20230118-IMF-Chile_Technical_Assistance_Report-An_Evaluation_of_Improved_Tax_Options_49页_686kb

Summary of the Technical Assistance Report: An Evaluation of Improved Green Tax Options in Chile

Core Content

This report, prepared by the International Monetary Fund (IMF) Fiscal Affairs Department (FAD), evaluates options to improve green tax policies in Chile, particularly focusing on carbon taxation. It aims to support Chile in aligning its current policies with its Nationally Determined Contribution (NDC) and legally binding net-zero emissions commitment by 2050.

Main Objectives

• Assess the performance and design of existing green taxes in Chile.
• Evaluate scenarios for enhancing carbon pricing to meet climate targets.
• Discuss revenue recycling options to support a well-thought-out reform communication strategy.
• Provide recommendations for improving the carbon tax framework.

Key Findings

Current Status of Green Taxes in Chile

• Chile has been a regional leader in climate action, including the introduction of green taxes on CO₂ emissions and local pollutants in 2014.
• The country also issued green bonds in 2019 and announced the decommissioning of coal-fired power plants by 2040.
• The Framework Law on Climate Change, passed in 2022, makes carbon neutrality legally binding by 2050.
• The existing carbon tax on stationary sources is set at $5 per ton of CO₂, which is low compared to international standards and significantly below the government's estimated social cost of carbon ($32.5 per ton).

Emissions Trends and Targets

• Energy-related emissions accounted for 71% of Chile's GHG emissions in 2020, excluding LULUCF.
• The largest polluting sectors are power generation (27%), industry (20%), transport (19%), and waste (11%).
• GHG emissions (excluding LULUCF) grew by 50% between 2000 and 2018, driven mainly by power generation (122%) and transport (66%).
• Chile's NDC targets a 30–45% reduction in CO₂ emissions by 2030 compared to 2016 levels, and carbon neutrality by 2050.

Carbon Pricing Scenarios

The report presents four scenarios to improve carbon pricing and bring Chile closer to its climate goals:

Key Challenges and Recommendations

• The current carbon tax is too low and needs to be increased to meet climate targets.
• The tax on mobile sources (transport) is narrow in coverage and includes multiple exemptions, which may need to be broadened or replaced with more effective carbon pricing mechanisms.
• The excise tax on diesel is lower than on gasoline, leading to higher diesel consumption. This distortion should be corrected.
• The mission recommends that the carbon tax should be gradually increased, especially considering the recent decline in fossil fuel prices that could allow for a higher tax without increasing energy prices.
• Design issues in the power sector, such as cross subsidies, need to be addressed to ensure the tax system works effectively.
• Revenue from higher carbon pricing should be recycled to support low-income households and energy-intensive sectors to minimize distributional impacts.

Conclusion

Chile has made significant progress in climate policy, but further improvements to its carbon tax are necessary to meet its climate targets. The report provides a comprehensive analysis of current and potential green tax reforms, emphasizing the importance of a gradual and well-targeted approach to carbon pricing. It also highlights the need for revenue recycling to ensure the reform is socially and economically sustainable.