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Abstract

The paper analyzes environmental tax policy reform using a competitive model of world trade that includes production-generated environmental damage (pollution) and trade tariffs. The authors examine the feasibility of Pareto-improving multilateral reforms of environmental taxes, and show that any environmental tax reform that is mutually welfare-improving when compensating lump-sum transfers are assumed is also welfare-improving when a suitable tariff reform (but no transfers) is combined with the tax changes. Several specific reform proposals are developed. These results expand the feasible set of mutually improving policy proposals for international policy initiatives.