## 1chlea2023001

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---

### Executive summary and context
- Chile updated its NDC to reduce CO2 emissions by 30 to 45 percent in 2030 from 2016 levels and reach carbon neutrality before 2050.
- Historical milestones:
  - 2014: introduced green taxes on CO2 emissions and local pollutants, and on new passenger cars.
  - 2019: issued green bonds and announced decommissioning of coal-fired power plants by 2040.
  - June 2022: Congress approved the Framework Law on Climate Change, making carbon neutrality legally binding.
- Current carbon tax: $5 per ton of CO2 (stationary sources).
- Government and literature social cost of carbon estimates cited:
  - Government estimate: $32.5 per ton of CO2 (mentioned earlier in chapter summary).
  - Government-calculated social cost of carbon: $37.5 per ton of CO2.
  - RFF estimate (Rennert and others (2022)): $185 per ton of CO2.
- Preface purpose: evaluate options to expand the existing direct carbon tax in Chile and support authorities improving green taxes within ongoing tax reform discussions.

### Assessment of current green taxes and institutional framework
- Coverage and design:
  - Direct carbon tax levied on CO2 emissions from stationary sources with thermal capacity of 50 MW or higher (thermal power plants and industrial boilers).
  - Stationary-source tax components: US$5 per ton of CO2 and local pollution charge taxing PM2.5, NOx and SO2.
  - Tax on mobile sources: levied on sale of new light-duty vehicles; multiple exemptions noted.
- Institutions: Ministry of Finance, Ministry of Environment, Ministry of Transport and Telecommunications, Superintendency of the Environment (SMA), Internal Revenue Service (SII), General Treasury (TGR).
- Revenue performance:
  - Total annual revenue from stationary-source green tax has not exceeded $200 million or about 0.06 percent of GDP.
  - Revenues declined by 1 percent per year since 2017; 2020 recorded a sharp drop (annual decline rate at 6 percent). In 2021 revenues recovered by 6.5 percent but remained below 2017 levels.
  - 2021 tax collected $186 million from 56 taxpayers.
    - Power generation: 45.8 percent of the revenue.
    - Trade: 31 percent.
    - Construction: 13.1 percent.
    - Transport: 4.7 percent.
  - Pollutant shares: CO2 89 percent; PM2.5 7 percent; NOx and SO2 together less than 5 percent.
- Tax Modernization Law (as of January 1st, 2023):
  - Changes tax basis from installed thermal capacity to emissions thresholds: applies to stationary sources that annually emit 100 or more tons of PM2.5, or 25,000 or more tons of CO2.
  - Exemptions: hot water boilers for personal use; generation units < 500 kw; process emissions.
  - Independent studies estimate coverage expands from 39 to 45 percent of CO2 eq emissions.
  - Introduced a carbon offset mechanism (eligibility and regulation to be defined by Ministry of Environment; at mission time regulation not issued).

### Design issues and distortions identified
- Dispatch and price formation:
  - The law excludes the carbon tax value from the marginal spot price of electricity when a fossil fuel-based plant is marginal.
  - Result: cross-subsidy provision reallocates carbon tax burden to utilities in proportion to electricity retired, shifting burden away from emitting plants and undermining cleaner generation investment incentives.
  - Recommendation: include the carbon tax in the variable cost of all generation plants considered for economic dispatch and eliminate the cross subsidy from utilities to fossil fuel-based power plants.
- Mobile sources and fuel excises:
  - Mobile-source green tax has narrow coverage and multiple exemptions.
  - Diesel faces complex credits and exemptions and much lower rates than gasoline.
  - Chile consumes almost double the amount of diesel than the regional average on a per capita basis.
  - MEPCO (Fuel Price Stabilization Mechanism) limits domestic price fluctuations on gasoline and diesel; taxation can turn into a negative tax (subsidy) depending on international oil prices and exchange rate.
  - Policy options: gradually bring diesel excise on par with gasoline; include transport sector in improved carbon pricing options; consider a feebate scheme.

### Principles on carbon pricing (conceptual)
- Carbon pricing advantages:
  - Reflects cost of carbon in prices, promotes energy shifts and reductions across sectors, equalizes marginal abatement costs, levels the playing field for clean investments, mobilizes revenue, reduces local air pollution deaths, and is administratively scalable.
- Instruments:
  - Carbon taxes: tax on carbon content of fossil fuel supply (current Chilean stationary-source tax example).
  - Emissions Trading Systems (ETS): government controls allowance supply; market sets price.
- Design principles to meet Chile’s 2030 NDC and net-zero pledge:
  - (i) cover a wide range of emissions;
  - (ii) establish a rising and predictable price; and
  - (iii) avoid unnecessary inefficiencies due to exemptions.
- Institutional note: carbon taxes typically sit with the finance ministry; ETS with the environment ministry.

### Offsets and carbon credits: cautions
- Law restricts offsets and carbon credits to projects developed in Chile (and the municipality for local pollutants).
- Concerns noted:
  - Offsets can be controversial, difficult to verify and monitor, potentially distract from effective instruments, and can increase net emissions if not additional; risk of greenwashing.
- Recommendation: restrict offsets geographically and implement carefully; consider limiting offsets where risks are high.

### Emissions and energy trends (key statistics)
- In 2020 Chile’s GHG emissions: 120 MtCO2 (excluding LULUCF); energy-related emissions accounted for 71 percent.
- Sector shares of GHG emissions in 2020 (energy-related, excluding LULUCF):
  - Power generation: 27%
  - Industry: 20%
  - Transport: 19%
  - Waste: 11%
  - Agriculture: 9%
  - Industrial processes: 9%
  - Buildings: 5%
- LULUCF emissions: negative 58 MtCO2 eq.
- GHG emissions excluding LULUCF grew 50 percent between 2000 and 2018.
  - Power generation emissions grew by 122 percent between 2000 and 2018.
  - Transport emissions grew by 66 percent.
  - Industry and industrial processes together increased by 29 percent.
  - Agricultural emissions decreased by 14 percent.
- Power sector (2020):
  - Fossil fuels: 53 percent of electricity generation (down from 60 percent in 2010).
  - Absolute fossil generation increased from 36 TWh to 43 TWh (20 percent increase).
  - Generation shares: coal 31%, gas 18%, oil 4%.
  - Hydro: 25% of electricity output.
  - Solar 9% and wind 7% (combined variable renewable share increased from zero to 16% over past 10 years).

### Global context and IMF proposals
- To maintain 1.5oC target: global CO2 and other GHG emissions must be cut by 50 to 25 percent, respectively, below 2019 levels by 2030.
- Base case projections with existing policies imply global CO2 emissions rise from 30 billion tons in 2020 to about 37 billion by 2030.
- Limiting warming to 1.5 – 2.0°C requires CO2 emissions about 15 to 25 billion tons in 2030.
- IMF proposed International Carbon Price Floor (ICPF) with four components:
  - negotiation between a small number of key large emitting countries;
  - focus on minimum carbon price each must put on CO2 emissions;
  - address equity through differentiated price floors and transfers;
  - accommodate other policies with equivalent emissions impacts as minimum price floor requirements.
- IMF analytical suggestion: additional measures equivalent to a global carbon price exceeding $75 per ton by 2030 are needed to limit warming below 2C; G20 countries should adopt measures equivalent to a carbon price of over $75 per ton by 2030 on top of existing policies to cut emissions at least 30 percent below BAU.

### Modeling framework (CPAT) and scenario assumptions
- Tool: Climate Policy Assessment Tool (CPAT), spreadsheet model developed jointly by IMF and World Bank staff.
- CPAT projects fuel use and CO2 emissions by major energy sectors, includes:
  - model of investment and dispatch in power sector;
  - assumptions about price responsiveness of electricity demand and fuel use (elasticities over longer term generally between -0.5 and -0.8).
- Emissions factors by fuel: IIASA (2021); emissions calibrated to UNFCCC GHG and other sources for 2019-2021.
- Revenue calculations:
  - Include effect of tax base erosion from the carbon tax.
  - Exclude the impact of offsets starting February 2023 (which may bias revenue estimates upwards).
- General caveats:
  - Moderate and Hybrid scenarios less effective at meeting NDC due to limited sectoral coverage.
  - Non-carbon pricing measures will be needed under all scenarios.
  - Price and emissions responses may be delayed by power system bottlenecks.

