Welfare Analysis of an Optimal Carbon Tax in Chile

  • Cristian Espinosa Banco Central
  • Jorge Fornero Banco Central
Keywords: DSGE, climate change, CO2 emissions, optimal taxation, carbon tax.

Abstract

We analyze a dynamic stochastic general equilibrium model which includes a negative externality that arises from fossil fuels burning. 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 and alternative degrees of commitment to reduce emissions.
Published
2014-11-03
How to Cite
Espinosa, C., & Fornero, J. (2014). Welfare Analysis of an Optimal Carbon Tax in Chile. Economic Analysis Review, 29(2), 75-112. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/413
Section
Articles