Decentralized emission standards with tax competition

Abstract

We consider a game between jurisdictions within a national economy. Capital migrates between jurisdictions to satisfy an equal return condition. The total supply of capital to the economy is a non-decreasing function of the national return. This allows us to cater for the case where capital has some home bias and jurisdictions have an incentive to engage in tax competition and set non-zero capital taxes in equilibrium. We then show that this competition does not distort emissions standards and that decentralized provision of environmental policy is locally efficient. Thus, we find no evidence of a race to the bottom or top in emissions standards as a result of tax competition.