads to a large-scale international reallocation of environmental rents. Only an internationally coordinated uniform base tax on CO2 that complements already existing emission trading systems could keep revenues from climate policy in those countries bearing the cost of fighting global warming and thus leave them with the option on a second dividend.

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The EU has promised in the Kyoto Protocol to reduce its CO2 emissions dioxide (including carbon equivalents of other greenhouse gases) from 1990 to 2012 by 8 percent. The overall environmental target having been proclaimed, national environmental policy is faced with the challenge to meet the respective national emission targets at minimum social cost. The less climate protection costs, the more funds will be available for other environmental, social or economic goals.

The direct costs of reducing CO2 emission are minimized if the cost of avoiding one ton of CO2 is the same at every source of emission (see e.g. Baumol and Oates 1988). If this is not the case, costs could be saved by allowing those with higher marginal abatement costs to emit more and - respectively - those with lower marginal abatement costs to emit less. Cost-efficient abatement can be achieved by introducing e.g. a uniform green tax. If, for...