On the Structure of Indirect Taxes when Consumption Pollution of Domestic and Foreign Goods Di ¤ ers

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good di¤er. We show that the …rst-best policy combination calls for consumption taxes on all polluting goods, zero export taxes and import tari¤s or subsidies. We identify conditions under which a consumer-price-neutral piecemeal reform of a trade and a consumption tax, and a consumer-price-neutral reform of all trade and consumption taxes improves welfare. We also evaluate whether a consumer-price-neutral reform of a tari¤ and a consumption tax is superior to a reform of a tari¤ alone. JEL classi…cation: F13, F18, H20