Chapter 3. Towards green growth1

An export-oriented and natural-resource based economy, Chile experienced strong economic growth for most of the 2000-15 period. The national Green Growth Strategy is being revamped with a view to better balancing economic, environmental and equity considerations. This chapter presents Chile’s progress in using economic and tax policies to pursue environmental objectives. It analyses public and private investment in environment-related and low-carbon infrastructure, and reviews the promotion of environmental technologies, goods and services as a source of economic growth and jobs. The role of Chile as both a recipient and provider of environment-focused development assistance is also discussed.

1. Introduction

Chile is an open and export-oriented economy. It has experienced a long period of strong economic growth, which has helped reduce poverty and improve the well-being of its citizens, although income distribution remains highly unequal (Figure 1.3). Gross domestic product (GDP) increased by almost 80% between 2000 and 2014, with an annual average growth rate of 4.6%, well above the average of the OECD or Latin American countries (Figure 1.1).

As the world’s largest copper producer and exporter, Chile has benefited from the commodities boom of the 2000s. Growing investment in the mining sector has generated large economic spill-over effects to other sectors, in particular construction.2 This, together with a construction boom following the 2010 earthquake, has helped the economy to recover quickly from the 2009 global economic crisis.3 However, declining raw material prices and lower external demand, notably from the People’s Republic of China (hereafter China), have discouraged investment in mining and resulted in a sharp decline in GDP growth to around 2% in 2014/15. The unemployment rate declined to a record low of 5.9% in 2013, but has been on the rise since (OECD, 2015a).

Chile’s macroeconomic performance has traditionally been strong, characterised by tight monetary policies and a generally balanced fiscal position, guided by a fiscal rule linking public spending to long-term government revenue.4 In 2013/14, both the fiscal deficit and general government debt were significantly below the respective OECD averages (see Basic Statistics). This gave the government some room to implement a strong fiscal stimulus in 2015 (OECD, 2015a).5 GDP grew by 2.2% in 2015 and is expected to accelerate to 2.6% in 2016; however, it will remain below the pre-2014 boom years (OECD, 2015a; EIU, 2015).

Natural resources have been a key driver of growth. Mining, mostly of copper, contributed to 11% of GDP in 2014 (Figure 1.2). Chile is also a major exporter of agricultural goods (notably fish, fruits and wine) and forest products (wood pulp). Forestry contributed 5.2% to national exports in 2013, the third highest value in the OECD after Finland and Sweden (OECD, 2015b). Overall, agriculture, forestry and fishery contributed to 3% of GDP in 2014 (Figure 1.2).

OECD (2016) estimated that the extraction of natural capital contributed nearly 0.2 percentage points to Chile’s GDP growth over 2000-12. This is the second highest value in the OECD and stands in contrast to most other OECD member countries, where natural resource extraction explains only a very small portion of output growth (Figure 3.1). Chile relies mainly on extraction of copper (58%), iron (35%) and gold (8%) to generate income from natural capital.

The strong reliance on natural resources, along with urbanisation and rising living standards, has increased environmental pressures, including air pollution, loss of native forests and sensitive habitats, soil erosion, and soil and water contamination. OECD (2016) estimated that if the growth accounting framework considered greenhouse gas (GHG) emissions, Chile’s GDP growth between 2000 and 2012 would be lower by nearly 0.03 percentage points. This may suggest the country has achieved economic growth at the expense of environmental quality. For most other OECD member countries, accounting for GHG emission abatement leads to an upward adjustment of their economic performance.

The OECD Economic Survey of Chile recommends that Chile further reduce its dependence on natural resources, increasing its knowledge-based contribution to global value chains and boosting productivity, which has been close to zero for much of the past decade (OECD, 2015a). Advancing the 2014 Growth, Innovation and Productivity Agenda, which is meant to broaden the base of the economy, is hence essential. Structural reforms to open the market further to competition will be particularly important to boost investment outside the mining sectors, increasing growth and making it more inclusive and environmentally sustainable.

