Economy-Wide Implications of a Carbon Tax in the Chilean
Electricity Generation Sector
Working paper
Carlos Benavides, Luis Gonzales, Manuel Díaz, Rodrigo Palma a, Gonzalo
García, Catalina Ravizza, Rodrigo Fuentes b
a
Energy Centre, Faculty of Physical and Mathematical Sciences, University of Chile. Avenida Tupper 2007,
Santiago, Chile.
b
Institute of Economics, Pontifical Catholic University of Chile.
Avenida Vicuña Mackenna 4860, Macul, Santiago, Chile
Abstract
This paper aims to analyse the economy-wide implications of a carbon tax applied on the Chilean
electricity generation sector. In order to reach this, both energy sectorial model and dynamic
stochastic generally equilibrium (DSGE) model have been used. An approach is proposed to
integrate results from the electricity generation sector and the DSGE model. Carbon taxes of 10,
20, 30, 40 and 50 US$/tCO2e are evaluated. We evaluate the carbon tax as energy prices shocks
on the path of gross domestic product (GDP). We suppose that these shocks are the result of
applying different values of the carbon tax in the electricity generation sector.
The results show that the effectiveness of this policy depends on some variables which are not
controlled by policy makers, for example, the non-conventional renewable energy investment cost
projection, price of natural gas, and feasibility of exploiting hydroelectric resource. For a carbon
tax of 20 US$/tCO2e, the average annual emission reduction should be between 1.1 and 9.1
million tCO2e. However, the price of the electricity (electricity generation level) should increase
between 8.3 and 9.6 US$/MWh, which is equivalent to a 7.4% and 8.5% with respect to currently
electricity price This shock decreases the annual GDP growth rate in a maximum value of 0.15%.
It means that the average yearly GDP growth rate will be 3.35% versus 3.5% of baseline scenario.
In addition, in this paper the carbon tax is compared to other policies: introduction of renewable
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
energy source and a sectorial cap. The results show that the same emission reduction can be gotten
with these policies but the macroeconomic impacts are lower.
Keywords: climate change, carbon tax, macroeconomic models, DSGE, generation expansion
planning, renewable energy
1. Introduction
Chile is a minor contributor to global GHG emissions (0.2%), however, its emissions
has grown by 232% over a 16-year period (1990-2006), according to the national GHG
inventory, see Figure 1 ( Ministry of Environment, 2011). These statistics also show
that the energy sector is responsible of the major amount. By 2011, the GHG emissions
from the energy sector reached 76.3 million ton CO2 eq., and electricity generation
sector reached 61.8 TWh (electricity consumption). Carbon intensity reached 0.49 kg
CO2/2005 USD (0.29 kg CO2/2005 USD PPP) (International Energy Agency, 2011).
Chile’s motivation to contribute to worldwide emissions reductions stems from
the United Nations Framework Convention on Climate Change (UNFCCC) and its
principle of common but differentiated responsibilities. The country intends to
contribute to achieving the ultimate objective of the Convention by undertaking
mitigation actions, as well as to take advantage of the potential environmental and
social benefits and improvements in the quality of growth that can be directly derived
from mitigation actions. In this line, “Chile will take nationally appropriate mitigation
actions to achieve a 20% deviation below the “Business as Usual” emissions growth
trajectory by 2020, as projected from year 2007 according to the commitment of Chile
at Copenhagen in 2010.
A more comprehensive analysis will help to exactly establish how Chile will
fulfil its commitment to achieve a 20 per cent reduction below the ‘business as usual’
emissions growth trajectory in year 2020. This paper aims to analyse the impact of a
2
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
specific economic instrument: a carbon tax applied to electricity generation sector. A
carbon tax would achieve reduce the GHG emission through two broad effects – a
demand effect, reducing energy demand due to higher prices in the electricity sector but
also in the whole economy, and a substitution effect, with switching from more to less
carbon intensive fuels. The second effect is analysed in this paper.
Figure 1: Chilean national inventory by sector
Carbon taxes have mostly been implemented in Scandinavian countries, Australia, and a
few other European countries. Finland (1990), Sweden (1991), Norway (1991) and
Denmark (1992) led the way in implementing a carbon tax (SBS, 2013).
Most previous studies have used computable general equilibrium (CGE) model to
analyses the economic implication of the mitigation actions.
In the LMTS process in South Africa (Vorster, Winkler, & Jooste, 2011)
(Winkler, 2010) a MARKAL modelling results considered the direct effects in the
energy sector only and economy-wide analysis was carried out using a CGE model. The
CGE analysis converted a given level of a CO2 tax to a comparative tax on coal, crude
oil or natural gas used as intermediate inputs in production processes. In (Mongelli,
3
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Tassielli, & Notarnicola, 2009) an IO matrix is used to estimate the short-term effects of
a carbon tax in Italy, which include the percentage increase in prices and the increase in
the imports of commodities to substitute domestically produced ones as intermediate
input.
Sectorial model also have been used in previous studies. In (Zang, 2012) a fuzzy
mixed-integer energy planning model under carbon tax policy is developed. In
(Kainuma, Matsuoka, Morita, & Hibino, 1999) an end-use energy model is presented
