Analysis on complementarity between a CO2 tax and an emissions trading system to reduce industrial emissions in Chile

Abstract

This study aims to analyze the behavior of Chilean industrial sources when a CO2 tax, an emissions trading system with a total reduction target of 30%, or both instruments simultaneously are applied. For the above, an optimization model is built that is then calibrated with firm -level data obtained from the Annual National Industrial Survey (ENIA). Specifically, the model assumes that industrial sources have the option of maintaining their original emissions, replacing their current fuels with less polluting ones to pay fewer taxes and/or trade of emissions in a carbon market. The results show that to reduce emissions by at least 30% a tax close to US $17.5/tCO2 could be applied with a total cost of US $106 million, but it would be better to apply an emissions trading system with a similar price because the total cost would be US $21.3 million. If both economic instruments are applied together, the total cost of reduction is higher than when the instruments are implemented independently. Thus, it is concluded that Chile could move from a CO2 tax to an emissions trading system in order to reduce the costs of its environmental regulation.