Fiscal considerations may shift governmental priorities away from environmental concerns: Finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter's ability to counteract carbon policies. Further, no green paradox occurs -instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.JEL Classification: F21, H21, H30, H73, Q38

The 21st century is characterized by an underprovision of basic public goods, such as public health, education, infrastructure, etc., and an overuse of the atmosphere as disposal space for greenhouse gases. Carbon pricing could address both problems simultaneously: a transition from negative carbon prices (fossil fuel subsidies) to positive levels could generate revenues to finance progress towards the Sustainable Development Goals.Given the scarcity of private sources of finance in many lower income countries, carbon pricing could be a particularly attractive policy option.Our analysis identifies countries where domestic revenues from carbon pricing consistent with the 2°C target could contribute substantially to financing the SDGs.