Evaluation of a CO2 tax in chile: Emissions reduction or design problems?

Abstract

In 2014, Chile introduced a tax reform on carbon dioxide (CO2) emissions that began to be collected in 2017; the reform is restricted to large industrial and power generation sources with thermal power greater than 50 megawatts (MW). Therefore, this study evaluates each industrial source’s option to reduce its taxes by switching to cleaner fuels (investing in new combustion equipment, such as boilers and dual burners). The results show that a tax of US$5 per ton of CO2 for industrial sources of more than 50 MW of thermal power is wholly ineffective in reducing emissions. If a carbon tax is applied to all independent sources of power, only a few industrial sources are predicted to change their current fuel, mainly changing coal to biomass. The conclusion is that the carbon tax serves to raise tax revenues rather than reduce emissions.