for assessing policy options to reduce greenhouse gas emissions. This model evaluates
the effects of imposing a carbon tax on various carbon emitting technologies in order to
reduce CO2 emissions. In (Careri, Genesi, Marannino, & Montagna, 2011) the impact of
renewable energy source incentives and mitigation policies (feed-in tariffs, quota
obligation, emission trade, and carbon tax) are considered in the framework of the
generation planning problem to be solved by a generation company. Renewable energy
quota and emission limits result in a set of new constraints to be included in a traditional
generation expansion planning model. In (Chen, Kang, Xia, & Zhong, 2010) an
integrated power generation expansion planning model towards low-carbon economy is
proposed.
In this paper both energy sectorial model and DSGE have been implemented.
We have selected a DSGE model instead of a CGE model. DGSE and CGE modelling
have in common that they belong to the micro founded macroeconomic models of
general equilibrium, but they differ in two important issues regarding modelling results:
dynamics and uncertainty. DSGE models are strictly dynamic models, while CGE
models are comparatively static ones. “Dynamic” or recursively-dynamic CGE models
can only be achieved by considering perfect foresighted agents or myopic agents. The
dynamic characterization of the models allows for optimal decision rules that are not
4
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
policy invariant, and where time is directly considered. This characterization has gained
in terms of allowing analysing the paths of the variables behaviour instead of comparing
different equilibriums, and by analysing the reachability of them, relative to the static
characterization. The treatment of uncertainty in the DSGE models makes them get
ahead over CGE models, which are deterministic, because it allows a better fit of the
theoretical models with the data. These features are causing a shift from CGE to DSGE
modelling, becoming a valuable tool for assessing policy analysis, mechanisms analysis
and projections (Del Negro & Schorfheide, 2012).
In Chile there are two main independent power systems, the Central
Interconnected System (Sistema Interconectado Central, SIC), and the Norte Grande
Interconnected System (Sistema Interconectado del Norte Grande, SING). Figure 2 and
Figure 3 show the historical generation by source for the SIC and SING, respectively.
The hydroelectricity generation is one of the main source in the SIC, while in the SING
coal is one of the main energy sources.
Chile has a big potential to produce electricity with renewable energy sources,
such as hydroelectric (12,000 MW), solar (1,000,000 MW), wind (40,000 MW) and
geothermal (16,000 MW) sources (Energy Ministry, GIZ, 2014). However, some issues
have affected the development of this technology in Chile. In the case of solar and wind
energy, there is uncertainty related to the evolution of the investment cost in the future
and the access to long term contracts constitutes a barrier for project developments.
In the case of hydroelectric source, environmental problems have faced some
projects. For example, the hydroelectric generation potential of the Aysén region has
been estimated in more than 7,000 MW. Two specific projects have been evaluated in
this zone: HidroAysen (2,750 MW) and Cuervo (640 MW). However, these projects
have had the opposition of several groups due to these will install in a pristine region of
5
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Patagonia, known for glaciers and lakes. In addition, these projects require a
transmission line of more than 2,000 km to inject its energy to SIC power system. The
first project presented its environmental evaluation in year 2008, and was approved in
May of 2011. However an action complaint against environmental resolution was
presented which have to be solved by a Minister Committee. The final resolution of this
was extend for more than 3 years. Finally, the environmental evaluation was rejected by
the current Minister Committee. The environmental evaluation of the transmission line
has not been presented.
Figure 2: Electricity generation by sources, SIC 1999-2012.
Figure 3: Electricity generation by sources, SING 1999-2012.
6
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
To overcome the shortfall of Argentina natural gas, in Chile two LNG terminals were
build: Mejillones and Quintero. The first began to operate by 2009. However, currently
it is operating below its maximum capacity due to the high price of the LNG in
comparison to electricity generation form coal source (see Figure 3). In the case of
Quintero LNG terminal, it is operating full capacity. Four companies share the property
of this terminal: British Gas, ENAP, which is a state refiner, METROGAS, which is a
private gas distributor, and ENDESA, which is a one of the bigger private electricity
generation company in Chile. Apart of ENDESA, there other companies which have
natural gas power plant (for example Nehuenco [785 MW] and Nueva Renca [305
MW]), however, these do not have open access to the terminal. Sometimes
METROGAS or ENAP has sold gas some gas surplaces to these companies, but at a
high price. There are uncertainties about the access to the terminal to get gas at
competitive prices or the access using an own terminal.
To capture these uncertainties, a sensitivity analysis is proposed to manage the
following aspects: solar PV technology investment cost, projection for LNG prices, and
potential use of hydroelectric resource of extreme south of Chile. The baseline scenarios
depend on these uncertainties and, therefore, the effectiveness of the carbon tax too.
The main contributions of this paper are:

