[We] must ensure that ordinary citizens in all countries actually benefit from tradeÑa trade that...protects the environment.

President William J. Clinton

State of the Union Address, 19 January 1999

The hullabaloo that was the World Trade Organization's millenium meeting in Seattle has shown us that ordinary people have serious misgivings about the multilateral trading regime-both the rules and the process. Future progress in trade liberalization will depend on convincing the wider public that trade agreements are good for the environment and good for development (including labour and human rights), not just GDP. This is more than a public relations challenge. The concerns voiced by the Seattle protesters-some of them, anyway-raise profound intellectual questions.

Free trade may not improve welfare when environmental distortions exist. We study the coordination of trade and environmental policies when the distortion is loose property rights governing resources. Using the dual approach of Dixit and Norman (1980), we trade out ‘iso-welfare’ curves in the space of the degree of environment distortion and the level of the import tariff. We use these curves to find necessary and sufficient conditions for disproportionate reforms, piecemeal or discrete, to be welfare improving. We also find that the needed reduction in the distortion to make trade welfare improving increases as the environmental stock increases, the productivity of the environmentally intensive good increases, or when the country is a large exporter of the environmentally intensive good.

This paper provides a conceptual and empirical general equilibrium framework for the analysis of the impact of trade reform on welfare and the environment. The analysis is applied to Côte d'Ivoire explicitly considering externalities affecting biomass (natural vegetation), which is shown to be an important factor determining agricultural productivity.

The simulation general equilibrium analysis shows that the agricultural output composition effect dominates the agricultural expansion effect for the case of complete trade liberalization. Thus, in this case trade liberalization causes a significant improvement in the rural biomass stock by cutting land area cultivated, increases agricultural productivity, and induces dramatic welfare gains. That is, trade liberalization is a win–win type of policy in this case. However, partial trade liberalization that only reduces protection to non-agricultural goods (and does not reduce tariffs to agricultural import substitutes and does not reduce export taxes) causes a further deterioration of the biomass resources and reduces welfare.

This paper develops a simple model to investigate linkages between trade and environmental policy. In the case of purely local pollution, trade liberalization without constraints on environmental policy induces a non-cooperative game between countries in pollution policy. Without any agreement on environmental policy, trade negotiations are unlikely to lead to a point on the Pareto frontier. When pollution is global, countries may be expected to disagree on linkages between trade agreements and environmental agreements. Countries importing pollution-intensive goods have an incentive to try to link trade agreements with environmental agreements, while countries exporting pollution-intensive goods have an incentive to try to obtain a binding commitment to free trade prior to negotiations over global pollution.

A number of recent papers have found that certain measures of pollution worsen and later improve as income per head increases. It is widely believed that the downhill portion of this inverted-U curve reflects an induced policy response; that, as incomes rise, citizens demand improvements in environmental quality, and that these demands are delivered by the political system. In this paper we find that, for a number of pollution variables, an increase in civil and political freedoms significantly improves environmental quality. For other pollution variables, however, we find that freedoms have no effect. The former finding suggests that political reforms may be as important as economic reforms in improving environmental quality worldwide. The latter finding hints that the observation that pollution levels fall with income, once income becomes high enough, may not always reflect an induced policy response.

International negotiations for an agreement to reduce the emission of greenhouse gases have not produced cost-effective policies for reducing emissions, not least because they are unlikely to prevent ‘leakage’ through a re-location of carbon-intensive activities to poorer countries. An alternative or supplementary approach that is more likely to achieve at least some emission reductions, and at the same time generate national and global economic benefits rather than costs, involves lowering coal subsidies and trade barriers. Past coal policies have encouraged excessive production of coal in a number of industrial countries and excessive coal consumption in numerous developing and transition economies. This paper documents those distortions and outlines the circumstances under which their reform (currently under way in some countries) could both improve the economy and lower greenhouse gas emissions globally. It then quantifies the effects on economic activity as well as global carbon emissions, using the G-Cubed multi-country general equilibrium model of the world economy. Both the gains in economic efficiency and the reductions in carbon dioxide emissions that could result from such reforms are found to be substantial—a ‘no regrets’ outcome or win–win Pareto improvement for the economy and the environment.