Do International Environmental Agreements Affect Tax and Environmental Competition among Asymmetric Countries?

Developed and developing countries compete using various instruments including corporate taxes and environmental regulations in order to attract firms. They also commit to international environmental agreements with “common but differentiated responsibilities” (CBDR). We investigate how the principles of CBDR and of “in a position to do so” embedded in global environmental agreements affect optimal corporate taxes and environmental standards. We find that the latter depend only on the mitigation burdens imposed by international agreements. In other words, the burden of competition between countries is carried by corporate taxes, which depend among others on the level of firms’ mobility costs and on production cost differentials. Interestingly, we find that developed countries are not necessarily worse-off in terms of payoffs under CBDR, while emerging countries “in a position to do so” are not necessarily harmed by assuming responsibilities.