Analyse the impact of the carbon tax at the Chilean electricity sector using
both a sectorial model and a DSGE model.

Propose a novel approach to integrate results from the sectorial model and the
DSGE model.
7
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
The paper is organized in four sections. In Section II, the methodological approach and
implementation is presented. Section III presents the results and analysis of the Chilean
case. Finally, in Section IV the main conclusions are summarized.
2. Methodology
2.1 Overview description
Figure 4 shows an overview of our approach to solve the problem. A generation
expansion planning model is developed. The models for industrial transport and CPR
sectors (commercial, public and residential) project the electricity demand which is an
input for the generation expansion planning model. In this iteration, the sectorial models
are run considering a base value for the GDP projection and considering a carbon tax
applied to the electricity generation sector. The electricity price got from the electricity
generation sector is an input for the DSGE model (price shock). This model could give
updated GDP projection according to the electricity price variation caused by the carbon
tax. In that scenario, the information would run from the macroeconomic model to the
sectorial models, and vice versa, until reaching the convergence for the GDP.
2.2 Energy sectorial model
Generation expansion planning model
The objective of this model is to determine the optimal mix of power generation to meet
projected demand. We formulate the problem as if planning was matched by a central or
state government. The objective function is to minimize the capital costs in new plants,
the variable cost related to fuel consumption, variable cost associated to non-fuel
consumption, and the cost of unserved energy. In addition, the objective function
includes a penalty for the GHG emission generated:
8
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
∑𝑇𝑡(∑𝑁
𝑖
∆𝑡 𝐼𝑖𝑡 𝑃𝑖𝑡
(1+𝑟)𝑡
+ ∑𝑁
𝑖
∆𝑡 𝐶𝑖𝑡 𝐺𝑖𝑡
(1+𝑟)𝑡
+ ∑𝑁
𝑖
∆𝑡 𝑓𝑡 𝐸𝑖 𝐺𝑖𝑡
(1+𝑟)𝑡
)
(1)
where the optimization problem variables 𝑃𝑖𝑡 (MW) and 𝐺𝑖𝑡 (MWh) are the additional
installed capacity and the electricity generation, respectively. 𝐼𝑖𝑡 is the capital cost
annuity (US$/MW), 𝐶𝑖𝑡 is the variable cost (fuel and non-fuel cost) (US$/MWh), 𝐸𝑖
(ton CO2/MWh) is the emission factor for each kind of technology, 𝑓𝑡 (US$/ton CO2) is
the carbon tax and r is the discount rate. The factor 𝑓𝑡 will take the values of 10, 20 and
30, 40, and US$/tCO2e between 2017 and 2030.
The problem is subject to the following constraints:

Energy balance between the electricity generations and load. A multi-nodal
formulation is used to represent the interconnection between SIC and SING.

