THE ENVIRONMENT AND WELFARE IMPLICATIONS OF TRADE AND TAX POLICY

Developing countries with comparative advantage in dirty industries fa ce the risk of environmental degradation unless appropriate policies a re implemented. Using applied general equilibrium analysis, we examine how trade influences the environment and assess the welfare and envir onmental implications of alternative pollution abatement policies for Indonesia. Our results indicate that unilateral trade liberalization b y Indonesia would increase the ratio of emission levels to real output for almost all major pollution categories. More importantly, when tar iff removal is combined with a cost-effective tax policy, the twin obj ectives of welfare enhancement and environmental quality improvement a ppear to be feasible. This sheds new and positive light on the role of trade in sustainable development.