Chile is first South American country to tax carbon

Palacio de la Moneda

On Friday (Sept. 26) Chile’s President Michelle Bachelet enacted new environmental tax legislation that will make the country the first in South American to tax carbon dioxide emissions.

Currently, 80% of Chile’s energy comes from fossil fuels. This tax aims to meet Chile’s voluntary target of reducing this fossil fuel dependence by 20% by 2020, based on 2007 emissions levels. Chile will start measuring emissions in 2017 and the tax itself will be implemented in 2018. The carbon tax targets the power sector, especially generators operating thermal plants with installed capacity equal to or greater than 50 megawatts. These plants will be charged $5 per ton of carbon dioxide released. Thermal plants fueled by biomass and smaller installations are exempt.

Four companies are expected to incur most of the tax: Endesa, AES Gener, Colbún and E.CL. These companies have indicated that their electricity prices will rise as a consequence of the tax. They have also complained that other industrial sectors have not been taxed under this reform.

This carbon tax comes as part of an overall reform in Chile’s tax regime. The Chilean government expects to collect about $160 million from this carbon tax. This is a relatively small proportion of the overall additional revenue expected in the general tax reform ($8.3 billion).

The carbon tax itself differs somewhat from what other nearby countries have implemented. Mexico recently placed a tax on the sale of several fossil fuels based on their carbon content. This tax averaged at $3 per tonne of carbon dioxide. Mexican companies are able to use carbon credits to reduce their tax bills. This is not the case with the Chilean carbon tax. Chile’s tax also differs from Costa Rica’s environmental tax that focuses only on gasoline sales.