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.
