Chile: Technical Assistance Report-An Evaluation of Improved Tax Options

This Technical Assistance report presents an evaluation of improved Green Tax Options for Chile. Consistent with its emission reduction ambitions, Chile has developed multiple climate policies. While Chile has made important progress to align policies with climate commitments, additional mitigation efforts are required to reach emission reduction targets in 2030 and by mid-century. The Ministry of Finance announced that improvements to green taxes will be included in the general tax reform presented to parliament in July 2022. Moreover, since the country has five years of experience administering green taxes, further carbon pricing enhancements should leverage existing institutional capacity without adding significant administrative burden. This report evaluates existing green taxes in the country, including revenue performance, coverage, and selected design issues. It also discusses changes that will take effect in 2023, as well as new mitigation tools introduced in the Framework Law on Climate Change. The report uses the Climate Policy Assessment Tool to evaluate different scenarios to improve carbon pricing and bring the country closer to or in line with its climate targets. Results are presented in terms of emissions reduction, revenue-raising potential, effects on gross domestic product and energy prices, distributional impacts across households and firms, abatement costs and co-benefits. The report also offers different options to recycle revenue from higher carbon pricing to help the government prepare a well-thought-out reform communication strategy.