We examine the effects of a proposed environmental tax in a small open developing economy,
using an applied general equilibrium model linked to a household survey database. The burden
of the tax, applied primarily to fossil fuels, is passed forward by non-traded industries and
backward by industries selling into the world market. It causes efficiency and competitiveness
losses equivalent to those of a real exchange rate appreciation, and since export industries are in
general highly labor-intensive, is regressive and thus poverty-increasing. The budget-neutral use
of increased tax revenues to raise spending on anti-poverty programs can offset most of the
losses of poor households. The extent of overall losses and their distribution is sensitive to some
parameters, such as labor supply response, about which little is currently known in a developingcountry
context.