The use of economic or incentive based instruments to control industrial pollution have been advocated by economists as a cost effective solution for environmental protection. Environmental taxation is one of a number of instruments that has received considerable attention both in literature and among policy makers in order to correct market failures. It has been shown theoretically and empirically that the use of taxes can reduce administrative and transaction costs unlike command and control instruments. Taxes can also provide incentives for further emissions reductions with subsequent cost savings to the industry. The present study seeks to design pollutant specific taxes to control BOD and COD emissions from textile processing industry in Pakistan. A taxes-standards approach is adopted to achieve the liquid effluent standards laid down under the Pakistan Environmental Protection Act 1997. The data envelopment technique (DEA), which allows modeling of undesirable outputs, is applied to individual textile mills in order to assess their relative efficiency using their production data.