This paper develops a dynamic general equilibrium model with two countries, characterized by the presence of a polluting and a green production sector, in order to analyse the strategic interactions in the choice of carbon taxes, quantify the benefits of international cooperation, and illustrate the impact on the main macroeconomic variables and international capital flows of the asymmetries in taxation between countries.
Our analysis shows that as the carbon tax increases in one of the two economies considered, the other economy finds it optimal to reduce its carbon tax. This determines a loss of well-being compared with what would be achieved in case of international cooperation. The imposition of a unilateral tax by a single economy causes a reduction in its production and capital outflows abroad; the decline in imports induces recessive effects on the other economy as well.