### Quantitative scenarios modeled (exact specifications)
- Moderate:
  - Carbon tax at $15 per ton of CO2 in 2025, increasing linearly to $50 per ton of CO2 in 2035.
  - Covers power, buildings, industry, rail, and aviation; exempts road transportation.
- Base case:
  - Carbon tax at $15 per ton of CO2 in 2024, increasing linearly to $60 per ton of CO2 in 2030.
  - Excludes gasoline and diesel; excise on diesel increased to bring effective carbon rate equal to gasoline (starts from $0.05/liter in 2024 and increases linearly to $0.37/liter in 2030).
  - Applies to all energy sectors (other than gasoline and diesel exclusion noted).
- Hybrid:
  - Carbon tax on power sector starting at $5 per ton of CO2 in 2024, increasing to $11 per ton of CO2 in 2027, then to $60 per ton of CO2 in 2035.
  - ETS in industrial sector starting at $5 per ton of CO2 in 2024, increasing to $11 per ton of CO2 in 2027, then to $60 per ton of CO2 in 2035.
- Social cost of carbon (SCC) scenario:
  - Economy-wide carbon tax starting at $35 per ton of CO2 in 2024, increasing linearly to $75 per ton of CO2 in 2030.

### Key modeled results in 2030 (exact figures)
- Energy-related CO2 emissions reduction in 2030, % to a BAU:
  - Base: 17%
  - Moderate: 7%
  - SCC: 16%
  - Hybrid: 6%
- Cumulative CO2 emissions reductions in 2024-2030, MtCO2:
  - Base: 51
  - Moderate: 20
  - SCC: 59
  - Hybrid: 17
- Additional fiscal revenues raised in 2030, % of GDP:
  - Base: 1.61
  - Moderate: 0.81
  - SCC: 1.55
  - Hybrid: 0.92
- Cumulative additional fiscal revenues raised in 2024-2030, bn USD:
  - Base: 25.3
  - Moderate: 7.4
  - SCC: 29.1
  - Hybrid: 12.3
- Impact on GDP growth in 2030, percentage points deviation from the BAU growth:
  - Base: -0.09%
  - Moderate: -0.08%
  - SCC: -0.06%
  - Hybrid: -0.08%
- Residential electricity price increase in 2030, percent from the BAU price:
  - Base: 24%
  - Moderate: 22%
  - SCC: 25%
  - Hybrid: 22%
- Residential electricity price increase in 2030, percent from the current price:
  - Base: -4%
  - Moderate: -6%
  - SCC: -3%
  - Hybrid: -5%
- Industrial electricity price increase in 2030, percent from the BAU price:
  - Base: 27%
  - Moderate: 24%
  - SCC: 28%
  - Hybrid: 24%
- Industrial electricity price increase in 2030, percent from the current price:
  - Base: -19%
  - Moderate: -20%
  - SCC: -17%
  - Hybrid: -20%
- Relative mean consumption effect on the poorest after revenue recycling, % of BAU consumption:
  - Base: 11.9
  - Moderate: 5.9
  - SCC: 11.7
  - Hybrid: 4.5
  - Note: Using 30 percent of revenues to compensate four bottom income deciles overcompensates the poorest.
- Pure abatement costs, % of GDP:
  - Base: 0.35
  - Moderate: 0.07
  - SCC: 0.32
  - Hybrid: 0.06
- Domestic co-benefits (transport, air pollution, climate), % of GDP:
  - Base: 0.62
  - Moderate: 0.24
  - SCC: 0.57
  - Hybrid: 0.15

### Sectoral and fuel contributions (modeled outcomes)
- Sectoral shares of CO2 emissions reductions in 2030:
  - Power: 36-64 percent across scenarios
  - Industry: 22-30 percent in 2030
  - Transport: 8-23 percent in 2030
  - Buildings: 2-13 percent in 2030
- Fuel contributions in 2030 reductions:
  - Coal: from a half to four-fifths of emissions reductions in 2030 come from coal in power and other sectors.
  - Diesel: 20-44 percent of total emissions reductions in 2030.
  - Gasoline: excluded in one scenario (base) and < 10 percent of total emissions reduction in others.
  - Natural gas: emissions expected to grow due to shift from coal to natural gas in the power sector.

### Price and energy impacts (selected modeled values)
- Coal weighted average prices increase relative to BAU in 2030:
  - Base: 98 percent
  - Moderate: 47 percent
  - SCC: 126 percent
  - Hybrid: 97 percent
- Electricity prices:
  - Increase by about 3-4 cents per kilowatt hour (or 25 percent compared to BAU in 2030) in each scenario.
  - Residential prices: current about $0.17 per kWh decreasing to $0.15 kWh in baseline; carbon price impact is a modest increase from current prices given baseline declines.
  - Selected fuel and energy table entries (current / baseline / Base / Moderate / SCC / Hybrid):
    - Electricity, residential: Current $/kWh 0.19; Baseline 0.15; Base 0.19; Moderate 0.18; SCC 0.19; Hybrid 0.18.
    - Electricity, industry: Current $/kWh 0.16; Baseline 0.10; Base 0.13; Moderate 0.13; SCC 0.13; Hybrid 0.13.
    - Coal: Current $/GJ 4.1; Baseline 5.1; Base 10.1; Moderate 7.5; SCC 11.6; Hybrid 10.1.
    - Natural gas: Current $/GJ 27.3; Baseline 25.5; Base 28.7; Moderate 27.1; SCC 29.5; Hybrid 27.6.
    - Oil: Current $/bbl 65.7; Baseline 50.6; Base 78.7; Moderate 65.8; SCC 85.8; Hybrid 65.3.
    - Gasoline: Current $/lit 1.2; Baseline 1.3; Base 1.3; Moderate 1.4; SCC 1.5; Hybrid 1.4.
    - Diesel: Current $/lit 0.8; Baseline 1.0; Base 1.4; Moderate 1.1; SCC 1.2; Hybrid 1.1.
    - LPG: Current $/lit 0.8; Baseline 0.5; Base 0.6; Moderate 0.6; SCC 0.7; Hybrid 0.6.
    - Kerosene: Current $/lit 0.9; Baseline 0.7; Base 0.9; Moderate 0.8; SCC 1.0; Hybrid 0.8.
- Road fuels:
  - Gasoline prices would grow by 7-15 percent relative to BAU (excluding the base scenario).
  - Diesel price increases would be 10-45 percent relative to BAU.

