Energy shocks, fiscal policy and CO2 emissions in Chile

Oil price increases and the restrictions to natural gas imports from Argentina generate multiple effects which ripple throughout the Chilean economy. The magnitude of the aggregate, sectoral, distributive and environmental impacts associated with these changes in the energy sector is debated. In this paper, using a static general equilibrium framework, we analyze quantitatively the direct and indirect effects of these international shocks. Also, using emission coefficients based on national data we simulate the environmental impacts and compare them with US transferred coefficients. The increase in international prices of oil and fuels generates a (small) negative impact on GDP, due to the recessionary effect on consumption. Coal gains participation in the energy matrix thus worsening the economy´s carbon intensity. The impacts on the income of the poorest and its distribution are clearly negative: contractionary and regressive. The former results are magnified when natural gas supply restrictions are added. When short run elasticities are considered , there is a slight 1.8% reduction in greenhouse gas emissions. However with higher elasticities, i.e., considering the impacts in the medium term, there is a switch in the sign and CO2 emissions increase due to the higher carbon dependency of the economy.This type of result is also observed with the emission of other gases. Using the model we evaluate the carbon tax required to obtain the same 1.8% reduction in CO2 emissions in the absence of an energy price shock. Additionally, a scenario that includes the sale of CERs is evaluated. These simulations show that reductions can be obtained with negligible macro economic and sectoral effects and that there are additional environmental co benefits. However these are only significant when the national emission coefficients are used, thus highlighting the importance of using national data.