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IMF Country Report No. 23/35

CHILE

TECHNICAL ASSISTANCE REPORT – AN EVALUATION OF IMPROVED GREEN TAX OPTIONS

January 2023

This Technical Assistance Report on Chile was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in November 2022.

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Title page

FISCAL AFFAIRS DEPARTMENT

Chile

An Evaluation of Improved Green Tax Options

Diego Mesa Puyo and Karlygash Zhunussova

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Technical Report

November 2022

The contents of this report constitute technical advice provided by the staff of the International Monetary Fund (IMF) to the authorities of Chile (the “TA recipient”) in response to their request for technical assistance. This report (in whole or in part) or summaries thereof may be disclosed by the IMF to IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the TA recipient, and upon their request, to World Bank staff and other technical assistance providers and donors with legitimate interest, unless the TA recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information— http://www.imf.org/external/np/pp/eng/2013/061013.pdf). Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than agencies or instrumentalities of the TA recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the TA recipient and the IMF’s Fiscal Affairs Department.

Contents

• ABBREVIATIONS AND ACRONYNMS

• PREFACE

• EXECUTIVE SUMMARY

• I. INTRODUCTION

• II. OVERVIEW OF EMISSIONS, TRENDS AND TARGETS

• A. Global Context

• B. Emissions in Chile

• C. Energy Prices in Chile

• D. Emissions Targets in Chile

• III. EVALUATION OF GREEN TAXES IN CHILE

• A. Green Taxes, Legal and Institutional Framework

• B. Revenue Performance

• C. Selected Issues

• D. Recommendations

• IV. OPTIONS TO ENHANCE CARBON PRICING

• A. Principles and Conceptual Issues

• B. Quantitative Evaluation of Carbon Pricing Options

• V. REVENUE RECYCLING OPTIONS

• REFERENCES

• FIGURES

• 1. CO2 Emission and Global Pathways

• 2. GHG Emissions in 2020 by Source

• 3. Historical GHG Emissions, 2000–2018

• 4. Electricity Generation by Source, 1990–2020

• 5. Effective Carbon Rates for Gasoline and Diesel in 2020, OECD

• 6. Historical Gasoline and Diesel Retail Prices vs International Oil Price

• 7. GHG Emissions vs Paris Pledge (NDC) and Net Zero Emissions Pathway

• 8. Average NDC Pledges in LAC6 Countries

• 9. Revenues Raised by the Direct Carbon Tax in 2017–2020

• 10. Cross Subsidies from Utilities to Power Plants

• 11. Carbon Prices around the World

• 12. Gasoline and Diesel Price Increases in LAC-6

• 13. The Impact on Total GHG Emissions excl. LULUCF by Scenario

• 14. CO2 Emissions Reductions from the Baseline in 2030

• 15. Additional Revenues Raised from Fossil Fuels by Scenario, Percent of GDP

• 16. Impact on GDP Growth in 2030

• 17. Percent Change in Output Prices by Scenario in 2030 (Output Price Increase, %)

• 18. Relative Mean Consumption Effect before Revenue Recycling (% of Baseline

• 19. Relative Mean Consumption Effect after Revenue Recycling (% of Baseline

• 20. Economic Costs and Domestic Environmental Co-benefits in 2030 (% of GDP)

• TABLES

• 1. Effective Carbon Rates in Chile, 2020

• 2. Energy Prices by Scenario in 2030

• 3. Summary Table

• 4. Options for Recycling Higher Carbon Tax Revenue

• APPENDICES

• 1. Carbon Taxes, ETS and Revenue Use

Abbreviations and Acronynms

Preface

At the request of the Chilean Minister of Finance, a team from the IMF Fiscal Affairs Department (FAD) visited Santiago between October 3–7, 2022, to evaluate options to expand the existing direct carbon tax in Chile. The mission comprised Diego Mesa Puyo (head) and Karlygash Zhunussova, both from FAD’s Climate Policy Division.

The mission met with the Minister of Finance, Hon. Mario Marcel Cullell, the Minister of Environment, Hon. María Heloisa Rojas Corradi, and the Minister of Energy, Hon. Diego Pardow Lorenzo. The team also had fruitful discussions with a range of government officials. In the Ministry of Finance, the mission met with Mrs. Claudia Sanhueza Riveros, Deputy Minister, Mr. Nicolas Bohme, Tax Policy Coordinator, and Mrs. Camila Schmidlin and Mr. Jose Alvarado from the Tax Policy Group; in the Servicio de Impuestos Internos (SII) meetings were held with Carolina Saravia, Deputy Director of Enforcement; in the Ministry of Environment discussions were held with Mr. Rodrigo Barragan and Mrs. Isabel Rojas from the Environmental Economy Division; in the Ministry of Energy, the mission met with Mr. Juan Pedro Searle, Chief of the Climate Change Division; in the National Commission of Energy, the mission met with Mr. Marco Antonio Mancilla Ayancán and technical staff; in the Environmental Superintendency, the mission met with Mr. Emanuel Ibarra Soto, Superintendent, and technical staff. In the private sector, the mission had meetings with Mr. Camilo Charme, General Manager, and Mr. Claudio Muñoz, Head of Studies, at Generadoras de Chile (the main power sector business group); and with Mr. Jorge Cáceres, Director of the Centre of Environment and Energy at Sociedad de Fomento Fabril (Association of Industrial Promotion). The mission also met with Mr. Adrien Vogt-Schilb, Senior Economist of the Climate Change and Sustainability Division of the Inter-American Development Bank, Chile Office; and with Mr. Luis Gonzales, head of Climate Change, Energy and Environmental Economics at Universidad Católica de Chile.

The mission held a workshop to present the Climate Policy Assessment Tool (CPAT) to more than 15 staff from the Ministry of Finance, Ministry of Energy, Ministry of Environment, SMA, SII and the Central Bank of Chile.

The mission acknowledges the excellent interpretation services provided by Mrs. Gina Cabach, Mrs. Claudia Goet and Mr. Pedro Velloso during meetings and the workshop.

Finally, the mission would like to express its gratitude for the outstanding support and hospitality received from the Ministry of Finance staff, in particular Mr. Nicolas Bohme, Mrs. Camila Schmidlin and Mrs. Vanessa Paluba.