Border tax adjustments and tariff-tax reforms with consumption pollution

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 differs. We show that the first-best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well-known tariff-tax reform policies for developing economies, such as a consumer-price-neutral piecemeal reform of trade and a consumption tax, and a consumer-price-neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer-price-neutral reforms of trade and consumption taxes.