Pricing carbon in Chile: green tax reform

In 1996, the Government of Chile established a National Advisory Committee for Global Change, which played an important role in formulating initial national positions for international negotiations and creating national policy instruments for climate change. Fifteen years later, in 2010, the Climate Change Office (OCC) of the Ministry of the Environment was established and has continued with progress in relevant environmental legislation. Now Chile is committed to further positive action.

Progress on climate change initiatives in Chile has been especially significant recently, and unique in the region. We have successfully established a permanent national greenhouse gases (GHG) inventory system, recursively updated as a result of the committed work of the ministries and agencies that manage critical data to support sectoral policies.

We have advanced the implementation of Nationally Appropriate Mitigation Actions (NAMAs, as defined by the Convention). Finally, we have conducted a national survey to identify public needs and support – financial resources, capacity building, technical assistance and technology transfer – available from the international community and deployed in the country in the fight against climate change.

Carbon tax provisions

This article particularly discusses an important milestone – our recently enacted carbon tax law, a cornerstone for mitigation actions in our country. Our ministry, in close collaboration with the Ministry of Finance and under the guidance of President Bachelet, has introduced a ‘green tax’ as a strong signal of our commitment to an equitable, sustainable, resilient and, above all, low carbon development path.

Chile’s CO2 tax targets large factories and the electricity sector, covering about 55 per cent of the nation’s carbon emissions

The Bill taxes emissions from stationary atmospheric CO2, SO2, NOx and particulate matter (PM) sources. It is aimed at facilities with boilers or turbines that, together, add up to a heat output of at least 50 megawatts thermal (MWt). Specifically, Chile’s CO2 tax targets large factories and the electricity sector, covering about 55 per cent of the nation’s carbon emissions. In my view, pricing carbon is a crucial element in any attempt – local or international – to cut emissions and to stabilise the atmosphere to secure GHG levels. This was one of our main drivers in the design of the green tax package.

In 2009 Chile voluntarily announced its willingness to join a global effort to mitigate GHG emissions, pledging to take actions to reduce, by 2020, 20 per cent of projected emissions from 2007 through nationally appropriate mitigation actions. The challenge, in fact, goes beyond a national effort in the context of international negotiations.

There is currently a growing conviction, which Chile shares, among UNFCCC parties and the international community that all countries must shift towards resilient low carbon development, especially in light of the dire consequences climate change has in store for the least advantaged. Today it is clear that climate change affects such aspects as national security, social development, competitiveness, job creation and equity. Therefore, as noted by President Michelle Bachelet (pictured about), equity and justice should be central elements of our climate action.

Hence, among other things, our tax reform aims to internalise a negative externality, at the same time as showing Chile’s political commitment to contribute. Chile is a highly vulnerable country, and despite our marginal responsibility in global GHG emissions, we are ready to lead the way towards resilient low carbon development.

Application of green taxes

Starting January 2017, a tax will be levied on global and local pollutants from vehicles and stationary sources. Consistent with Chile’s international commitments and the observed global trends in carbon pricing, Chile has set the CO2 tax at US$5 per tonne of CO2 emissions.

For local pollutants (PM, NOx, SO2), the design of the tax considers the social cost and recognises the differences in the carrying capacity of the local area where the polluting source is located (maximum people per surface area) and the exposed population, making it a pioneer tax instrument across the world. This translates into a tax per tonne that varies by pollutant and municipal commune (district).

Green taxes are recognised internationally as a central policy instrument in environmental management, since they have proved to be an ideal way to deliver appropriate signals to the market and modify behaviours that are harmful to the environment. The implementation of green taxes is a breakthrough in environmental issues in Chile, as it will allow producers to internalise negative externalities, and improve environmental conditions by reducing emissions of greenhouse gases.

Green taxes are recognised internationally as a central policy instrument in environmental management

But the initiative is not only important in itself, by reducing emissions from stationary sources; the legislation will also provide a clear signal to the private sector of the government’s commitment to decarbonise the energy matrix.

Moreover, the implementation of this tax will have enormous learning benefits. The tax generates not only a price signal but also, perhaps even more important, requires the state to build new institutional infrastructure that will boost our monitoring, reporting and verification capabilities.