The Impact of International Tax-Competition for FDI on Environmental Policy

This paper uses a simple two-country model to analyze the effects of inter-national tax-competition for FDI on the domestic environmental-policy levels in the competing countries. The question is, how the level of a welfare-maximizing emissions-tax rate changes if strategic profit-tax rates are adjusted downwards due to intensified FDI competition. Will this competition come at the expense of environmental degradation? In addition, the paper addresses the impact of market integration, represented by declining trade costs, on environmental-policy levels. It turns out that an intensification of tax competition for FDI induces stricter environmental policy and is thus beneficial from an environmental point of view. The impact of market integration cannot be predicted in general but depends on the level of transport costs