Chile Follows Mexico, Wants to Tax Carbon Emissions

Chile's government wants to impose a tax on carbon dioxide (CO2) emissions from thermal power plants, the second major economy in Latin America to resort to environmental taxation to discourage the use of carbon-intensive fuels.

On Jan. 1, Mexico imposed a tax on several types of fossil fuels, including gasoline, averaging $3 per metric ton of CO2.

According to the proposal presented this week by Chile's President Michelle Bachelet, a center-left politician who returned to the helm of the country on March 11, Chile will charge thermal power generators $5 per metric ton of CO2 emitted.

In a similar way as to what happened in Mexico last year, a carbon tax in Chile is part of a broader fiscal reform sought by the government to increase revenues and fund new social policies.

"This measure has the objective to encourage the shift to clean technologies," said the government about the environmental tax in a message sent to Congress this week presenting the reform bill.

The $5 per metric ton of CO2 tax will be applied, if approved by the Congress, to thermal power plants with a generation capacity equal or higher than 50 megawatts.

Smaller power units will be exempt.

Bachelet had criticized the heavy use of fossil fuels to generate energy in Chile during her campaign to the presidency.

Around 80 percent of Chile's energy is based on fossil fuels, mostly imported oil and coal.

The country has a voluntary target to reduce greenhouse gas emissions 20 percent by 2020, from 2007 levels.

Chile's new environmental minister, Pablo Badenier, said he expected the new tax to force power companies to change their projects towards less polluting systems.

"These companies can incorporate technologies to reduce pollutants or simply change the fuel they use," he said to local media.

"Once you have the taxation in place, you open a range of possibilities to reduce emissions," he added.

Besides carbon, the new environmental tax targets other chemicals such as nitrogen oxide and sulfur dioxide.

An extra levy will also apply to imports of diesel-fueled vehicles.

Companies complained about the carbon taxation.

AES Gener said the sector already has strict environmental rules and that the new tribute will likely increase the cost of energy for consumers.

GDF Suez said it was not against the environmental tax, in principle, but that it should apply also to other industrial sectors and not only to power generation.

Chile's power generators association will evaluate the impact of the measure, but said it would possibly increase the price for electricity.

The government expects the broad fiscal reform to increase its tax take by $8.2 billion a year.

The environmental tax would contribute with $162 million.

A study from Boston Consulting Group estimated the amount to be bigger. It said the power generation sector in Chile will pay around $350 million related to the tax on CO2 emissions in 2018, the year the tribute should be implemented.

(By Marcelo Teixeira; Editing by Bernard Orr)