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Welfare Analysis of an Optimal Carbon Tax in Chile

Author

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  • 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, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 29(2), pages 75-111, October.
  • Handle: RePEc:ila:anaeco:v:29:y:2014:i:2:p:75-111
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    1. repec:chb:bcchec:v:20:y:2017:i:1:p:004-025 is not listed on IDEAS

    More about this item

    Keywords

    DSGE; climate change; CO2 emissions; optimal taxation; carbon tax;

    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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