### Fiscal and macroeconomic implications and revenue recycling (exact figures and scenarios)
- Revenue potential:
  - Carbon pricing might raise up to 1.6 percent of GDP in 2030 on top of BAU.
  - Cumulative additional revenues over 2024-2030:
    - Moderate: $7 billion
    - SCC: $29 billion
  - In 2030 alone:
    - Moderate: additional 0.8 percent of GDP in revenues
    - SCC: additional 1.6 percent of GDP in revenues
  - Existing carbon tax raised no more than 0.06 percent of GDP in 2017-2021.
- GDP growth impacts in 2030 (potential negative impacts before recycling):
  - Base: 1.1 percentage points
  - Moderate: 0.6 percentage points
  - SCC: 1.0 percentage points
  - Hybrid: 1.5 percentage points
- Illustrative revenue recycling example:
  - If 70 percent of revenues are recycled through productive public investment and 30 percent through targeted cash transfers, negative impact on GDP growth in 2030 would be reduced to 0.1 percentage points.
  - Distributional illustrative recycling:
    - Use 30 percent of revenues for targeted unconditional cash transfers to bottom four consumption deciles; 70 percent to public investment.
    - Net impacts:
      - Bottom four deciles: net benefits about 4-12 percent of consumption.
      - Next three deciles: approximately no better or worse off.
      - Wealthier households: worse off on net by about 2 percent of consumption.
- Revenue use options and trade-offs (summary categories and considerations):
  - Environmental investment: may disproportionately benefit low-income households; potentially modest administrative burden.
  - General investments: may disproportionately benefit low-income households; potential efficiency gains.
  - Universal transfers: highly progressive; forgone efficiency benefits.
  - Payroll tax cuts: benefits largely proportional across working households; improves incentives for formal work.
  - Personal income tax cuts: typically skewed to higher-income groups.
  - Consumption tax cuts: largely proportional to consumption.
  - Corporate income tax changes: skewed to higher-income groups.
  - Deficit reduction: benefits future generations; significant efficiency gains.
  - Targeted assistance (means-tested): effective for low-income groups if safety nets comprehensive.
  - Assistance for household energy bills: partial relief for all households; modest reduction in environmental effectiveness.

### Competitiveness, industrial costs and policy options
- Industrial production cost increases components:
  - Direct tax/allowance costs for emitting firms.
  - Abatement costs (cleaner but costlier technologies).
  - Indirect carbon embodied in inputs, especially electricity.
- Modeled impacts in 2030:
  - Production costs for non-metallic industries (most notably cement), iron and steel, and chemicals increase by less than 6 percent in SCC and base scenarios (relative to BAU costs in 2030).
- Competitiveness policy options:
  - Border carbon adjustment (BCA) or free allowances allocation for energy-intensive trade-exposed (EITE) industries under an ETS.

### Key recommendations (policy actions prioritized)
- Include the carbon tax in the variable cost of all generation plants considered for economic dispatch.
- Eliminate the cross subsidy from utilities to fossil fuel-based power plants.
- Increase the carbon tax and set a path to gradually increase it over time to reach levels consistent with the country’s NDC and net-zero pledge.
- Complement mobile-source tax with higher excises on diesel or include transport sector in a broader carbon pricing scheme.
- Consider increasing the social cost of contaminants for PM2.5, NOx and SO2.
- Continue to geographically restrict offsets and credits to projects developed in Chile (and in municipalities for local pollutants) and implement offset rules carefully.
- Pair gradual carbon price strengthening with well-targeted assistance to low-income households and energy-intensive or trade-exposed sectors to address distributional and competitiveness concerns.
- Consider feebate schemes and improved energy efficiency policies to complement carbon pricing.

_Italic: Source: 1chlea2023001 (IMF staff analysis and CPAT results presented in the chapter)._

### PREFACE _________________________________________________________________________________________ 6

### PREFACE

### Mission and participants
- At the request of the Chilean Minister of Finance, a team from the IMF Fiscal Affairs Department (FAD) visited Santiago between October 3-7, 2022, to evaluate options to expand the existing direct carbon tax in Chile.
- The mission comprised Diego Mesa Puyo (head) and Karlygash Zhunussova, both from FAD’s Climate Policy Division.
- High-level meetings:
  - Minister of Finance, Hon. Mario Marcel Cullell.
  - Minister of Environment, Hon. María Heloisa Rojas Corradi.
  - Minister of Energy, Hon. Diego Pardow Lorenzo.
- Other government counterparts and institutions engaged:
  - Ministry of Finance: Mrs. Claudia Sanhueza Riveros (Deputy Minister), Mr. Nicolas Bohme (Tax Policy Coordinator), Mrs. Camila Schmidlin and Mr. Jose Alvarado (Tax Policy Group).
  - Servicio de Impuestos Internos (SII): Carolina Saravia (Deputy Director of Enforcement).
  - Ministry of Environment: Mr. Rodrigo Barragan and Mrs. Isabel Rojas (Environmental Economy Division).
  - Ministry of Energy: Mr. Juan Pedro Searle (Chief, Climate Change Division).
  - National Commission of Energy: Mr. Marco Antonio Mancilla Ayancán and technical staff.
  - Environmental Superintendency (SMA): Mr. Emanuel Ibarra Soto (Superintendent) and technical staff.
- Private sector and research interlocutors:
  - Generadoras de Chile: Mr. Camilo Charme (General Manager) and Mr. Claudio Muñoz (Head of Studies).
  - Sociedad de Fomento Fabril: Mr. Jorge Cáceres (Director, Centre of Environment and Energy).
  - Inter-American Development Bank (Chile Office): Mr. Adrien Vogt-Schilb (Senior Economist).
  - Universidad Católica de Chile: Mr. Luis Gonzales (head of Climate Change, Energy and Environmental Economics).
- Workshop:
  - The mission held a workshop to present the Climate Policy Assessment Tool (CPAT) to more than 15 staff from the Ministry of Finance, Ministry of Energy, Ministry of Environment, SMA, SII and the Central Bank of Chile.
- Acknowledgements:
  - Interpretation services provided by Mrs. Gina Cabach, Mrs. Claudia Goet and Mr. Pedro Velloso.
  - Outstanding support and hospitality from Ministry of Finance staff, in particular Mr. Nicolas Bohme, Mrs. Camila Schmidlin and Mrs. Vanessa Paluba.

### Preface purpose
- Evaluate options to expand the existing direct carbon tax in Chile and support the authorities in improving green taxes within ongoing tax reform discussions.

---

### EXECUTIVE SUMMARY

### Chile’s climate commitments and policy context
- Chile updated its Nationally Determined Contribution (NDC) to reduce carbon dioxide (CO2) emissions by 30 to 45 percent in 2030 from 2016 levels and reach carbon neutrality before 2050.
- Key policy milestones:
  - 2014: first Latin-American country to introduce green taxes on CO2 emissions and local pollutants, and on new passenger cars based on fuel efficiency and emissions.
  - 2019: first country in the region to issue green bonds, publish a financial strategy for climate change, and announce decommissioning of coal-fired power plants by 2040.
  - June 2022: Congress approved the Framework Law on Climate Change, making carbon neutrality legally binding and introducing new mitigation tools and institutional arrangements.
- The Ministry of Finance announced improvements to green taxes will be included in the general tax reform presented to parliament in July 2022.

### Assessment of current green taxes
- Existing carbon tax on stationary sources is $5 per ton of CO2 — low by international standards and significantly lower than the $32.5 per ton of CO2 social cost of carbon estimated by the government.
- The recent RFF estimate on social cost of carbon is $185 per ton of CO2. (See Rennert and others (2022).)
- The carbon tax coverage needs to be broadened and the rate increased to achieve Chile’s climate goals.
- For local pollutants, Chile levies taxes on PM2.5, NOx, and SO2; Chile is a pioneer in these taxes in the region.
- Design issues that create distortions in the power sector should be corrected before increasing rates:
  - The full amount of the carbon tax should be included in the variable cost of all generation plants considered for the economic dispatch.
  - Correcting dispatch accounting will eliminate cross subsidies from utilities to marginal or inframarginal fossil fuel-based power plants.
- The green tax on mobile sources has very narrow coverage and multiple exemptions; transport is a main emitter.
- Fuel excises and other fuel taxes are distorted and inefficient:
  - Diesel faces complex credits and exemptions and much lower rates than gasoline.
  - Chile consumes almost double the amount of diesel than the regional average on a per capita basis.
  - Options to address diesel distortion: gradually bring diesel excise on par with gasoline or include transport sector in improved carbon pricing options modeled here.
  - A feebate scheme could be considered to promote decarbonization of the vehicle fleet if higher fuel taxes prove contentious.

### Modeling and scenarios (CPAT)
- The report uses the Climate Policy Assessment Tool (CPAT) to evaluate scenarios to improve carbon pricing. Results are presented for emissions reduction, revenue potential, GDP and energy prices, distributional impacts, abatement costs and co-benefits.
- Strengthening the carbon tax should be gradual, particularly given global energy price volatility in 2021 and first half of 2022. Recent fall in fossil fuel prices (expressed in USD) may allow locking in a higher carbon tax without increasing energy prices relative to recently observed levels.

