Carbon pricing aims to capture the social and environmental costs of carbon dioxide (CO2) and other greenhouse gas emissions through the implementation of instruments such as emission taxes or emission trading permit systems (ETS) in order to meet cost-effective monitoring targets and greenhouse gas (GHG) emission reduction targets set and/or regulated by a government.
Carbon pricing provides a price signal so that polluters can choose to stop polluting, reduce their emissions, or continue polluting and pay for it. This mechanism also allows the global environmental objective pursued by the Climate Change Convention to be achieved in a much more flexible manner and at a lower cost to society.
A carbon price has, in turn, important co-benefits such as stimulating investments in clean technology and market innovation, driving new, more sustainable engines of economic growth and encouraging a transition to a lower-carbon economy.
There are two main types of CPIs: 1) carbon taxes, and 2) market mechanisms (mainly emissions trading schemes, or ETS).
A carbon tax directly sets a price on carbon, defining a rate on greenhouse gas emissions or the CO2 content of fossil fuels. Unlike other instruments, the tax does not predefine the outcome of emission reductions.
The Emissions Trading System (ETS) is a market-based instrument designed to reduce GHG emissions. Governments or jurisdictions use them to set a ceiling (cap) on total emissions in one or more sectors of the economy. The companies involved must have permits for each ton emitted into the atmosphere. These permits can be traded (trade or commerce), generating supply and demand for emission permits among market players and, consequently, also greater flexibility in terms of time and formulas to reduce emissions.
The carbon tax sets the price of one metric ton of CO2 (or CO2 equivalent, if emissions of other gases such as methane and nitrous oxide are added together), but it does not ensure that the expected emission reduction will occur. Instead, in emissions trading system the maximum limit to be emitted is set in advance, which ensures that this limit is not exceeded. However, it does not set a specific price, but varies according to the market for emission permits.
An offset is a complementary mechanism to carbon price instruments. It is a measure and/or action to reduce or absorb GHG emissions that makes it possible to reduce in other countries or sectors those emissions that countries or sectors are unable to reduce by offsetting with the use of carbon credits measured in metric tons of carbon dioxide equivalent.
The most common offset systems are those from renewable energy and forestry projects. They follow a full set of validation and verification procedures to demonstrate that they are resulting in emission reductions. Therefore, independent third parties regularly monitor them.
An important offset example is the UNFCCC’s Clean Development Mechanism (CDM), the main global certification standard for projects that have resulted in or are producing emission reductions. Chile was a key user of this mechanism in Latin America with 102 projects registered by 2016, 77 of them in non-conventional renewable energy.
The offsets allow governments and businesses to compensate for their environmental impact in other sectors, support compliance with their emission reduction targets and contribute to national climate change mitigation policies.
By purchasing carbon credits to offset their emissions, companies provide essential financing for renewable energy, forest protection and reforestation, forestry and biodiversity projects that would otherwise not be economically viable.
Many of these projects also bring additional sustainable impacts to local communities and the environment, such as job creation, improved health and well-being and protection of biodiversity.
In 2017, the CO2 tax became effective in Chile, which is equivalent to US$ 5 per metric ton emitted. This value is set by the Ministry of Social Development and seeks to internalize the social and environmental costs of carbon generation. The tax will be applied to establishments whose fixed sources consisting of boilers or turbines individually or as a whole add up to a thermal power greater than or equal to 50 MWt (thermal megawatts) considering the upper limit of the fuel’s energy value.
The Ministry of the Environment, together with the Superintendency of the Environment and the Ministry of Finance are the bodies responsible for defining the regulations and the system of measurement, reporting and verification (MRV) that are being applied to the tax in Chile. As a starting point, the existing Pollutant Release and Transfer Register (PRTR) has been established as the basis for establishing the required MRV regulations and protocols.
GHG emissions measurement, reporting and verification (MRV) systems are a fundamental pillar of any mitigation policy instrument.
An MRV system seeks to employ public protocols and regulations to ensure the same means of measuring, reporting to authorities and verifying the emission of one metric ton of CO2 (or the CO2 equivalence of other GHGs).
The Superintendency of the Environment is the institution in charge of designing and applying systems to monitor, report and verify the emissions affected by said tax, in addition to consolidating the data to inform the Internal Revenue Service and to be able to calculate the tax on establishments subject to payment.
The Pollutant Release and Transfer Register (PRTR) is a catalogue or database containing information on emissions and transfers of potentially harmful chemicals into the environment. It includes information on the nature and quantity of emissions and transfers.
PRTR data in Chile are collected from fixed emission sources (industry), and mobile sources (transport). It covers emissions into the air, water and hazardous waste transported for treatment or final disposal. Decree No. 138/05 of the Ministry of Health obliges the various facilities to report the emissions of various pollutants. For the application of the tax, it has been determined that the PRTR will be used as the base system for establishing and applying the MRV regulations and protocols required to implement the tax in Chile.
The Paris Agreement is a global agreement, which derives from the work of the United Nations Framework Convention on Climate Change (UNFCCC). The agreement was reached in the French capital in December 2015 and entered into force on November 2016. Its main objective is for the signatory countries to implement an action plan to limit global warming.
Governments agreed to keep the global average temperature increase well below 2°C above pre-industrial levels and to increase efforts to limit it to 1.5°C, recognizing that this would significantly reduce the risks and impacts of climate change.
Based on the Agreement, countries define plans with their National Determined Contributions (NDC) to reduce emissions, which will be reported and evaluated every five years with a view to setting more ambitious targets.
The Agreement establishes the responsibility of countries to report on the status of achievement of their targets by establishing provisions on transparency, accountability, governance and environmental integrity.
The implementation of the Paris Agreement includes a solidarity component, which supports countries with fewer resources to reduce their emissions and increase their resilience to the effects of climate change.
Chile has signed the United Nations Framework Agreement on Climate Change (UNFCCC), the Kyoto Protocol and, more recently, the Paris Agreement, recognizing its vulnerability to climate change and the need to agree on the environmental, social and economic impacts of this phenomenon.
Chile has committed itself to efforts around mitigation (reduction of greenhouse gas emissions) and adaptation (compilation of technical background information for the definition of actions for adaptation to climate change in the energy sector), which are reflected in the National Determined Contributions (NDC).
Tentatively, Chile is committed to reducing its CO2 emissions per unit of GDP by 30% by 2030 compared to 2007 considering future economic growth that will allow it to implement appropriate measures to reach this commitment. In the event of international financing, it will be increased to 45%.