2. A framework for green growth initiatives

Chile has improved the institutional set-up of its environmental policies with, for example, the creation of a Council of Ministers for Sustainability (Chapter 2). In 2013, Chile launched a Green Growth Strategy, jointly developed by the Ministry of Finance and Ministry of Environment (MMA). In line with the 2009 OECD Declaration on Green Growth, the strategy encourages an extended use of economic instruments to ensure that polluters pay for environmental and social costs, promotes the environmental goods and services market, and calls for monitoring and measuring of the strategy.6 The strategy is based on five principles (prevention, polluter pays, efficiency, gradualism and realism) and proposes actions over different time-scales (Government of Chile, 2013).

The current government is revamping the Green Growth Strategy, with a view to introducing additional principles. These include environmental equity, health, gender, cultural diversity and protection of valuable ecosystems. This shift in focus is linked to the highly skewed income distribution in Chile (Chapter 1). The new strategy aims to be an umbrella for all major sectoral strategies and plans related to green growth, many of which are already underway (e.g. on climate change, biodiversity, energy and air pollution control). Several ministries and the Council of Ministers for Sustainability are involved in the preparation of the revised strategy, and the government plans extensive consultations with the general public. The MMA is also developing a National Programme on Sustainable Consumption and Production, which will constitute a major pillar of the new Green Growth Strategy (Box 3.1).

Box 3.1. The National Programme on Sustainable Consumption and Production

In 2014, the Ministry of Environment (MMA) launched a four-year programme to raise the profile of sustainable consumption and production at the national level. It sought to co‐ordinate the related actions of the public sector, facilitate dialogue with the private sector and develop implementation tools.

A cross-sectoral committee, composed of 18 ministries and public institutions, was established in September 2014 to oversee the development and implementation of the National Programme on Sustainable Consumption and Production. A multi-stakeholder body with representatives from the private sector, civil society and academia was established to advise the committee. The MMA expects the committee to develop an action plan for the programme’s implementation by 2016, including indicators to monitor progress. The action plan’s first phase is expected to be implemented by 2018 (which would include the development of criteria for the definition of green products and a national plan on sustainable procurement, among others).

As a first step, the committee surveyed sustainable consumption and production initiatives across various public institutions, with a view to taking stock of existing efforts and building consensus on definitions and methodologies. The survey identified 157 such initiatives across 16 ministries or agencies. About two-thirds of initiatives target the production side (with most initiatives stemming from the energy, industry and agriculture sectors), while nearly 30% promote sustainable consumption (notably in energy, construction and education). Most sustainable consumption and production initiatives target energy efficiency, but a significant number also focus on areas like eco-labelling and certification, sustainable product design and eco-innovation. The MMA launched most of the initiatives (followed by the ministries for urban development and energy), while the ministries of tourism and public works were the ones that engaged the most in initiatives launched by others.

3. Greening the tax system

3.1. Overview

Total tax revenues measured against GDP have varied considerably over the last decade. In 2014, they equalled 19.8% of GDP, which is well below the OECD average of 34.4%, as well as lower than the average for Latin America and the Caribbean (21.7% in 2014). This is also lower than the tax-to-GDP ratio that most OECD member countries were collecting when they had similar levels of GDP per capita. This suggests there is scope to raise more tax revenues to meet growing public spending needs (OECD, 2015a). Chile’s tax system depends heavily on indirect taxes (mainly value added tax), while personal income tax revenue is very low.7 This is common to most Latin American countries, partly because consumption taxes have a limited impact on export activities and are easier to collect than income taxes; however, it also implies a less progressive tax system (OECD/ECLAC/CIAT/IDB, 2015). The central government collects the bulk of revenues, reflecting Chile’s highly centralised government structure; total tax revenues collected by local governments only equalled 1.5% of GDP in 2014, against an OECD average of 3.9% (in 2013).

In 2014, Chile approved a major tax reform, seeking to reduce the fiscal gap and to finance additional expenditures in education, health and infrastructure. The reform aims to raise an additional 3% of GDP in tax revenue, make the tax system more progressive and reduce income inequality. In line with a recommendation from the 2005 OECD/ECLAC Environmental Performance Review, the reform includes several new environmentally related taxes. A tax on purchases of motor vehicles, with tax rates depending on energy efficiency and nitrogen oxides (NOx) emissions, was introduced in 2015; a tax on emissions of carbon dioxide (CO2) and several local air pollutants will be implemented from 2017. In addition, in 2014, the government introduced a tax on fisheries extraction rights based on the size of the fishing quotas of each industrial operator (Section 3.5).

