We analyze how horizontal and vertical externalities may occur in presence of two distortionary taxes (capital and energy taxes). We also access the impact of these taxes on local jurisdiction welfare. We identify three effects generated by the inclusion of energy tax as a way to alleviate environmental damages: i) horizontal externalities may occur due both to the mobility of production factors (capital and energy) and to the citizen's preferences between private and public consumption, ii) jurisdiction size and perfect mobility of inputs can lead to vertical externalities, iii) energy tax may lead a “double dividend ” by allowing to finance public good and also by improving environmental quality.