Tariff Reforms in the Presence of Pollution

A number of countries are considering, mainly as part of their obligations under current treaties, domestic action internalizing the social cost of pollution. One of the major obstacles, however, in those countries is the fear of jeopardizing their competitive position in world markets. A policy that has been repeatedly proposed to deal with this challenge is a tariff that mitigate any distortions arising from cross-country differences in environmental policy. Such unilateral actions are the focus of this paper. It is argued that if a country set its pollution taxes optimally, cooperatively or non-cooperatively, there exist unilateral tariff reforms that improve global welfare.