As the following sections discuss, however, many rates of environmentally related taxes do not reflect the cost of environmental damage. The wide range of preferential tax treatment continues to send contradictory signals. For example, energy use outside the road transport sector is effectively not taxed at all. Tax rates on petrol and, especially, diesel are very low compared to those applied in most OECD member countries. In spite of the low tax rate at the outset, heavy goods transport also gets a refund on diesel taxes paid.

In 2014, revenues from environmentally related taxes were among the lowest of all OECD member countries, amounting to USD 3.1 billion, 1.2% of GDP and 6.1% of total tax revenues (Annex 3.A).8 Between 2000 and 2014, revenues from environmentally related taxes declined as a share of GDP and of total tax revenue, from 1.6% and 8.4%, respectively (Figure 3.2). Several factors contributed to this, including a significant increase in the end-user prices of petrol in line with international fuel prices, which reduced demand of petrol per unit of GDP until 2006 (Figure 3.3); the introduction of fuel price stabilisation mechanisms that lower the fuel tax rate when international fuel prices are above a certain threshold (Section 3.2); and an increased use of diesel, which is taxed at a lower rate than petrol. While total petrol use grew by 22% in 2000-13, diesel use grew by 66%. The increase in diesel use occurred mainly for two reasons: the passenger vehicle fleet partially shifted from petrol to diesel; and freight transport grew strongly, linked to economic growth (the vast majority of heavy goods vehicles run on diesel). This ultimately lowered environmentally related tax revenues compared to GDP, as petrol is more taxed than most other energy products in the economy (Section 3.2).

3.2. Taxes on energy products

In Chile and most other OECD member countries, taxes on energy use generate the largest amount of revenues among environmentally related taxes (Annex 3.A). In 2014, they contributed 77% of environmentally related tax revenues, above the OECD average of 70%, although Chile’s energy tax rates are relatively low in international comparison. Revenues raised on other tax bases (vehicles, pollution and natural resources) are lower in Chile than the OECD average.

Effective tax rates on energy

Chile’s energy taxation only partly reflects environmental externalities, including those linked to climate change and air pollution. OECD (2013a) calculated the implicit tax rates of all energy taxes in OECD member countries, expressed per tonne of CO2 emitted. Figure 3.4 shows that only CO2 emissions from burning petrol and diesel are taxed in Chile, which corresponds to about 20% of emissions associated with energy use in the country (represented by the horizontal axis in the chart). With respect to taxes on energy use, Chile only taxes fuels for road transport. There are no taxes on aviation fuels; diesel used for powering trains is taxed, but enjoys a credit against value added tax (VAT) payments.9 Kerosene for heating and cooking is actually subsidised.

As Figure 3.5 shows, this tax system differs from most other OECD member countries, which apply taxes on other fuels such as coal and natural gas. As a consequence, the effective tax rate on CO2 emissions from energy use is well below that of most OECD member countries, excluding Canada, Mexico and the United States, although above that of most emerging economies.

The petrol-diesel tax gap

Figure 3.6 compares the tax rates on petrol and diesel across all OECD member countries. Chile’s tax rate on petrol is higher than in any other country covered in the Americas,10 Australia and New Zealand, but lower than in the rest of the OECD. And the country has, with the exception of New Zealand, the largest relative difference between the tax rates on petrol and diesel, making the Chilean diesel tax rate exceptionally low. In addition, diesel used in truck cargo transport receives a tax credit. This credit effectively subsidises transport externalities; evidence suggests it has given rise to far-reaching avoidance behaviour, such as setting up companies for the sole purpose of avoiding the tax (OECD, 2013b). The petrol-diesel gap is not consistent with the carbon content of the different fuels and the local pollutants generated by their use.

The much lower tax rate on diesel than on petrol, together with growing freight traffic, has contributed to a marked increase in the share of diesel vehicles in the total vehicle stock since the early 2000s: from 13% to 23% between 2002 and 2014 in the country as a whole, and from 9% to 18% in the Santiago Metropolitan Region (INE, 2015).11 As a consequence, diesel consumption increased more than petrol consumption, which has also contributed to growing NOx and particulate matter (PM) emissions from transport (Figure 3.3; Figure 1.10; Chapter 1). The diesel share in the vehicle fleet in Chile is, however, relatively low compared to most European countries.

