A carbon tax on agriculture? A CGE analysis for Chile

Abstract

This paper evaluates the implementation of a tax on CO₂ equivalent (CO₂eq) emissions produced by the agricultural sector. Computable general equilibrium (CGE) simulations consider tax rates ranging from $5 to $131 USD/ton CO₂eq with sensitivity analyses. We find that a tax applied only to agricultural emissions makes agriculture less competitive and, thus, reduces its production. Real GDP falls from 0.00–0.01% to 0.12–0.40% as a result, and total emissions decline from 0.07–0.10% to 1.79–2.25%. The tax is slightly regressive. We conclude that the tax on just agriculture does not substantially reduce emissions. Indeed, we find it is more efficient to apply the tax across the board, while subsidizing the forestry.

KEYWORDS:

• Environmental taxes
• CO₂ equivalent emissions
• CGE

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Measurement unit used to indicate the global warming potential of each GHG, compared to CO₂.

2 World Bank data on CO₂ emissions (metric tons per capita), available online in October 2019 at https://data.worldbank.org/indicator/EN.ATM.CO2E.PC?view=map

3 It is important to remark that a tax of $5 USD/ton CO₂ started been collected in Chile in 2017, while the data used to calibrate the model corresponds to the base year 2013, so the baseline scenario was not affected by this policy.

4 Except for a recent ‘green' tax on the purchase of new vehicles whose tax rate depends on the price and the emission factor (g/km) of the vehicle. However, this tax is not applied to old vehicles nor to the intensity of use that the vehicle actually has; therefore, it is not strictly an environmental tax.

5 The rationale for choosing these tax rates is as follows. Chile already has an environmental tax of $5 USD/ton CO₂ for fixed sources. As a result, this initial rate was considered for the agricultural sector. The World Bank (2016) points out that three-quarters of emission taxes currently applied around the world have a value of less than $10 USD/ton CO₂ and that international emissions trading would generate a carbon price of around $74 USD/ton CO₂ if all countries reached their reduction targets by 2030. Tol (2011) has estimated that the social cost of carbon emissions is about $49 USD/ton CO₂. Currently, Sweden applies the highest carbon tax in the world is $131 USD/ton CO₂ (World Bank, 2016).

6 Specifically, these rates were $0.54 USD/ton CO₂eq for simulation SIM1, $1.07 USD/ton CO₂eq for SIM2, $4.95 USD/ton CO₂eq for SIM3, $7.23 USD/ton CO₂eq for SIM4 and $11.82 USD/ton CO2eq for SIM5.

Additional information

Funding

This work was supported by the Fondo Nacional de Desarrollo Científico y Tecnológico, FONDECYT Regular [grant number 1191303].