Upper and lower bounds to appropriate limits to the electricity generations.
Maximum feasible amount of investment for each kind of technology that
could happen in a year.

Maximum feasible amount of investment for each kind of technology for the
total period. Potential capacity for hydroelectric run-of-river power plants
2014-2015 is set according potential projects which are under evaluation. In
the case of geothermal energy, a conservative expectative is assumed in
comparison with previous works in Chile (Comité Técnico de la Plataforma
Escenarios Energéticos 2030, 2013).

Quota obligation to renewable energy generation according to new renewable
energy law (20% by 2025).
Other assumptions:
9
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector

Technical parameters of the electricity generation plants were obtained from
ISOs web pages (CDEC-SIC) and (CDEC-SING).

Projects which are been building were collected from reports published by the
national regulatory institution (National Energy Comission, 2013) (National
Energy Comission, 2013a).

Hydroelectric-dam plants can regulate it generation during every stage. On the
contrary, hydraulic-run of river and small hydroelectric plants are not able to
regulate.

Minimum technical power is considered for coal and LNG power plants. This
constraint avoids starts up and shut down between blocks in a same stage.

Investment costs for the first year were obtained from (National Energy
Comission, 2013) (National Energy Comission, 2013a) (National Energy
Comission, 2014) (National Energy Comission, 2014 a). The projection is based
on growth rate used in (Comité Técnico de la Plataforma Escenarios Energéticos
2030, 2013).

The interconnection between SIC and SING power systems is simulated by year
2019.

