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

Abstract

The aim of this paper is to examine how the "Common but Differentiated Responsibility" (CBDR) principle embedded in international climate agreements influences the intensity of corporate tax competition between a developed and a developing country. In contrast to the standard (asymmetric) tax competition literature, our model shows that the interplay between corporate taxes and environmental regulations do not necessarily lead to a higher equilibrium corporate tax in the developed country compared to the developing country. Furthermore, we demonstrate that the developing country does not necessarily become a pollution haven. This finding nuances the argument put forward by developed countries to shrink their climate responsibility that developing countries are pollution havens.