This paper analyses taxation of emissions and energy in the presence of two market frictions that are common in developing countries. First, credit markets are less developed in terms of their depth and borrowing conditions for individual borrowers. Second, limited state capacity restricts the operation of the tax system. We show that the second-best tax on emissions reflects both marginal damages (as per the Pigouvian principle) and the effectiveness of tax in reducing pollution. Credit market frictions hinder the adoption of clean technologies and increase emissions, necessitating a higher emissions tax under the Pigouvian principle. However, these frictions may also reduce the responsiveness of clean technology adoption to emission taxes, thereby lowering the optimal second-best tax. To model credit market imperfections, the paper examines two distinct types of distortions, namely limited market access and limited individual borrowing capacity. Interestingly, the optimal tax policy responds differently to each type of distortion.