### Four modeled scenarios and main assumptions
- Moderate:
  - Set the carbon tax at $15 per ton of CO2 in 2025, increasing linearly to $50 per ton of CO2 in 2035 but exempting the road transportation sector.
- Base case:
  - Set the carbon tax at $15 per ton of CO2 in 2024, increasing linearly to $60 per ton of CO2 in 2030.
  - The carbon tax excludes gasoline and diesel, but the excise on diesel is increased to bring the effective carbon rate equal to that of gasoline (starts from $0.05/liter in 2024 and increases linearly to $0.37/liter in 2030).
- Hybrid:
  - Carbon tax applies only to the power sector, starting from $5 per ton of CO2 (current level) in 2024 and increases at a lower slope at the beginning, up to $11 per ton of CO2 in 2027. It then increases with a steeper slope up to $60 per ton of CO2 in 2035.
  - Emissions Trading System (ETS) in the industrial sector, starting from $5 per ton of CO2 (current level) in 2024, increasing at a lower slope at the beginning, up to $11 per ton of CO2 in 2027. It then increases with a higher slope up to $60 per ton of CO2 in 2035.
- Social cost of carbon (SCC):
  - Economy-wide carbon tax starting from $35 per ton of CO2 in 2024 and increasing linearly to $75 per ton of CO2 in 2030.

### Key results in 2030 by scenario (exact figures)
- Energy-related CO2 emissions reduction in 2030, % to a BAU:
  - Base: 17%
  - Moderate: 7%
  - SCC: 16%
  - Hybrid: 6%
- Cumulative CO2 emissions reductions in 2024-2030, MtCO2:
  - Base: 51
  - Moderate: 20
  - SCC: 59
  - Hybrid: 17
- Additional fiscal revenues raised in 2030, % of GDP:
  - Base: 1.61
  - Moderate: 0.81
  - SCC: 1.55
  - Hybrid: 0.92
- Cumulative additional fiscal revenues raised in 2024-2030, bn USD:
  - Base: 25.3
  - Moderate: 7.4
  - SCC: 29.1
  - Hybrid: 12.3
- Impact on GDP growth in 2030, percentage points deviation from the BAU growth:
  - Base: -0.09%
  - Moderate: -0.08%
  - SCC: -0.06%
  - Hybrid: -0.08%
- Residential electricity price increase in 2030, percent from the BAU price:
  - Base: 24%
  - Moderate: 22%
  - SCC: 25%
  - Hybrid: 22%
- Residential electricity price increase in 2030, percent from the current price:
  - Base: -4%
  - Moderate: -6%
  - SCC: -3%
  - Hybrid: -5%
- Industrial electricity price increase in 2030, percent from the BAU price:
  - Base: 27%
  - Moderate: 24%
  - SCC: 28%
  - Hybrid: 24%
- Industrial electricity price increase in 2030, percent from the current price:
  - Base: -19%
  - Moderate: -20%
  - SCC: -17%
  - Hybrid: -20%
- Relative mean consumption effect on the poorest after revenue recycling, % of BAU consumption:
  - Base: 11.9
  - Moderate: 5.9
  - SCC: 11.7
  - Hybrid: 4.5
  - Note: Using 30 percent of revenues to compensate four bottom income deciles overcompensates the poorest.
- Pure abatement costs, % of GDP:
  - Base: 0.35
  - Moderate: 0.07
  - SCC: 0.32
  - Hybrid: 0.06
- Domestic co-benefits (transport, air pollution, climate), % of GDP:
  - Base: 0.62
  - Moderate: 0.24
  - SCC: 0.57
  - Hybrid: 0.15

### Overall assessment
- Under the Base and SCC scenarios, Chile would achieve its NDC target by 2030 and be on track to reach net-zero by 2050.
- Under the Moderate and Hybrid scenarios, the country would be within 11 and 12 percent of achieving its NDC, respectively.
- Additional measures across all scenarios — improved energy efficiency policies, introduction of feebate schemes, faster adoption of low- and zero-emission sources for transport, power, and industry — would further contribute to achieving climate goals.
- Revenue recycling options and communication strategies are discussed to help prepare a well-thought-out reform communication strategy.

---

### I. INTRODUCTION

### Objectives and scope
- The Chilean authorities requested FAD to evaluate options for improving green taxes, particularly the direct tax on CO2 emissions.
- The report assesses different scenarios to gradually increase the existing carbon tax and bring Chile closer to or in line with its NDC for 2030 and legally binding net-zero pledge for 2050.
- The authorities expect the carbon tax to remain central to Chile’s green taxes package introduced in 2014, with periodic reviews to ensure climate objectives are met.

### Tax reform context
- A higher carbon tax is part of a broader tax reform currently debated in Congress.
- The proposed reform targets net gains of 3.5 percent of GDP by 2026 to finance additional social spending.
- The reform aims to make the tax system more progressive, simplify and lower compliance costs, and promote a greener economy.
- Authorities have not published an official revenue target for the carbon tax; preliminary estimates provided to the mission indicate corrective taxes (green, health, territorial) could raise up to 0.5 percent of GDP.

### Need for strengthening the carbon tax
- Despite comprehensive institutional frameworks and multiple policy tools, the carbon tax at $5 per ton of CO2eq remains low and needs to be significantly increased to achieve climate and fiscal goals.

*Source: 1chlea2023001 - PREFACE.*

### 4.      Strengthening the carbon tax should be a gradual process, however, especially

### 4.      Strengthening the carbon tax should be a gradual process, however, especially

### Gradual strengthening of the carbon tax: context and rationale
- Fossil fuel prices increased sharply during 2021 and the first half of 2022, largely as a result of the war in Ukraine, resulting in higher prices of electricity and refined products for households and firms in many jurisdictions.
- Although prices have retreated somewhat recently, energy prices continue to be well-above pre-pandemic levels.
- The expected fall in fossil fuel prices may give the government an opportunity to lock-in a higher carbon tax without increasing energy prices relative to recently observed levels.
- Well targeted assistance to low-income households and energy-intensive or trade exposed sectors may be needed when strengthening the carbon tax.

### Analytical framework and scenarios (CPAT)
- The report uses the Climate Policy Assessment Tool (CPAT) developed jointly by IMF and World Bank staff.
- CPAT projects fuel use and CO2 emissions by major energy sectors in Chile, including:
  - a model of investment and dispatch in the power sector, and
  - assumptions about the price responsiveness of electricity demand and fuel use in other sectors representative of the broader climate modelling literature.
- Each scenario includes:
  - tax effects on GDP and fiscal revenue,
  - energy consumption and emissions reduction,
  - distributional impact and incidence on households and firms,
  - other domestic environmental co-benefits.
- The scenarios are intended to bring emissions in Chile close to or in line with its NDC by 2030 and the carbon neutrality commitment by midcentury.
- The analysis also discusses international mitigation practices and alternative mitigation instruments and revenue recycling options that could complement green taxes.

### Global emissions context and policy implications
- Maintaining the 1.5oC target requires additional efforts amid an energy price crisis.
- Global CO2 and other GHG emissions must be cut by 50 to 25 percent, respectively, below 2019 levels by 2030 (textual order preserved).
- Base case projections with existing policies imply global CO2 emissions will rise from 30 billion tons in 2020 to about 37 billion by 2030.
- Limiting warming to 1.5 – 2.0°C requires CO2 emissions to be limited to about 15 to 25 billion tons in 2030.
- If action is not taken soon at a global scale, the window of opportunity for containing global warming will close.
- The IMF has proposed an international carbon price floor (ICPF) with four key components:
  - negotiation between a small number of key large emitting countries,
  - focus on the minimum carbon price each must put on their CO2 emissions,
  - address equity concerns through differentiated price floors and transfers,
  - accommodate other policies with equivalent emissions impacts as minimum price floor requirements.
- IMF analytical work suggests additional measures equivalent to a global carbon price exceeding $75 per ton by 2030 are needed to limit global warming below 2C.
- G20 countries should adopt measures equivalent to a carbon price of over $75 per ton by 2030, on top of existing policies, to cut emissions at least 30 percent below business as usual (BAU) levels.

