No. 1348 - Can capital controls promote green investments in developing countries?

The paper develops a model of a small open economy, characterised by the presence of carbon-intensive and green industries, to evaluate the effectiveness of a tax on foreign capital inflows to carbon-intensive production, with the aim of redirecting capital to green firms.

Taxing foreign capital inflows to carbon-intensive firms has an expansionary effect, through the reduction of the negative environmental externality of their production, and a contractionary effect, due to the reduction of capital inflows from abroad. These results depend on the assumption that foreign investors have weaker pro-environmental preferences than domestic investors.

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