Abstract
In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition.
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