### Emissions and energy in Chile: key statistics and trends
- Energy-related emissions accounted for 71 percent of Chile’s 120 MtCO2 GHG emissions in 2020, excluding LULUCF emissions.
- Sector shares of GHG emissions in 2020 (energy-related, excluding LULUCF):
  - Power generation: 27%
  - Industry: 20%
  - Transport: 19%
  - Waste: 11%
  - Agriculture: 9%
  - Industrial processes: 9%
  - Buildings: 5%
- LULUCF emissions were estimated at negative 58 MtCO2 eq.
- GHG emissions excluding LULUCF in Chile grew 50 percent between 2000 and 2018.
  - Power generation emissions grew by 122 percent between 2000 and 2018.
  - Transport emissions grew by 66 percent in the same period.
  - Industry and industrial processes emissions together increased by 29 percent.
  - Agricultural emissions decreased by 14 percent.
- In the power sector in 2020:
  - Fossil fuels accounted for 53 percent of electricity generation (down from 60 percent in 2010).
  - Absolute generation from fossil fuels increased by 20 percent, from 36 TWh to 43 TWh.
  - Generation shares: coal 31%, gas 18%, oil 4%.
  - Hydro power accounted for a quarter of electricity output.
  - Solar and wind reached 9% and 7% respectively; combined variable renewable share increased from zero to 16% over the past 10 years.

### Energy prices, effective carbon rates, and MEPCO
- Effective carbon pricing via excises applies to transport sector fuels at comparatively low levels and with multiple distortions.
- Effective rate for gasoline: $200.7 per ton of CO2 (presented as 200.7 in table format).
- Diesel’s effective rate is more than three times lower than gasoline (table shows diesel effective rate as 58.9 in context of other figures; gasoline listed as 200.7).
- Table excerpted figures (preserved numeric layout where provided):
  - Coverage of the existing carbon tax: 29.4% and is expected to increase to 40% after recent changes in legislation.
  - Example effective fuel tax entries in table: 5.2, 21.8, 46.4, 200.7, 58.9, 9.0, 53.3 (values shown as in source table).
- Gasoline and diesel effective carbon tax rates are among the lowest in the OECD:
  - The effective carbon tax rate for gasoline in Chile is higher only than a handful of countries.
  - The effective carbon tax rate on diesel is even lower, just ahead of Costa-Rica and Colombia.
- The Fuel Price Stabilization Mechanism (MEPCO) limits domestic price fluctuations on gasoline and diesel despite changes in international fuel prices.
  - Since 2014, when MEPCO started to operate in its actual form, changes in retail gasoline and diesel prices have deviated from changes in international oil price.
  - In some cases, taxation can turn into a negative tax (subsidy) depending on international oil prices and the exchange rate.

### Chile’s emissions targets and implications for policy
- Updated NDC pledge: reduce GHG emissions to 95 MtCO2 eq by 2030 (updated NDC).
  - First NDC had pledged reduction to 123 MtCO2 eq.
- Updated NDC commits to a GHG budget not exceeding 1100 MtCO2 eq in 2020-2030 with a peak in 2025.
- Chile committed to reduce black carbon emissions by 25 percent in 2030 vs. 2016 levels.
- IMF staff projections:
  - The 2015 NDC target would be reached in the baseline (i.e., unambitious).
  - The updated NDC target will require an 18 percent reduction in GHG emissions excluding LULUCF in 2030, relative to the baseline.
- Expressed as reduction to current levels, the NDC implies 23 percent reduction from 2021 GHG emissions.
- Compared to other LAC6 countries:
  - Chile’s NDC implies an 18 percent reduction against the baseline in 2030 (other countries vary from 17 percent in Argentina to 43 percent in Colombia).
  - Expressed as reduction to current levels, Chile’s implied 23 percent reduction is in line with other LAC6 countries (variation from 3 percent in Peru to 35 percent in Colombia).
- Chile has pledged net-zero emissions by 2050; this became legally binding in the Framework Law on Climate Change (June 2022).
  - The net-zero target covers all sectors and gases and proposes separate emissions reduction and removal targets.

### Evaluation of green taxes, legal and institutional framework
- 2014 general tax law introduced:
  - green taxes on annual CO2 emissions and local pollutants from stationary sources,
  - a tax on mobile sources.
- Tax on stationary sources currently has two components:
  - levy of US$5 per ton of CO2 (standard carbon tax),
  - local pollution charge taxing PM2.5, NOx and SO2 based on population and local pollution conditions.
- Tax on mobile sources is a function of vehicle fuel economy, NOx and vehicle price; applies only to light-duty vehicles and includes multiple exemptions.
- Direct carbon tax levied on CO2 emissions from stationary sources with thermal capacity of 50 megawatts (MW) or higher (includes thermal plants for power generation and boilers used in industrial processes).
- Institutions involved in administering green taxes include Ministry of Finance, Ministry of Environment, Ministry of Transport and Telecommunications, Superintendency of the Environment (SMA), Internal Revenue Service (SII), and General Treasury (TGR).
  - SMA oversees methodologies and systems to monitor, verify and report emissions for the stationary-source tax.
  - Ministry of Transport and Telecommunications determines fuel economy and NOx for the mobile-source tax and provides tax values to SII.
  - SII receives tax declarations; TGR collects payments.
  - The institutional framework and operation are contained in Law 20,780/2014 and regulations, a measurement protocol published by SMA, a notification system managed by the Ministry of Environment and the Ministry of Transport, and both a registry and monitoring, reporting and verification system operated by SMA.
- Implementation history and early revenue:
  - Tax on stationary sources first implemented in 2017.
  - In its first year, the tax covered 58 taxpayers and raised $191 million, covering about 39 percent of total CO2 eq emissions in Chile.
  - Revenue composition: CO2 emissions 88 percent, PM2.5 8.2 percent, NOx 3.1 percent, SO2 0.9 percent.
  - By sector, revenue shares: power generation 53 percent, trade 21 percent, construction 12 percent.

*Source: 1chlea2023001 - 4.      Strengthening the carbon tax should be a gradual process, however, especially*

### introduction, revenue has decreased modestly although the composition has varied as a result of

### 1chlea2023001 - introduction, revenue has decreased modestly although the composition has varied as a result of

### Tax Modernization Law and scope changes
- As of January 1st, 2023, the green tax on stationary sources will no longer be levied based on installed thermal capacity but on a threshold of emissions partially or totally released in combustion processes.
- The tax will apply to all stationary sources that annually emit 100 or more tons of PM2.5, or 25,000 or more tons of CO2.
- Exemptions: emissions from hot water boilers for personal use; generation units with a capacity of less than 500 kilowatts (kw); emissions released from raw materials used in the production processes (process emissions).
- Independent studies estimate these changes will expand the tax coverage from 39 to 45 percent of CO2 eq emissions.
- The Law introduced a carbon offset mechanism allowing companies to lower carbon tax burden starting on February 24, 2023, through emission reduction projects developed in Chile (or in the municipality for local pollutants) following standards to be defined and published by the Ministry of the Environment.
  - Eligibility criteria for offset projects:
    - Emission reductions must be additional to any environmental or sector regulation that the taxpayer is subject to.
    - Reductions should be measurable and verifiable by the Ministry of Environment.
    - Reduction projects should operate throughout the time that the taxpayer is liable to the green tax.
  - At the time of the mission, the Ministry of Environment had not issued the regulation for the offset mechanism.

