The classic economic theory of international trade evaluates free trade favorably as it is considered to make full or optimal use of existing comparative advantages. Another branch of economics, welfare theory, teaches us that international trade governed by prices that do not take external effects into account, will only lead to a suboptimal international allocation of activities and commodities, and an associated suboptimal international income distribution.

Against this background the relationship between international trade and environmental policy will be examined in this paper. The discussion whether trade measures can fulfill a useful role as either a replacement of, or a complement to, environmental measures has become a fuzzy one as it is very hard to determine what "correct" prices are for two reasons. In the first place, prices of many internationally traded commodities are not correct because external environmental effects are not incorporated. Secondly, many prices are distorted towards the "private market determined competitive price" because of subsidies. In this paper we analyze the relationship between perverse subsidies and international trade and hence on environmental degradation. Many of the global $950 billion in government subsidies work out perversely. In particular producer subsidies turn out trade distorting and environmentally harmful. With the aim to eliminate or at least to reduce these subsidies, some brief policy proposals are presented