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Welfare Analysis of an Optimal Carbon Tax in Chile

Cristian Espinosa () and Jorge Fornero
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Cristian Espinosa: Central Bank of Chile

Revista de Analisis Economico – Economic Analysis Review, 2014, vol. 29, issue 2, 75-111

Abstract: We analyze a dynamic stochastic general equilibrium model which includes a negative externality that arises from fossil fuels burnings. 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 degrees of commitment to reduce emissions.

Keywords: DSGE; climate change; CO2 emissions; optimal taxation; carbon tax (search for similar items in EconPapers)
JEL-codes: E32 H21 Q54 Q58 (search for similar items in EconPapers)
Date: 2014
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