Do International Climate Agreements Affect Tax and Environmental Competition between Developed and Developing Countries?

Developed and developing countries compete to attract firms using various instruments including corporate taxes and environmental regulations. They also commit to international environmental agreements with “common but differentiated responsibilities” (CBDR). We investigate how the principles of CBDR and of being “in a position to do so” embedded in global climate agreements affect optimal corporate taxes and environmental standards. We find that the latter depend only on the CBDR principle imposed by international agreements. In other words, the burden of competition between countries is carried exclusively by corporate taxes, which depend among others on firms’ mobility costs and 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