Competition in emissions standards and capital taxes with local pollution

This paper analyzes the competition in emissions standards and capital taxes when production causes local pollution and large jurisdictions act strategically. It is shown that emissions standard competition both with and without capital tax competition results in inefficient outcomes. The more productive jurisdiction imports capital and sets inefficiently tight emissions standards, whereas the less productive jurisdiction chooses inefficiently lax emissions standards. Adding capital tax competition improves local pollution, but exacerbates the capital distortion and the efficiency loss of emissions standard competition. •Large countries compete for mobile capital that causes local pollution.•Countries use emissions standards and capital taxes to manipulate the rate of return to capital.•Adding capital taxation to emissions standards improves local pollution but causes an additional welfare loss.