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Welfare Analysis of an Optimal Carbon Tax in Chile

Author

Listed:
  • Cristian Espinosa

    (Central Bank of Chile)

  • Jorge Fornero

    (Central Bank of Chile)

Abstract

We analyze a dynamic stochastic general equilibrium model which includes a negative externality that arises from fossil fuels burnings. The carbon released to the atmosphere by electricity producers is the main driver of climate change. We adapt the optimal tax derived by Golosov et al. (2011) to a small open economy to force polluters to internalize their damages. The results show that the tax benefits outweigh their costs; yet welfare gains seem to be marginal under plausible parameters. We calculate the optimal carbon tax for Chile and the tax effectiveness achieved, which is around 10 percent. The results remain robust to variations in the utility function, changes in parameters that determine the externality degrees of commitment to reduce emissions.

Suggested Citation

  • Cristian Espinosa & Jorge Fornero, 2014. "Welfare Analysis of an Optimal Carbon Tax in Chile," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 29(2), pages 75-111, October.
    • Handle: RePEc:ila:anaeco:v:29:y:2014:i:2:p:75-111
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    Cited by:

    1. Karla Hernández & Carlos Madeira, 2021. "The impact of climate change on economic output in Chile: past and future," Working Papers Central Bank of Chile 933, Central Bank of Chile.
    2. Espinosa, Cristian & Gutierrez Cubillos, Pablo & Castro Nofal, Bastián, 2025. "The carbon tax as an automatic stabilizer in a commodity-producing Small Open Economy," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 835-853.
    3. Felipe Avilés-Lucero & Gabriel Peraita & Camilo Valladares, 2021. "Huella de Carbono para la Economía Chilena 2017," Economic Statistics Series 135, Central Bank of Chile.
    4. Cristian Mardones P. & Tamara Muñoz Z., 2017. "Impuesto al CO2 en el sector eléctrico chileno: efectividad y efectos macroeconómicos," Journal Econom a Chilena (The Chilean Economy), Central Bank of Chile, vol. 20(1), pages 004-025, April.
    5. Carlos Madeira, 2022. "A review of the future impact of climate change in Chile: economic output and other outcomes," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 27(8), pages 1-22, December.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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