### Framework Law for Climate Change (June 2022)
- Introduced emission standards and tradable carbon credits as the basis for an Emissions Trading System (ETS).
- Provides for the Ministry of Environment to establish maximum annual greenhouse gas limits, in CO2 eq, for emitting sources or establishments.
  - Caps should be based on reference emission standards by technology, sector and/or activity aligned with national long-term climate strategy and the country NDC.
- Agents may comply, partially or wholly, with emission standards through carbon credits from carbon reduction or absorption projects developed in Chile (or in the municipality for local pollutants).
- The Ministry must create, manage, and maintain a public registry of approved reduction or absorption projects and certificates of carbon credits; all transfers, purchases and values of these certificates must be recorded.
- While regulations should be prepared within one year of publication, at the time of the mission the Ministry of the Environment was still working on them.
- The Law set the basis for voluntary certification systems for GHG and water use; the Ministry of the Environment grants certificates for measurement, management and reporting of GHG and local pollutants, and issues reduction and absorption certificates voluntarily requested and meeting regulatory criteria. Violations may be sanctioned including revoking certificates under SMA organic law provisions.

### Revenue performance of green taxes
- Total annual revenue collected from the green tax on stationary sources has not exceeded $200 million or about 0.06 percent of GDP.
- Revenues have declined by 1 percent per year since 2017.
- In 2020, tax revenue recorded a sharp drop due to the COVID19 pandemic, with an annual decline rate at 6 percent.
- In 2021, revenues recovered by 6.5 percent but remained below 2017 levels.
- 2021 tax collected $186 million from 56 taxpayers.
  - Power generation accounted for 45.8 percent of the revenue.
  - Trade accounted for 31 percent.
  - Construction accounted for 13.1 percent.
  - Transport accounted for 4.7 percent.
- Sectoral shares (general): Electricity, gas, and water sector accounts for almost half of collected revenues; trade, construction and transportation make 26, 12, 5 percent of total collected revenues, respectively.
- Pollutant shares:
  - About 89 percent of revenues come from CO2 emissions.
  - 7 percent from PM2.5 emissions.
  - Shares of NOx and SO2 together are less than 5 percent.

### Design flaws and distortions in the direct carbon tax
- The law excludes the carbon tax value from the marginal spot price of electricity when the tax is levied on the system’s marginal power plant, i.e., the carbon tax is not considered in determining the wholesale market price when a fossil fuel-based plant is marginal.
  - This restriction prevents differentiation between plants with higher emissions and higher costs (due to the carbon tax) and more competitive lower- or zero-emission plants.
- The 2014 Law includes a cross-subsidy provision that benefits fossil fuel-based power generation:
  - For generation plants with a total unit cost (variable cost considered for economic dispatch plus the carbon tax) greater than or equal to the marginal spot price (wholesale electricity price), the difference must be covered by all utility companies in proportion to the amount of electricity each company retires from the system.
  - This shifts the tax burden from the emission source to utility companies buying electricity, relieving emitting and otherwise less competitive power plants from paying the carbon tax and undermining investment incentives for cleaner generation.
- Hypothetical dispatch example:
  - Three thermal plants dispatched in the same period: variable cost bars and carbon tax bars shown.
  - If the second plant is marginal, spot price equals its variable cost (excluding carbon tax); carbon tax levied on that plant and any portion of tax not covered by spot price for other plants is prorated among utilities.

### Carbon tax level, international comparisons and recommended strengthening
- Existing carbon tax level: $5 per ton of CO2 eq.
- This rate is low relative to social cost estimates and other jurisdictions:
  - Government-calculated social cost of carbon: $37.5 per ton of CO2.
  - Uruguay introduced a carbon tax in January 2022 at a level close to $137 per ton of CO2 eq.
  - Canada increased its federal carbon tax in April 2022 to CAD$50 per ton of CO2 eq and will continue to rise it by CAD$15 per year until it reaches $170 by 2030.
- Recommendation: Increase the carbon tax level (gradually), coupled with other measures such as higher incorporation of variable renewable energy, low and zero emission vehicles, feebates, and improved energy efficiency policies.
- Strengthening should be gradual given the 2021–first half of 2022 sharp fossil fuel price increases; the expected fall in fossil fuel prices could provide an opportunity to lock-in a higher carbon tax without increasing energy prices relative to recent levels.
- Well-targeted assistance to low-income households may be needed to limit distributional impacts while not undermining energy conservation incentives.

### Green tax on local pollutants
- Chile levies taxes on NOx, MP (PM2.5), and SO2 with a rate formula: Tij = 0,1 x CCAj x CSCpc_i x Pobj
  - CCAj (air quality coefficient): 1.2 if municipality is “saturated” (measurement exceeds environmental quality standard); 1.1 if “latent” (concentration between 80 and 100 percent of standard); 1.0 otherwise.
  - CSCpc_i (per capita social cost of contaminant i): $0.9 for MP, $0.01 for SO2, $0.025 for NOx.
  - Pobj is population in municipality j.
- Example: Hypothetical coal-fired power plant emitting PM2.5
  - In Puente Alto (625,500 inhabitants, defined as saturated for PM2.5): estimated tax rate $67,560 per ton of PM2.5; if emitting 100 tons (tax threshold), annual tax $6.7 million.
  - In Contulmo (5,500 inhabitants, neither saturated nor latent): estimated tax rate $495 per ton of PM2.5; if emitting 100 tons, annual tax $49,500.

### Green tax on mobile sources and fuel excises
- Tax on emissions from mobile sources:
  - Levied on sale of new light-duty vehicles.
  - Exemptions: vehicles with nine seats or more used to transport passengers; taxis; police and armored trucks; ambulances; tractors; pickup trucks with load capacity of 2,000 kilos or more.
  - Tax does not apply to taxpayers subject to VAT for acquisition of new pickup trucks (load capacity up to 2,000 kilos) provided it becomes part of taxpayer’s fixed assets.
  - Broad exemptions weakened the tax’s performance.
- Excises on fossil fuels for road transportation:
  - Dual structure with fixed (specific charge per quantity) and variable component. Variable component adjusts the base tax depending on international price fluctuation (known as Mecanismo de Estabilización de Precios de los combustibles, MEPCO), and operates as a price stabilization mechanism set weekly by the Ministry of Finance and implemented by ENAP.
  - Different excise rates apply by fuel type (diesel much lower than gasoline); a system of credits operates for diesel depending on end use.
  - Result: Chile consumes almost double the amount of diesel than the regional average on a per capita basis.
- Policy options to correct transport sector distortions:
  - Gradually increase excise rate on diesel to be on par with gasoline.
  - Apply the same carbon tax used for stationary sources to the transport sector (potentially at a higher level).
  - Implement an ETS, a hybrid combining a higher carbon tax and an ETS, or a pure feebate mechanism.
  - Incorporate carbon tax through existing excise or VAT structure; feebate mechanism could leverage institutional capacity developed for the green tax on mobile sources.

### Offsets and carbon credits: cautions and implementation
- The offset mechanism introduced in the Tax Modernization Law and the Framework Law on Climate Change requires careful implementation.
- Concerns:
  - Offsets are controversial; various countries have banned their use.
  - Offsets are difficult to verify and monitor and can distract policy efforts from instruments that effectively reduce emissions (e.g., carbon pricing).
  - Offsets may increase net emissions if underlying credits are not additional and can lead to greenwashing.

*Source: 1chlea2023001 - introduction, revenue has decreased modestly although the composition has varied as a result of (IMF PDF chapter).*

### 43.      The Law restricts offsets and carbon credits to projects developed in Chile (and the

### The Law restricts offsets and carbon credits to projects developed in Chile (and the municipality in the case of local pollutants)

### Key recommendations
- Include the carbon tax in the variable cost of all generation plants considered for the economic dispatch.
- Eliminate the cross subsidy from utilities to fossil fuel-based power plants.
- Increase the carbon tax and set a path to gradually increase it over time to reach a level consistent with the country’s NDC and pledge to net zero.
- Complement the tax on mobile sources with higher excises on diesel or by including the transport sector in a broader carbon pricing scheme.
- Consider increasing the social cost of contaminants for PM2.5, NOx and SO2.
- Continue to geographically restrict carbon offsets and credits to emission reduction or absorption projects developed in Chile (and in municipalities for local pollutants).