Parry and Strand (2012) estimate “corrective” petrol and diesel tax rates for Chile. Such tax rates would reflect all the negative external effects caused by use of these fuels in road transport. Their estimates are USD2006 2.35 and USD2006 2.09 per gallon – approximately EUR 0.47 and EUR 0.42 per litre in current money value – respectively. The authors indicate the petrol estimate is substantially larger than comparable calculations for the United States even though the valuation of travel time and health risk is lower in Chile. They explain those factors are offset by a much higher accident externality in Chile, due to a high incidence of pedestrian fatalities. In addition, they point out that the high percentage of the country’s population residing in Santiago has two important implications: a large share of nationwide driving occurs under congested conditions; and a large share of the population is exposed to high health risks from air pollution.

Box 3.2. Road pricing in Santiago

Toll road concessions, which Chile has been granting to private operators since the 1990s, helped significantly expand the country’s highway network, including around the Santiago Metropolitan Region. Santiago was the world’s first city to implement urban highways almost simultaneously with interoperable free-flow toll charges.a Tolls reflect both the cost of road use and externalities linked to traffic, namely congestion. They increase with the length of road stretches and weight of vehicles, and vary with time of day (off-peak, peak or saturation)b (PPIAF, 2009). Congestion charges have economic and environmental advantages. They allow not only for recovery of investment costs, but also for adequate pricing of limited space, environmental externalities (e.g. air pollution) and fairer competition among different transport modes. Linking the tolls to emission levels and fuel efficiency of vehicles would further stimulate a shift towards cleaner vehicles. Tolls could be extended to critical parts of the untolled network in Santiago (e.g. congested road sections in the city centre); and similar systems could be applied to other major cities.

a. Highways were tendered to different operators. An inter-operable free-flow tele-toll allows users to avoid stopping when paying the toll, passing under a portico that permits information to be exchanged for automatic invoicing.

b. Peak time rates come into effect when traffic reduces the average travelling speed to levels below the road’s design speed; saturation rates come into effect when average speeds are far below the level designed for the road.

Flues and Thomas (2015) analyse the impacts of the motor fuel taxes on income distribution in Chile on the basis of the 2006/07 household expenditure survey.13 The authors look at the share of the sum of these taxes in total income and total expenditure of households in different income and expenditure deciles. They rank households by current income levels, which gives a measure of the short-term distributive impacts of the tax. They find that the low-income deciles of the population spent a much lower share of their income on transport fuels compared to the high-income decile households. Ranking households by current expenditures, which might better represent expected lifetime earnings, give similar results.14 Using both ways of ranking households, transport fuel taxes stand out as progressive in Chile. In other words, the country’s low fuel tax rates largely benefit the richer parts of the population, which spend larger shares of their income on transport fuels; Chile forgoes tax revenues it could spend on programmes benefiting the poorer population.15

Tax exemptions and other fossil fuel subsidies

Chile’s consumer-related fossil fuel support, measured as a share of revenue from energy taxes, is relatively low compared to that of other countries (Figure 3.7). Energy tax revenue in Chile is relatively low, which tends to enlarge the magnitude of support compared to tax raised.16

Prices for petroleum-based fuels are freely set by the refiner and throughout the distribution chain (OECD, 2013b). However, some mechanisms lower fossil fuel prices compared to what they would otherwise be. As indicated above, fuels other than petrol and diesel used for road transport are not taxed, including fuel used in agriculture, fishery, industry, mining and power generation.

In addition, several systems to reduce volatility of fuel prices have been introduced over the years. Most recently, the Fuel Price Stabilisation Mechanism (MEPCO) – introduced in 2014 – applies to transport fuels (petrol, diesel, liquefied and compressed natural gas). Similar to previous systems, the MEPCO adjusts excise rates weekly to keep fuel prices within a given band around a reference price; this is calculated as an average of past and projected fuel prices over a certain time. In practice, this lowers the tax rate when the international fuel price is higher than the threshold, and raises it when the price is below the band. MEPCO expenditure is capped at USD 500 million per quarter. The MEPCO replaced all previous stabilisation mechanisms,17 with the exception of the Petroleum Price Stabilisation Fund (FEPP). Since 2011, the FEPP has applied only to domestic use of kerosene, which is widely used for heating several areas of the country.

