Trade and pollution linkages: Piecemeal reform and optimal intervention

We demonstrate how coordinated trade and environmental policy can achieve efficiency and pollution mitigation gains superior to those obtained without such coordination. We show how trade and environment linkages give rise to complex second-best policy issues and derive optimal interventions and sufficient conditions for welfare-improving piecemeal trade and environmental policy reforms in a small economy. Changing trade and environment distortions in proportion to their optimal levels increases welfare. We decompose the economic and environment effects of policies targeted at trade and pollution in both consumption and production. We also decompose production responses into output adjustments and changes in pollution intensities.