### Principles and conceptual issues on carbon pricing
- Carbon pricing is attractive because it:
  - Promotes the full range of opportunities for reducing energy use and shifting to cleaner energy sources across all covered sectors by reflecting the cost of carbon emissions in the prices of fuels, electricity, and other goods;
  - Automatically minimizes the costs of these responses by equalizing the cost of the last ton of CO2 eq reduced across fuels and sectors;
  - Levels the playfield for clean technology investments by establishing a clear price signal;
  - Mobilizes a valuable source of revenue which can be used to help meet climate, social, or broader fiscal objectives;
  - Generates domestic environmental co-benefits such as reductions in local air pollution deaths; and
  - Is straightforward to scale-up from an administrative perspective, in Chile’s case building off already established capacity for green taxes.
- Carbon pricing instruments:
  - Carbon taxes: tax on the carbon content of fossil fuel supply (current Chilean tax on stationary sources is an example).
  - Emissions Trading Systems (ETS): firms acquire allowances; government controls supply of allowances and market trading establishes the emissions price.
- Design principles to meet Chile’s 2030 NDC and net-zero pledge:
  - (i) cover a wide range of emissions;
  - (ii) establish a rising and predictable price; and
  - (iii) avoid unnecessary inefficiencies due to exemptions.
- Institutional note: carbon taxes typically sit with the finance ministry; ETS with the environment ministry.

### Quantitative scenarios modeled
- Moderate:
  - Carbon tax at $15 per ton of CO2 in 2025, increasing linearly to $50 per ton of CO2 in 2035.
  - Tax covers power, buildings, industry, rail, and aviation sectors but exempts the road transportation sector.
- Base case:
  - Carbon tax at $15 per ton of CO2 in 2024, increasing linearly to $60 per ton of CO2 in 2030.
  - Carbon tax excludes gasoline and diesel, but the excise on diesel is increased to bring the effective carbon rate equal to that of gasoline (starts from $0.05/liter in 2024 and increases linearly to $0.37/liter in 2030).
  - Carbon tax applies to all energy sectors.
- Hybrid:
  - Carbon tax applies only to the power sector, starting from $5 per ton of CO2 (current level) in 2024 and increases to $11 per ton of CO2 in 2027, then to $60 per ton of CO2 in 2035.
  - ETS in the industrial sector starting from $5 per ton of CO2 (current level) in 2024, increasing to $11 per ton of CO2 in 2027, then to $60 per ton of CO2 in 2035.
- Social cost of carbon (SCC):
  - Economy-wide carbon tax starting from $35 per ton of CO2 in 2024 and increasing linearly to $75 per ton of CO2 in 2030.

### Emissions impacts (exact modeled outcomes)
- By 2030, total emissions reduced relative to BAU:
  - Base: 17 percent
  - Moderate: 7 percent
  - SCC: 16 percent
  - Hybrid: 6 percent
- Cumulative CO2 reductions over 2024-2030:
  - Base: 51 million tons
  - Moderate: 20 million tons
  - SCC: 59 million tons
  - Hybrid: 17 million tons
- Sectoral shares of CO2 emissions reductions in 2030:
  - Power: 36-64 percent across scenarios
  - Industry: 22-30 percent in 2030
  - Transport: 8-23 percent in 2030
  - Buildings: 2-13 percent in 2030
- Fuel contributions in 2030 reductions:
  - Coal: from a half to four-fifths of emissions reductions in 2030 come from coal in power and other sectors (even with BAU coal phase-out in power).
  - Diesel emissions account for 20-44 percent of total emissions reductions in 2030.
  - Gasoline emissions: excluded in one scenario (base) and make up less than ten percent of total emissions reduction in others.
  - Natural gas emissions expected to grow, driven by shift from coal to natural gas in the power sector.

### Fiscal and macroeconomic implications (exact figures)
- Revenues:
  - Carbon pricing might raise up to 1.6 percent of GDP in 2030 on top of BAU.
  - Cumulative additional revenues over 2024-2030:
    - Moderate: $7 billion
    - SCC: $29 billion
  - In 2030 alone:
    - Moderate scenario: additional 0.8 percent of GDP in revenues
    - SCC scenario: additional 1.6 percent of GDP in revenues
  - Existing carbon tax raised no more than 0.06 percent of GDP in 2017-2021.
- GDP growth impacts in 2030 (potential negative impacts before recycling):
  - Base: 1.1 percentage points
  - Moderate: 0.6 percentage points
  - SCC: 1.0 percentage points
  - Hybrid: 1.5 percentage points
- Illustrative revenue recycling scenario:
  - If 70 percent of revenues are recycled through productive public investment and 30 percent through targeted cash transfers, the negative impact on GDP growth in 2030 would be reduced to 0.1 percentage points.
  - The extent of offset depends on the Keynesian fiscal multiplier of the recycling measures.

### Price effects (exact modeled changes)
- Coal weighted average prices increase relative to BAU in 2030:
  - Base: 98 percent
  - Moderate: 47 percent
  - SCC: 126 percent
  - Hybrid: 97 percent
- Electricity prices:
  - Increase by about 3-4 cents per kilowatt hour (or 25 percent compared to BAU in 2030) in each scenario.
  - Electricity prices are projected to decrease in the baseline: residential today about $0.17 per Kilowatt hour (kWh) decreasing to $0.15 kWh in the baseline; industry today $0.15 kWh decreasing to $0.10 kWh in the baseline.
  - The carbon price impact would be a modest increase from current prices given baseline declines.
- Road fuels:
  - Gasoline prices would grow by 7-15 percent relative to BAU (excluding the base scenario).
  - Diesel price increases would be 10-45 percent relative to BAU.

### Modeling approach and caveats
- Analysis uses the Climate Policy Assessment Tool (CPAT), a spreadsheet model developed jointly by the IMF and the World Bank, calibrated to empirical evidence and energy model results (fuel and electricity price elasticities over the longer term generally between -0.5 and -0.8).
- Emissions factors by fuel from IIASA (2021); emissions calibrated to UNFCCC GHG and other sources for 2019-2021.
- Revenue calculations:
  - Include effect of tax base erosion from the carbon tax.
  - Exclude the impact of a system of offsets starting in February 2023, which may bias calculations upwards.
- Notes:
  - Moderate and hybrid scenarios are less effective at meeting the NDC because of limited sectoral coverage (moderate excludes transport; hybrid applies only to industry and power).
  - Under all scenarios, non-carbon pricing measures would be needed to fully reach the NDC.
  - Price and emissions responses may be delayed if there are bottlenecks in the power system.

*Source: IMF staff using CPAT and related IMF analysis in the provided chapter.*

### 60.      Carbon pricing would also lead to slight increases in the cost of industrial

### 1chlea2023001 - 60. Carbon pricing would also lead to slight increases in the cost of industrial production, which may raise competitiveness concerns

### Industrial production costs and competitiveness
- Production cost increases have three components:
  - Direct tax payment, or allowance purchase requirement, for emissions firms continue to emit directly.
  - Abatement costs to the extent firms cut emissions (e.g., switching to cleaner but costlier technologies and fuels).
  - Indirect payment for carbon charges on emissions embodied in inputs, especially electricity.
- Overall, carbon pricing in 2030 would increase production costs for non-metallic industries (most notably cement), iron and steel, and chemicals by less than 6 percent in the SCC and base scenarios (relative to BAU costs in 2030).
- Competitiveness policy options (not the focus of the study) mentioned include border carbon adjustment (BCA) or free allowances allocation for EITE industries in case of ETS.

