Tradable Emission Permits and Strategic Capital Taxation

In a model of two large asymmetric countries, we examine the e¤ectiveness of the noncooperative setting of tradable emission permits in reducing global pollution, under di¤erent rules of international taxation of capital earnings. Our key result is that, under certain conditions, the lowest Nash equilibrium level of global pollution is achieved when the policy-mix combines internationally, rather than nationally, tradable emission permits and either capitaltax exemptions or capital-tax credits. JEL classi…cation: F18, F21, H21.