Baseline scenario does not consider nuclear energy.
For the below example, a decrease of the GDP induced by a carbon tax applied in the
electricity sector will cause an increase of the energy prices.
10
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Figure 4: General description of the Chilean approach.
2.3 Macroeconomic model
A DSGE model for the Chilean economy is used for this exercise. This model was
developed by Medina and Soto at (Medina & Soto, 2006). The Figure 5 represents the
structure of the main agents involved in this model. There is a continuum of households
and different types of firms in the economy. Households live infinitely, take decisions
on consumption and savings, and set wages in a staggered way. There is a set of firms
that produce differentiated varieties of tradable intermediate goods using labour and
capital. They have monopoly power over the varieties they produce and set prices in a
staggered way. Another set of firms are importers that distribute domestically different
varieties of foreign intermediate varieties. These firms have monopoly power over the
varieties they distribute, and also set prices in a staggered fashion. There is a third single
firm that produces a commodity good which is completely exported abroad. This firm
has no market power: it the international price of the commodity good as given.
Production by this firm is exogenously determined and requires no inputs. Its revenues
are owned by the government and by foreign investors.
11
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Domestic and foreign intermediate varieties are used to assemble two final
goods: home and foreign goods. These two final goods are combined into a bundle
consumed by household, another bundle consumed by the government and a third
bundle that corresponds to new capital goods that are accumulated to increase the
capital stock.
Figure 5: General description of DSGE model
Adapting DSGE following (Medina & Soto, 2007) model for the Chilean economy
we calibrate the performance of the price of energy by using the historical data of
National Energy Balance from 1990 to 2012. A composite of energy is generated as:
𝐸𝑡 = ∑ 𝛼𝑗 𝐸𝑗
(2)
In the last equation 𝐸𝑡 is the total energy resulting from the sum of each “j” energy
source 𝐸𝑗 weighted by of their relative prices (𝛼𝑗 ). One of these energy sources is the
electricity. With 𝐸𝑡 we will estimate with Bayesian approach the elasticity of
substitution in order to update the current elasticity of the DSGE model (Medina &
Soto, 2007) and obtain the parameters of the model.
Moreover, the share of the energy by the total output of the economy would be
modified with the productivity according the indirect productivity of the expenditure of
energy by output 𝐸𝑡 /𝐺𝐷𝑃.
12
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
The electricity price got from the electricity generation sector for these different
scenarios is an input for the DSGE model. After changing energy prices the economy
must move to a new long-run equilibrium. The resulting steady state will show a shift in
the growth rates during the convergence period. The following expression is used to
calculate the energy price difference is:
𝑈𝑆
∆𝑃𝑟𝑖𝑐𝑒 (
)=
𝑀𝑊ℎ
∆𝐶𝐴𝑃𝐸𝑋+∆𝑂𝑃𝐸𝑋+ 𝑇𝐴𝑋
𝑡𝑖𝑛𝑖−𝑡
∑𝑇
𝑡=𝑡𝑖𝑛𝑖 𝐺𝑡 /(1+𝑟)
(3)
Where ∆𝐶𝐴𝑃𝐸𝑋 corresponds to the present value of the variation of the capital
expenditure in power plants in comparison with the baseline scenario, i.e., the case
without carbon tax; ∆𝑂𝑃𝐸𝑋 represents the variation of the operation expenditure, TAX
is the carbon tax that the generation companies should pay due to their GHG emissions,
𝐺𝑡 is the total electricity generation in the year t, tini is the starting year for the carbon
tax application. ∆𝐶𝐴𝑃𝐸𝑋, ∆𝑂𝑃𝐸𝑋, and TAX are outputs of the electricity generation
model.
Upon reaching the new steady state the economy will grow at similar rates
before imposing the tax because of the improvements in productivity and population
growth, but this growth will be based on a lower level due to lower growth rates in the
transition period.
Regarding the implementation of the proposed analysis framework, the
generation expansion planning model was programmed in MATHPROG using a GLPK
distribution and solved by CPLEX MIP solver. The DSGE model was programmed
using DYNARE and MATLAB (Cerda, 2010). The MIP problems were solved with a
gap below 0.03%.
13
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
3. Case study
The impacts of carbon tax on the Chilean electricity generation sector are
evaluated considering five values of carbon tax scenarios: 10, 20, 30, 40, and 50
US$/tCO2e. The carbon tax is applied between 2017 and 2030 to both SING and SIC
power systems.
For this simulation exercise we did several assumptions. An annual exogenous
growth rate of 1.5% and 1.0% for productivity and employment is assumed. For every
scenario we assume that the convergence time of electricity prices to the new
equilibrium is 12 quarters and gradual increases will be linear. The currently price of the
original steady state energy is 105 USD/MWh; it is estimated as the average between
January 2007 and February 2013.
A sensitivity analysis is performed for 3 main parameters which are inputs for
