The Effects of Environmental Taxes on the Private and Social Incentives to FDI

Mario Martínez Fernández, Rafael Moner-Colonques and Jose J. Sempere-Monerris

Chapter 5 in Green Innovation and Industrial Organization, 2026, pp 99-124 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We develop an imperfect competition model of trade with environmental damages where firms decide between foreign direct investment (FDI) and exports prior to competition in quantities. We shall also characterise countries’ choices according to welfare. The comparison of equilibria allows us to identify a potential market failure and whether the highest possible welfare is attained. Our analysis shows that an environmental tax equal to marginal damage brings private and social interests together and the highest possible welfare is reached in more cases relative to no intervention. Also, there is a tax, greater than the marginal damage, that eliminates the welfare dilemma, but a market failure remains. Finally, environmental taxes may influence firms’ internationalisation choices and eventually lead to lower environmental damages.

Keywords: Green Innovation; Industrial Organization; R&D Smoothing; Emissions Tax; Porter Hypothesis; Corporate Social Responsibility; Public Eco-Firm; Foreign Direct Investment (FDI); Environmental Taxes; Voluntary Agreements; Mandatory Regulation; Green Consumers; Green R&D Organization; Environmental Regulation; Sustainable Development (search for similar items in EconPapers)
JEL-codes: F18 L16 L51 Q5 Q55 (search for similar items in EconPapers)
Date: 2026
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