### Fuel and energy price projections (selected values from table)
- Electricity, residential: Current $/kWh 0.19; Baseline 0.15; Base 0.19; Moderate 0.18; SCC 0.19; Hybrid 0.18.
- Electricity, industry: Current $/kWh 0.16; Baseline 0.10; Base 0.13; Moderate 0.13; SCC 0.13; Hybrid 0.13.
- Coal: Current $/GJ 4.1; Baseline 5.1; Base 10.1; Moderate 7.5; SCC 11.6; Hybrid 10.1.
- Natural gas: Current $/GJ 27.3; Baseline 25.5; Base 28.7; Moderate 27.1; SCC 29.5; Hybrid 27.6.
- Oil: Current $/bbl 65.7; Baseline 50.6; Base 78.7; Moderate 65.8; SCC 85.8; Hybrid 65.3.
- Gasoline: Current $/lit 1.2; Baseline 1.3; Base 1.3; Moderate 1.4; SCC 1.5; Hybrid 1.4.
- Diesel: Current $/lit 0.8; Baseline 1.0; Base 1.4; Moderate 1.1; SCC 1.2; Hybrid 1.1.
- LPG: Current $/lit 0.8; Baseline 0.5; Base 0.6; Moderate 0.6; SCC 0.7; Hybrid 0.6.
- Kerosene: Current $/lit 0.9; Baseline 0.7; Base 0.9; Moderate 0.8; SCC 1.0; Hybrid 0.8.

### Distributional impact on households
- Two-step approach used:
  - Input-output tables to calculate effect of carbon pricing on categories of consumer goods.
  - Map price increases to household budget shares by income group using household expenditure surveys.
- Incidence results:
  - Carbon pricing is revenue-neutral for carbon tax scenarios and regressive for hybrid.
  - Carbon pricing imposes a burden on an average household of 1.5-3 percent of consumption.
  - Burdens are largely driven by direct increases in the price of fossil fuels and electricity.
  - Estimates overstate net household burden because they ignore:
    - Partially offsetting domestic environmental benefits (especially local air pollution mortality).
    - Benefits from recycling carbon pricing revenues.

### Revenue recycling and distributional outcomes
- Revenue recycling would offset negative impacts on households; targeted recycling could make reforms pro-poor.
- Example policy: Use 30 percent of revenues for a targeted, unconditional cash transfer aimed at the bottom four consumption deciles and use the other 70 percent to invest in public infrastructure.
  - Net impacts under this example:
    - Bottom four deciles: better off with net benefits amounting to about 4-12 percent of consumption.
    - Next three deciles: approximately no better or worse off.
    - Wealthier households: worse off on net by only 2 percent of consumption.

- Relative mean consumption effect on the poorest after revenue recycling (from summary table):
  - Base: 11.9 percent of BAU consumption.
  - Moderate: 5.9 percent of BAU consumption.
  - SCC: 11.7 percent of BAU consumption.
  - Hybrid: 4.5 percent of BAU consumption.

### Economic costs and environmental co-benefits
- Carbon pricing imposes a relatively small economic cost in Chile equivalent to about 0.1-0.4 percent of GDP in 2030 and these are offset by domestic environmental co-benefits.
- Economic costs reflect pure mitigation costs, primarily the annualized costs of using cleaner but more expensive technologies instead of fossil-based technologies (net of any savings in lifetime energy costs).
- Domestic environmental co-benefits composition:
  - 10-30 percent reflect fewer local air pollution deaths.
  - 70-90 percent reductions in traffic congestion and accident externalities.
- Adding global climate benefits increases environmental benefits from 0.2-0.4 to 0.2-0.6 percent of GDP, or two-three times the economic efficiency cost.
- Pure abatement costs and domestic co-benefits (from summary table):
  - Pure abatement costs, % of GDP: Base 0.35; Moderate 0.07; SCC 0.32; Hybrid 0.06.
  - Domestic co-benefits (transport, air pollution, climate), % of GDP: Base 0.62; Moderate 0.24; SCC 0.57; Hybrid 0.15.

### Summary of scenario outcomes (Table 3 key results)
- Energy-related CO2 emissions reduction in 2030, % to a BAU:
  - Base 17% ; Moderate 7% ; SCC 16% ; Hybrid 6%.
- Cumulative CO2 emissions reductions in 2024-2030, MtCO2:
  - Base 51 ; Moderate 20 ; SCC 59 ; Hybrid 17.
- Additional fiscal revenues raised in 2030, % of GDP:
  - Base 1.61 ; Moderate 0.81 ; SCC 1.55 ; Hybrid 0.92.
- Cumulative additional fiscal revenues raised in 2024-2030, bn USD:
  - Base 25.3 ; Moderate 7.4 ; SCC 29.1 ; Hybrid 12.3.
- Impact on GDP growth in 2030, percentage points deviation from the BAU growth:
  - Base -0.09% ; Moderate -0.08% ; SCC -0.06% ; Hybrid -0.08%.
- Residential electricity price increase in 2030, percent from the BAU price:
  - Base 24% ; Moderate 22% ; SCC 25% ; Hybrid 22%.
- Residential electricity price increase in 2030, percent from the current price:
  - Base -4% ; Moderate -6% ; SCC -3% ; Hybrid -5%.
- Industrial electricity price increase in 2030, percent from the BAU price:
  - Base 27% ; Moderate 24% ; SCC 28% ; Hybrid 24%.
- Industrial electricity price increase in 2030, percent from the current price:
  - Base -19% ; Moderate -20% ; SCC -17% ; Hybrid -20%.

### Revenue recycling: options and political economy considerations
- Government objective: Ministry of Finance informed mission that the main purpose of the carbon tax reform is not to generate additional revenue, but to induce changes in consumption behavior to reduce social costs and comply with the country’s climate goals.
- Chile does not allow earmarking; Ministry is exploring different uses of carbon tax revenue to offset impacts on GDP growth, energy prices and income distribution.
- Political challenges:
  - Voters and interest groups likely oppose carbon tax increases due to fear of higher energy prices and cost of living impacts.
  - Energy-intensive and trade-exposed firms that cannot easily pass on higher energy costs will be vocal opponents.
- Strategy recommendations:
  - Build a broad and diverse coalition; explain clearly how revenue will be spent considering economic efficiency and income distribution.
  - Develop a well-planned communication strategy on revenue use.
  - Assess revenue use options against impacts on income distribution, economic efficiency, and administrative burden.

- Broad categories of revenue use (summary of Table 4 impacts):
  - Environmental investment: May disproportionately benefit low-income households; may be less efficient than broader uses; Modest administrative burden.
  - General investments: May disproportionately benefit low-income households; Potentially significant efficiency gains; Modest administrative burden.
  - Universal transfers: Highly progressive; Forgoes efficiency benefits; New capacity needed (manageable).
  - Payroll tax cuts: Benefits largely proportional across working households; Improves incentives for formal work; Minimal administrative burden.
  - Personal income tax cuts: Typically skewed to higher-income groups; Improves incentives for formal work and saving; Minimal administrative burden.
  - Consumption tax cuts: Largely proportional to consumption; Some improvements in incentives for formal work; Minimal administrative burden.
  - Corporate income tax increases/cuts: Benefits skewed to higher-income groups; Improves incentives for investment; Minimal administrative burden.
  - Deficit reduction: Benefits accrue to future generations; Significant efficiency gains (lowers future tax burdens and macro-financial risk); Minimal administrative burden.
  - Targeted assistance (means-tested cash/in-kind transfers): Effective for low-income groups if safety nets comprehensive; Efficiency impacts unclear but likely modest; Low administrative burden if building on existing capacity.
  - Assistance for household energy bills: Provides partial relief for all households (does not address indirect pricing burden); Modest reduction in environmental effectiveness; Low administrative burden if building on existing capacity.

*Source: IMF staff using CPAT and chapter content from 1chlea2023001.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1chlea2023001.pdf_