Economic and environmental effects of financing subsidies for non-conventional renewable energies with a carbon tax – A comparison of intersectoral models

Abstract

Non-conventional renewable energy (NCRE) subsidies have been introduced in various countries to help reduce greenhouse gas (GHG) emissions. However, other social priorities limit the allocation of fiscal resources to this climate policy in Chile. This study analyzes the option of financing NCRE subsidies through carbon taxes in the thermoelectric sector. Specifically, two intersectoral models (the Leontief price model and the SAM price model) are used to simulate the impact of this mix of climate policies on prices, production, employment, and emissions of global and local air pollutants. The results of both models show that CO2 emissions would be reduced slightly in the short term, which is explained by the low current tax rate, the inelasticity of energy demand, and the indirect stimulus of subsidies on production in other sectors of the economy. In addition, it is concluded that the Leontief price model overestimates the impacts since it omits the falls in labor income and household consumption that the SAM price model captures. So, it is recommended to use models based on a social accounting matrix to evaluate energy policies when more sophisticated intersectoral models with endogenous prices and quantities (computable general equilibrium models) are unavailable.