the optimization problem: projection of investment cost in solar PV technology,
projection for LNG prices, and potential use of hydroelectric resource of extreme south
of Chile, see Table I. Considering these uncertainties 4 scenarios are build (see Table
II).
14
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
TABLE I. Sensitivity analyses considering three sources of uncertainties
Solar Investment
LNG Prices
Situation of hydroelectric
Cost
resources at extreme south of
Chile
Case 1: Base situation
Case 1: Base situation
Case 1: No exploitation of
additional hydroelectric resources.
Case 2: More
Case 2: More optimistic
Case 2: An additional potential of
optimistic projection
LNG prices projection for
2,750 MW of hydroelectric source
of solar investment
power plants which have
is considered.
cost, see Annex.
not open access to LNG
terminal, see Annex
TABLE II. Evaluated scenarios
Scenario
Solar
LNG
Exploit the hydroelectric resource of
Investment
Prices
extreme south of Chile
Cost
1
Case 1
Case 1
Case 1
2
Case 2
Case 1
Case 1
3
Case 1
Case 1
Case 2
4
Case 1
Case 2
Case 1
3.1 Electricity generation sector results
The Figure 6 shows the GHG trajectory for the scenarios defined in Table II. These
scenarios are called baseline scenarios (without carbon tax). The carbon tax is applied in
every of these four scenario. Figure 7, Figure 8, Figure 9, and Figure 10 show the total
15
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
emissions (SING and SIC) for the baseline scenarios, in comparison to different carbon
tax values.
Figure 6: GHG trajectory for different baseline scenarios
In addition, different indicators are proposed to compare the impact on the
carbon tax on the electricity generation sector in comparison to the baseline scenario:
OPEX, carbon tax, CAPEX, emission reduction. These values are expressed in present
value and as variation with respect baseline scenario. Also the abatement cost and
average increase of the electricity price in a national level are reported, see Table III.
Then the electricity price rise is evaluated as shock in the DSGE model.
Figure 7: Emissions for baseline scenario #1 in comparison to different scenarios of
carbon tax.
16
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Figure 8: Emissions for baseline scenario #2 in comparison to different scenarios of
carbon tax.
Figure 9: Emissions for baseline scenario #3 in comparison to different scenarios of
carbon tax.
Figure 10 Emissions for baseline scenario #4 in comparison to different scenarios of
carbon tax.
17
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
TABLE III. Indicators associated to the application of carbon tax on the Chilean
electricity generation sector.
Indicators
Scenario #1
Scenario #2
Tax (US$/tCO2)
10
20
30
40
∆ OPEX (M US$)
-151.9
-414.4
-825.8
-1,773.6 -2,573.9 -755.7
INCOME TAX (M US$)
2,074.6 4,091.9 5,955.7 7,080.2
8,318.8
1,902.7 3,378.7
4,869
6,190.1
7,308.9
∆ CAPEX (M US$)
266.3
869.3
1,817.3 4,912.9
6,617.6
1561
3,237.9
4,267.3
5,115.9
6,253.6
Total ∆ Emission (M tCO2e)
-20.6
-29.7
-51.0
-134.2
-168.1
-50.2
-126.9
-151.6
-172.4
-196.7
-1.5
-2.1
-3.6
-9.6
-12.0
-3.6
-9.1
-10.8
-12.3
-14.0
276.4
426.7
416.4
267
253.5
215.5
144.3
165.1
176.5
180.9
4.3
8.9
13.7
20.1
24.3
5.3
9.6
13.3
16.7
20.2
Average ∆ Annual Emission
(M tCO2e)
Abatement Cost (US$/tCO2)
Increase of Electricity Price
(US$/MWh)
Indicators
50
10
20
40
50
-1,716.3 -2,374.6 -2,827.2 -3,310.8
Scenario #3
Scenario #4
Tax (US$/tCO2)
10
∆ OPEX (M US$)
-239.8 -424.9
INCOME TAX (M US$)
1,904
3,757.4 5,511.1 6,886.3
8,139.5
2,096.3 4,124.6 5,923.1 7,006.1
8,451.7
∆ CAPEX (M US$)
321.9
887.2
1,570.9 2,963.9
1,570.9
324.7
877.8
2,093.2 5317.4
6,497.6
Total ∆ Emission (M tCO2e)
-11.5
-20.1
-33.5
-71.9
-102.7
-4.2
-15.7
-43.4
-130.1
-149.7
-0.8
-1.4
-2.4
-5.1
-7.3
-0.3
-1.1
-3.1
-9.3
-10.7
436.1
590.8
560.9
377.9
235.7
1,498.8 928.8
520.3
288.8
297.5
3.9
8.3
12.4
17.0
21.3
4.4
14.1
20.5
24.6
Average ∆ Annual Emission
(M tCO2e)
Abatement Cost (US$/tCO2)
Increase of Electricity Price
(US$/MWh)
20
30
30
40
50
10
-760.4
-1,206.9 -2,113.8 -169.7
20
30
40
-413.7
-863.2
-1,921.2 -2,413.2
9.0
50
As the carbon taxes go up, the electricity sector’s carbon emissions come down. The
operational costs also come down, while the total investment in new power plants
increases and the cost of electricity rises, relative to a business-as-usual scenario. The
total investment increases due the fact that more renewable energy sources are
introduced which have higher investment cost (US$/kW) than coal plants. The highest
emission reduction happens in the scenario 2. This is because the solar investment cost
projection is more optimistic, and the carbon tax promotes the introduction of new non18
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
conventional renewable energy source happens earlier in comparison to scenario 1. On
the contrary, the impact on the carbon tax is low in the scenario 4. This is because this
baseline scenario includes more hydroelectric sources than scenario 2, and then there is
less thermoelectric generation with coal sources. In scenario 3, there is more electricity
generation with LNG source in comparison to scenario 1 (and less with coal