The strong decrease in international oil prices since mid-2014 reduces any need for support to vulnerable groups. It should be seen as an opportunity to phase out all remaining fuel price stabilisation measures. These measures should be monitored carefully to ensure they are not functioning as implicit fossil fuel subsidies, which can be fiscally costly and contribute to more fuel use and higher CO2 emissions.

3.3. Tax on emissions from stationary sources

Chile will implement a tax on emissions of CO2, PM, NOx and sulphur dioxide (SO2) beginning 1 January 2017. The tax will be levied on stationary sources with boilers or turbines that generate at least 50 thermal megawatts (MWt); this will affect approximately 100 facilities, particularly fossil fuel-based electricity plants, but also cellulose plants, for example. Given the selected criterion, the tax will not cover a number of facilities with major emissions; these include the country’s copper smelters, which cause large amounts of local air pollution (Chapter 1).

For CO2 emissions, the tax rate has been set to USD 5 per tonne of CO2. The MMA estimates the tax will address around 27% of Chile’s CO2 emissions (Chapter 4). The tax does not apply to stationary sources with boilers or turbines operating on non-conventional renewable energy generation (mainly on biomass). CO2 emissions of plants will be measured as from 2017 and the tax will be charged in 2018.

The tax intends to increase the costs faced by fossil fuel-based power generation, thereby encouraging the shift to low-carbon sources of electricity. The design of the system for auctioning long-term generation contracts, however, will shield some fossil-fuel power generators from the full costs of the tax. In addition, the CO2 tax is designed to limit the pass-through of its costs to households and small businesses, which could reduce its effectiveness in encouraging more efficient consumption. The government should assess the interactions between the electricity market and the CO2 tax, as well as their impacts on the tax effectiveness. If necessary, it should consider wider reforms so that the aims of the tax are not frustrated by other aspects of the electricity market design. Alternative mechanisms could be considered to achieve the distributional objective of sheltering lower-income households from the effect on this tax on electricity prices.

While households are sheltered from increases in electricity prices, major industrial users, including the mining sector, are not. In 2013, for example, mining and quarrying used about 37% of all electricity in Chile. These firms, however, will only be affected indirectly by the tax. From an environmental point of view, it would have been preferable for the tax to affect all major emission sources directly.

The introduction of a CO2 tax element clearly is a step in the right direction. The tax rate chosen, however, is low compared to most available estimates of monetary carbon values (Smith and Braathen, 2015). Hence, it could be desirable to apply a higher tax rate at the outset, and to phase-in further increases gradually. A recent OECD survey of ex post analyses found that various carbon pricing mechanisms in use around the world had few, if any, impacts on sectoral competitiveness (Arlinghaus, 2015).

For emissions of PM, NOx and SO2, the tax will depend on the population in the commune where emissions take place, on the air quality of the commune and on the social costs of different pollutants. The tax rate will be higher for “saturated” (or “latent”) communes, where air quality standards are exceeded (or nearly exceeded). The social costs per unit emitted vary across the three pollutants, with the highest costs attached to a unit of PM2.5 emissions.

The tax takes into account the size of the population affected by the pollution, which is a positive feature. However, the formula only considers the population of the municipality where the emission source is located. As local air pollutants can be transported over relatively large areas, it would be preferable to take the total population in the whole relevant airshed into account when calculating the tax for each polluter. Ideally, it would also be useful to consider other impacts, such as water pollution caused by NOx emissions to air. As with the CO2 component of the tax, it would also be desirable to apply the tax to all major sources, including the mining sector. An ideal tax should cover all sources contributing a given type of pollution. However, continuous monitoring of emissions can be relatively costly. There is, hence, a trade-off as to how much coverage makes environmental and economic sense.

3.4. Vehicle taxes and subsidies

Taxes on motor vehicles

Since January 2015, Chile has been phasing in a tax on new private passenger vehicle registrations. Such a tax can help gradually modify the composition of the car fleet. From an environmental point of view, however, it is less efficient than taxes on vehicle fuels and road pricing because it is not linked to vehicle use.18 A number of OECD member countries apply vehicle taxes that vary with the fuel efficiency or CO2 emissions of the vehicles; fewer countries address local air pollutants in their vehicle taxes (Israel and Norway are among the exceptions). The Chilean tax is differentiated according to the vehicles’ test-cycle urban fuel efficiency, their NOx emissions,19 and their retail price. The government is phasing in the NOx element of the tax gradually; in 2016, this element will be 75% of the full value to be applied from 2017. Since the tax has been applied only for a short period, it is not yet possible to assess its overall impact. Some indications, however, suggest that consumption is changing in the expected directions, with increasing market share for low-emission vehicles.

