Chile
Owing to its mountainous geography, Chile has significant hydroelectric resources that contributed 22.3% of the country’s electricity supply in 2022, down from 30.4% in 2010 and 50.3% in 2005. Chile has experienced severe supply disruptions (e.g. droughts or earthquakes) rendering annual hydroelectricity output highly variable. Biomass in the form of firewood is mostly used for heating and cooking and accounts for around 40% of final energy consumption in Chile’s residential sector. As of December 2022, Chile had an installed capacity of 33.218 MW, of which 62% of the installed capacity corresponds to renewable sources (22.3% hydroelectric; 24.1% solar; 13.0% wind; 2.3% biomass; and 0.3% geothermal) while 38% corresponds to fossil fuels (13.0% coal, 15.1% natural gas and 9.8% crude oil). With little indigenous production of fossil fuels, Chile imports 69% of its total energy supply (TES) in the form of oil products, coal, and natural gas. The country’s imports of natural-gas were solely met by Argentina until 2009, when two liquefied natural gas (LNG) terminals became operational to allow for a greater diversification of suppliers, which now include Trinidad and Tobago, Equatorial Guinea, the United States, Norway and to a lesser extent, the Middle East.
Under the Chilean Constitution, the exploration and extraction of crude oil and natural gas can be carried out either directly by the national oil company ENAP (Empresa Nacional del Petróleo) or by private companies where contracts are established with the Chilean state. Private companies can also participate in imports, refining, storage, and distribution activities. As the owner of the country’s three refineries, ENAP remains the leading company in oil extraction and refining, however it does not compete directly in the retail sector. ENAP owns natural-gas transmission pipelines in the far south of the country, but other companies also operate three major pipelines in the populous central core of the country, as well as three pipelines in the northern region.
The pioneering privatisation and liberalisation of Chile’s electricity sector, starting in the 1980s, was completed in 1998 with the sale of the last state-owned utility, Edelaysen (Empresa Eléctrica de Aysén S.). While there are many distinct power grids in the country, the Sistema Eléctrico Nacional is by far the major one, resulting from the merger, in 2017, of the northern and central-southern grids. In 2016, ENAP was authorised to enter the electricity market and develop projects.
Chile has defined an energy policy whitepaper (2050 Energy Policy) whose main objective is to increase the share of renewable and low-emission fuel types in the energy mix. The country has advanced its energy transformation in recent years despite its historical ties to fossil fuels and copper mining because to widespread political support, private-public collaborations, and cutting-edge green technologies. It has vowed to become carbon neutral by 2050 and has set an ambitious aim of shifting 70% of its whole energy usage to renewable sources by 2030.
In Chile, prices for petroleum-based fuels are set freely by the market. A Specific Excise Tax (Impuesto Específico a los Combustibles, IEC) is levied on transport fuels such as gasoline, liquefied petroleum gas (LPG), compressed natural gas, and diesel. The latter can be recovered as credit in industrial activities, applicable only for road use. The tax rates are expressed in UTM (Unidad Tributaria Mensual), an inflation-tracking currency unit. The IEC has a fixed and a variable component. The floating component was implemented in 2011 and increases or decreases the final rate of the IEC, in order to reduce price volatility for final consumers. Domestic kerosene is covered by the Fondo de Estabilización de Precios del Petróleo (FEPP), described in the following section. However, the low level of taxes keeps end-user fuel prices relatively low compared to other IEA countries.
Since 1991, the Government of Chile has introduced two different price-stabilisation funds for petroleum products. One is the Fondo de Estabilización de Precios del Petróleo (FEPP) and the other was the Fondo de Estabilización de Precios de los Combustibles (FEPCO). Both shared the objective of partially insulating the Chilean economy from fluctuations in the world price of oil. When world prices were high (low), previously accumulated revenues would be used to lower (or raise) domestic prices, thereby applying a tax credit (or taxing) the consumption of petroleum products. The FEPCO programme was then introduced in 2005 to counterbalance a sharp increase in fuel prices that the Petroleum Price Stabilisation Fund (FEPP alone could not address. Over the period between January 2007 and July 2009, credits under FEPCO outweighed taxes by USD 288 million. To maintain a positive balance in the fund in the face of these outflows, the government injected more than USD 760 million, of which only USD 362 million remained when the fund effectively ceased to operate in August 2010. FEPCO has since been replaced by a new system of floating excise taxes, the SIPCO (Sistema de Protección al Contribuyente antes las Variaciones en los Precios Internacionales de los Combustibles), which was then itself replaced by the MEPCO (Mecanismo de Estabilización de Precios de los Combustibles) starting in 2014, which administered an estimated USD 1.2 billion in 2017. The FEPP still operates but since 2011, only covers kerosene for heating in domestic use.
During 2020, to mitigate COVID-19’s adverse economic impact, the Ministry of Energy co-ordinated with fossil fuel companies to ensure stable oil and gas production in Chile’s southernmost region of Magallanes, as well as the transport and distribution of liquid fuels, LPG, LNG and networked gas. The co-ordination and management of the Ministry of Energy through a special Direct Communication Protocol allowed the companies to operate normally in these communities where mobility restrictions were put in place during the pandemic. For end users of networked gas electricity and health services, the Government ordered that these basic services not be cut off in case of customer bill payment delinquencies, in response to the economic crisis generated by the pandemic. The government promulgated Law No. 21,249 of 2020, which exceptionally provides measures in favour of health service, electricity and networked gas consumers, and Law No. 21,340, of 2021, which extends the applicability period of Law No. 21,249. During this period, the government also adopted measures to reduce the impact of the pandemic on the public transport sector through the issuance of support bonos worth CLP 500,000 aimed at owners of public transit vehicles (e.g. buses, taxis) registered as of 1 March 2021 in addition to the price freeze on tariffs of regulated public transportation nation-wide.
In May 2022, as part of the programme Chile Apoya, president Boric’s administration approved a bill that will allow an injection of USD 40 million to the FEPP to contain the prices of electricity and paraffin, to stabilise domestic kerosene prices. The government has also doubled the amounts for its price stabilisation mechanism of fuels (MEPCO) measure, from around USD 750 million in 2020 to USD 1.5 billion in 2021. The amount of the subsidy is directly related to the international prices of kerosene and crude oil, which have tended to rise steadily. During the first quarter of 2022, kerosene has registered a cumulative rise of 70% (35% since Russia's invasion of Ukraine). Because of the war and global supply disruptions, it is estimated that international prices are unlikely to reverse the increases in the short term.
On January 2023 by law 21537 a new version of the MEPCO stabilisation mechanism entered into force, the aim is to change the frequency of adjustment in fuel prices to every three weeks instead of every week. The amendment also seeks to extend the benefit of partial reimbursement of the specific fuel tax for cargo transporters. This initiative responds to the high volatility of international fuel prices, which reached historic highs between May and June 2022. The MEPCO has allowed a slow pass-through of fuel prices, significantly cushioning the pass-through of international prices to the local market.
The fiscal cost of support measures for fossil fuels in Chile was estimated at USD 0.19 billion in 2022 (Table 1). One hundred per cent (100%) was directed at end user beneficiaries, as opposed to 0% directed to firms. Support was mainly given out in the form of tax expenditures (USD 0.12 billion) accounting for 65% of the total fiscal cost of support measures. Direct transfers amounted to USD 0.07 billion.
The fiscal cost of support measures for fossil fuels has decreased by 70% since 2017. Since last year, tax expenditures have decreased by 38%, from USD 0.38 billion to USD 0.12 billion and direct transfers decreased by 2%, from USD 0.07 billion to USD 0.07 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.