generation). This is because the impact on carbon tax is lower than scenario1. These
results show that the effectiveness of the carbon tax depends on certain variables which
are not controlled by policy makers.
For example, the Table IV shows that a carbon tax of 10-20 US$/tCO2e could
not have a big impact in terms to reduce GHG emissions (the minimum values are 0.3
and 1.1 million tCO2e, respectively).
TABLE IV. Emission reduction and electricity price rise range.
Carbon tax
Average annual emission
Increase of Electricity
(US$/tCO2e)
reduction Range (million
Price Range (US$/MWh)
tCO2e)
10
[0.3, 3.6]
[3.9, 4.4]
20
[1.1, 9.1]
[8.3, 9.6]
30
[2.4,10.8]
[12.4,14.1]
40
[5.1,12.3]
[16.7,20.5]
50
[7.3,14.0]
[20.2,24.6]
19
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
3.2 Macroeconomic results
The effect of taxing CO2 emissions in the electricity sector on the path of gross
domestic product (GDP) is evaluated. Figure 11, Figure 12, Figure 13, and Figure 14
show the results for the four scenarios evaluated which are compared with respect to the
baseline scenario. These figures show the annual GDP reduction (percentage over
baseline deviations) which varies between 1 and 6%.The highest GDP reduction
happens between 2021 and 2025.
It is important to note this analysis is not considering recycling of the results (tax
collection is not reinvested at the economy) so the cases presented below can be
considered as the worst case (maximum negative effect) of this instruments over the
GDP path.
Figure 11: Effect on the level of GDP (% over baseline deviations). Scenario #1.
20
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Figure 12: Effect on the level of GDP (% over baseline deviations). Scenario #2.
Figure 13: Effect on the level of GDP (% over baseline deviations). Scenario #3.
21
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Figure 14: Effect on the level of GDP (% over baseline deviations). Scenario #4.
The Table V shows the equivalent average annual GDP growth observed after
the carbon tax is applied (for the period 2017-2030). We can see the most important
effect over the GDP growth is observed at the Scenarios 1 and 2 for the tax value of 50
US$/tCO2e, where the average yearly GDP growth rate will be 3.11% versus 3.5% of
baseline scenario (reduction of 0.4%).
TABLE V. Effect on GDP growth for different tax levels and scenarios
Scenario 1
Carbon tax
(US$/tCO2e)
Scenario 2
Scenario 3
Scenario 4
GDP
Reductio
GDP
Reductio
GDP
Reductio
GDP
Reductio
growth
n (%)
growth
n (%)
growth
n (%)
growth
n (%)
(%)
(%)
(%)
(%)
10
3.43%
0.1%
3.42%
0.1%
3.44%
0.1%
3.43%
0.1%
20
3.36%
0.1%
3.35%
0.2%
3.37%
0.2%
3.36%
0.2%
30
3.28%
0.2%
3.29%
0.2%
3.30%
0.2%
3.28%
0.2%
40
3.18%
0.3%
3.23%
0.3%
3.23%
0.3%
3.17%
0.3%
50
3.11%
0.4%
3.18%
0.3%
3.16%
0.3%
3.11%
0.3%
22
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
3.3 Comparison to other policies
We compare the carbon tax with other policies that stockholders can apply in order to
reduce GHG emissions: introduction of renewable energy source and a sectorial cap.
Currently Chile has a non-conventional renewable energy (NCRE) law, based on a
quota system, which states that the 20% of energy sales have to be provided by NCRE
source by 2025. We evaluated to increase this percentage to 25% by 2030 (25/30) and
30% by 2030 (30/30). The Table IV shows the results for the Scenario 1 of Table II.
TABLE VI. Evaluation of a change to currently non-conventional renewable
energy law.
Indicator
25/30
30/30
∆ OPEX (M US$)
-34.8
-225.2
∆ INCOME TAX (M US$)
0.0
0.0
∆ CAPEX (M US$)
550.5
1431.3
Total ∆ Emission (M tCO2e)
-19.9
-33.3
Average ∆Annual Emission (M tCO2e)
-1.4
-2.4
Abatement Cost (US$/tCO2)
99.5
150.7
∆ Electricity Price (US$/MWh)
1.0
2.4
23
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
The emission reduction of the 25/30 case is similar to the emission reduction of 10
US$/tCO2e carbon tax case, and the emission reduction of the 30/30 case is similar to
the emission reduction of 20 US$/tCO2e carbon tax case. However, electricity price
increase is lower in both cases. Therefore, the impact on GDP will be lower.
Additionally, a sectorial cap in the electricity generation sector is evaluated. The
results are shown in Table V. The simulations were done considering an emission cap
equals to the emission trajectory when the carbon tax is applied. The cap is introduced
in the optimization problem as a constraint. The emission reduction is the same,
however, the result shows the electricity price increase is lower than the carbon tax
cases; therefore, the impact on GDP will be lower.
TABLE VII. Indicators associated to the application of sectorial cap on the
Chilean electricity generation sector.
Indicator
Cap 1
Cap 2
Cap 2
Cap 3
Cap 4
∆ OPEX (M US$)
-156.3
-418.5
-812.0
-1785.8
-2593.3
∆ INCOME TAX
0.0
0.0
0.0
0.0
0.0
∆ CAPEX (M US$)
248.4
879.4
1816.2
4928.6
6642.2
∆ Emission
-20.8
-29.7
-51.1
-134.3
-168.3
-1.5
-2.1
-3.7
-9.6
-12.0
Abatement Cost (US$/tCO2)
11.5
43.0
60.0
81.9
82.8
∆ Electricity Price (US$/MWh)
0.2
0.9
2.0
6.2
8.0
(M US$)
(M tCO2e)
Average ∆ Annual Emission
(M tCO2e)
24
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Where:

