Multilateral trade and environemntal reforms in a polluted open economy

Abstract
This paper presents welfare-improving reforms for a polluted open economy aiming to reduce distortions from the use of trade and pollution taxes applied at a sub-optimal level. Using a general equilibrium model where two final goods are produced using an intermediate pollutant input and traded with a foreign country, the domestic economy chooses trade and environmental policies optimally. Terms of trade effects are key to finding that free trade and non-zero pollution taxes are the directions for multilateral welfare-improving reforms.