Computable general equilibrium model analysis of economywide cross effects of social and environmental policies in Chile

Abstract

The analysis of the linkages between development policies and social and environmental variables is a neglected area within the development literature. This paper focuses on the key interrelations among the economic, social and environmental elements of the sustainable development triangle. A thorough review is undertaken of both social and environmental policies in Chile, underlining important economic growth and reforms. Using the static CGE model ECOGEM-Chile, the economywide impacts of several environmental, social and combined policies are simulated for the Chilean economy. Six different policies are simulated—three environmental policies that impose different taxes on PM10, SO 2 and NO 2 emissions, respectively; the same tax on PM10 in a context of high unemployment; one social policy that increases government transfers to households; and a mixed social-environmental policy package where the environmental tax on PM10 and the social transfer policy are simulated simultaneously. The results show that environmental tax policies may have negative social effects, using real disposable income by quintiles as proxy. The impacts depend on the use of the new revenues and the status of employment. Taxing PM10 emission yields better environmental results than taxing SO 2 and NO 2. Social policies do not show negative environmental impacts. Combined environmental and social policies improve results. Thus, specific compensating social policies would improve environmental policy acceptance, while also reducing poverty or strong income distribution disparities. The evidence suggests that environmental policies may have social impacts, but not vice versa. The results show that the ECOGEM-Chile model is useful for analyzing systematically and holistically, different economywide policies and their impact on the Chilean economy. Winners and losers may be identified, as well as the potential magnitude of gains and losses. The results obtained are not all straightforward, due to indirect effects.