Internalizing the externalities of fine particulate matter emitted by firewood heaters through environmental taxes

Pollution from using firewood for residential heating is a widespread problem in south-central Chile during the fall and winter. The choice of this type of heating is mainly explained by the low price of firewood relative to other cleaner energy sources. In this context, implementing an economic instrument that internalizes the environmental damage caused by thousands of small emission sources that use firewood heaters is evaluated. Specifically, an optimization model calibrated with real household data in the urban area of Metropolitan Concepción is developed to simulate the impact of an environmental tax. Three tax scenarios are considered, showing that adopting less polluting heaters would be incentivized. The results show that a tax rate equal to the social cost of fine particulate matter in each district of Metropolitan Concepción would reduce total emissions by 68 %, a tax rate equal to the weighted average of the social cost across all districts would reduce emissions by 79 %, and a uniform tax rate for all households using firewood heaters would reduce emissions by 63 %. Finally, it is concluded that the uniform tax is more realistic and has a slightly higher regulatory cost than the socially optimal tax.