Current negotiations at the WTO’s Committee on Trade and Environment have made it conceivable that WTO members agree on selective tariff cuts for certain Environmentally Preferable Products, in an attempt to combine gains from trade and from cleaner production/consumption. This raises questions on the environmental and welfare implications of trade policy when a close substitute (“environmentally worse") exists. Using a simple partial equilibrium model with two substitutable goods ('green' and conventional), we analyze the rationale for large trading countries to negotiate tariff cuts upon environmental characteristics of the production process. The extent and distribution of environmental and terms-of-trade effects are compared for three policy scenarios: free trade, selective tariff cuts for the 'green' product, domestic environmental policy. We show that if consumers in the importing country value the 'green’ product, selective tariff cuts result in lower pollution levels in both countries, due to substitution in consumption patterns. Other policies (full liberalization /unilateral environmental tax) may allow greater environmental benefits in one country, but result in an increase in pollution in the trading partner and an ambiguous global impact.


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