Trade and Environmental Policy Instruments and Reforms

This chapter first presents and summarises results from recent analytical literature, explaining the implications of different policy menus to abate pollution in a small, polluted, competitive economy opening to world trade. This situation is consistent with the stylised facts of many developing economies evolving in a global marketplace and with emerging environmental concerns. The context of a developing economy constrains the choice of available policy instruments for environmental objectives because of scarce institutional capacity. This limitation brings the possible temptation to use blunt policy instruments, such as trade barriers, for environmental purposes. The third section evaluates the case for harmonisation of environmental policies, which has been promoted by anti-globalisation and labour interests in the current policy debate and through recent demonstrations. Following these analytical sections, the chapter briefly describes the policy reform scenarios considered in the empirical investigation (Part B of the book). Then the chapter looks at the feasibility of environmental policy implementation for developing economies based on the recent experience of industrialised and developing economies. In this context, institutional feasibility of policies dominates. This chapter examines these various issues and explains that, in most cases, trade barriers are inadequate instruments for environmental purposes; they are inadequate because they are untargeted: they subsidise pollution in either production or consumption, while abating it in consumption or production. Other simple instruments, such as taxes on input, production, or consumption are much more targeted in the sense that they are likely to achieve substantial abatement of pollution while inducing smaller welfare losses, because they have a less-distorting impact on the rest of the economy. Uniform effluent taxes correspond to an implicit tax on output, which is proportional to the outputs’ pollution content. If they are available, effluent taxes or ambient standards are best suited to decrease intensities, because they decrease pollution with the smallest loss of economic welfare while providing