This study investigates the potential impact of acarbon tax on the economy of the Philippines and on the livelihood of its people. It focuses on the interaction between such a tax and the country’s ongoing trade liberalization programme. With energy use on the rise in the Philippines, increases in greenhouse gas emissions are almost inevitable. The policy most widely recommended by economists – a carbon tax – may be an efficient way to deal with the problem, but there is concern about its distributional effects. The study finds that a carbon tax would compensate for any tariff revenues lost through a reduction in trade tariffs. It also finds that the tax would reduce poverty and increase people’s welfare. Imposing a carbon tax during the ongoing trade liberalization process – provided the carbon tax is used to reduce income taxes -is a sensible approach that could meet the country’s economic, environmental and equity objectives.