<p>We examine the global implications of carbon taxation using a two-country environmental DSGE model, with a specific focus on the strategic interactions among countries, the case for cooperation, and the impact on the balance of payments. From a normative perspective, we show that, assuming a convex pollution disutility, carbon taxes are strategic substitutes across countries: when a country increases carbon taxation, the other country finds it optimal to reduce it. From a positive perspective, a country imposing unilateral carbon taxation experiences a reduction of its production, a decrease in its interest rate, an expected gradual currency appreciation, higher bond and equity outflows to the rest of the world.</p>