Environmental Impacts of Tariff and Tax Reforms Under Origin and Destination Principles

The impacts of a point-by-point tariff/tax reform on the environment under the origin-based or destination-based tax principle are examined. The policy reform under the origin-based principle can raise the optimal pollution tax and, hence, improve the environment when the consumption demand and pollution are strongly substitutable, whereas the reform under the destination-based principle lowers the optimal pollution tax and, hence, worsens the environment. Nonetheless, when the consumption demand and pollution exhibit weak substitutes or even complements, the tariff/tax reform results in less environmental deterioration under the destination-based principle.