Cap1: the emission cap is equal to the emission reduction that we got when the
carbon tax of 10 US$/tCO2 is applied (scenario 1)

Cap2: the emission cap is equal to the emission reduction that we got when the
carbon tax of 20 US$/tCO2 is applied (scenario 1)

Cap3: the emission cap is equal to the emission reduction that we got when the
carbon tax of 30 US$/tCO2 is applied (scenario 1)

Cap4: the emission cap is equal to the emission reduction that we got when the
carbon tax of 40 US$/tCO2 is applied (scenario 1)

Cap5: the emission cap is equal to the emission reduction that we got when the
carbon tax of 50 US$/tCO2 is applied (scenario 1)
The effect of NCRE law modifications and sectorial cap over the path of gross domestic
product (GDP) with respect to the baseline scenario is showed in the Figure 15. The
highest GDP reduction happens between 2021 and 2025. This reduction (percentage
over baseline deviations) varies between 0.05 and 2%.
25
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Figure 15: Effect of NCRE law modifications and sectorial caps on the level of GDP (%
over baseline deviations).
4. Conclusions
The economy-wide implications of a carbon tax applied in the Chilean electricity
market were successfully evaluated. A novel approach is proposed to integrate results
from the electricity generation model and the DSGE model. The results show that the
effectiveness of this policy depends on some variables which are not controlled by
policy maker such as non-conventional renewable energies investment cost projection,
price of LNG, and exploit of hydroelectric resources. For example, in a scenario with
carbon tax of 20 US$, the annual average emission reduction should be between 1.1 and
9.1 M tCO2e. However, the price of the electricity (electricity generation level) should
increase between 8.3 and 9.6 US$/MWh, which is equivalent to a 7.4% and 8.5% with
respect to currently electricity price. This shock decreases the annual GDP growth rate
in a maximum value of 0.15%. It means that the average yearly GDP growth rate will
be 3.35% versus 3.5% of baseline scenario.
On the other hand, alternative policies were evaluated getting interesting results.
The results show that the same emission reduction can be achieved with these policies
with lower macroeconomic impacts. Nevertheless, it is important to note that in the case
of carbon tax recycling is not considered in the macroeconomic evaluation.
ANNEX
Figure 16 shows the investment costs in the power generation sector that were
considered for the preliminary calibration for the SIC and the SING.
26
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Figure 17 shows the LNG prices projection considered in this paper.
Figure 16: Investment cost (US$/kW)
Figure 17: LNG prices projection. LNG 1 SIC and LNG 1 SING are the prices of LNG
for plants which have open access to the LNG terminal in SIC and SING, respectively.
LNG 2 SIC and LNG 2 SING is the price for plant which have not open access to LNG
terminal.
ACKNOWLEDGMENTS
The paper was supported by Climate and Development Knowledge Network (CDKN)
and MAPS Programme.
27
Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
Disclaimer
This document is an output from a project funded by the UK Department for
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International Cooperation (DGIS) for the benefit of developing countries. However, the
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Copyright © 2014, Climate and Development Knowledge Network. All rights reserved
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Economy-Wide Implications of a Carbon Tax in the Chilean Electricity Generation Sector
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