This paper analyses the e!ects of the environmental policy instruments taxes and standards on the investment behaviour of "rms in the context of an international duopoly. Two production factors are considered: the capital stock and a polluting input. The government of each country values high pro"ts for its "rm and a good environmental quality. Through standards on the polluting input "rms get commitment on output which is not the case under taxes. Standards thus seem a better environmental policy instrument, because for the same use of the polluting input, taxes lead the duopolists to higher investment with lower pro"ts. This result was derived in a twostage game model. It was con"rmed in a di!erential game model with open-loop strategies. The paper shows that in a di!erential game model with feedback strategies an e!ect occurs that counteracts the "rst e!ect. The cause of this is that taxes induce substitution between capital and the polluting input. The conclusion is that, under taxes, "rms invest more due to the absence of commitment but invest less due to substitution between the inputs. The net e!ect depends on the values of the parameters. Taxes are