Figure 3.8 illustrates how the tax varies depending on the NOx emissions for different levels of fuel efficiency. It uses a passenger vehicle with an assumed retail price of approximately USD 10 000 as the example. The tax in per cent of the retail price increases proportionally with NOx emissions. At the Euro-5 NOx emission limit for diesel vehicles, the tax rate is 8% to 9% of the retail price, given the selected fuel efficiency levels. For a petrol vehicle complying with the Euro-5 limit, the tax rate is 3% to 4% (the Euro-5 emission limit is stricter for petrol vehicles than for diesel vehicles). Accordingly, in absolute terms, the petrol vehicle would pay in the order of USD 500 less in tax than the diesel one.

As Figure 3.8 shows, assuming each vehicle is driven 200 000 km over its lifetime, the tax rate per unit of both NOx and CO2 lifetime emissions increases with the price of the vehicle. There is no environmental argument in favour of tying the emission-related components of the tax to retail price: a unit of the two pollutants does the same environmental and health damage whether it stems from a cheap or an expensive vehicle (assuming in the case of NOx that vehicles are driven at places with similar population densities and environmental conditions). The tax per kg of NOx exceeds USD 30 for more expensive vehicles (vehicles with a retail price higher than USD 20 000).20 As a comparison, the NOx element in the Norwegian motor vehicle registration tax is constant at around USD 26, under similar assumptions. On the other hand, the tax on lifetime CO2 emissions is quite low – below the rate of the new tax on CO2 emissions from stationary sources, discussed in the previous section, for all vehicles with a retail price lower than approximately USD 30 000.

The motor vehicle tax does not apply to commercial vehicles since businesses need such vehicles for their activity. There are good reasons to exempt inputs in production activities from taxation; however, the same rationale does not exist for exempting such inputs from taxes meant to ensure the polluter pays all social and environmental costs. The emissions from a combustion engine cause the same environmental damage, regardless of whether vehicles are driven on or off the roads, for business or for private purposes. This could be an additional argument for applying the NOx and CO2 elements of the tax on vehicles used for business purposes, while exempting them from the price element. In addition, sport utility vehicles (SUVs) are exempted from the tax. This seems unfortunate, as it will encourage people who can afford an expensive vehicle to buy large, often energy-inefficient SUVs, rather than other types of high-standard vehicles.

Electrical vehicles are also exempt from this tax. These vehicles cause no direct emissions of greenhouse gas or local air pollutants when driven. In Chile’s case, however, emissions caused through electricity generation should be considered.21 If increased use of electrical vehicles requires more electricity generation in coal-fired power plants, for example, any environmental gain compared to a petrol vehicle could be very modest. The cost effectiveness of this exemption, therefore, could be usefully assessed. As a minimum, application of the price element of the tax could be considered on such vehicles.

Company car taxation

In most OECD member countries, the benefits reaped by individuals who can use a company-owned car are taxed more leniently than other types of income. This has several disadvantages: it results in revenue losses; it is highly regressive; and it leads to negative environmental impacts. One recent OECD study suggests the forgone revenue related to such under-taxation is substantial in many countries (Harding, 2014); Roy (2014) indicates the related environmental and other social costs caused by increased air emissions, more traffic accidents and greater congestion are significantly higher than the estimated forgone revenue.

In Chile, those who benefit from personal use of company-owned cars add at least 20% of the car’s net book value (according to company accounts) to their income. From 2017, the benefit amount will be deemed to be either 20% of the net value book or the annual depreciation applicable to the vehicle in question, whichever of the two is greater.

Harding (2014) developed a “benchmark” for neutral tax treatment of company car benefits relative to cash wage income. Using three different sets of assumptions, the benchmark can help estimate the value of the tax expenditure resulting from the company car tax settings in each country (Figure 3.9). According to these estimates, Chile sits in the mid-range of the countries covered, capturing slightly less than half of the benchmark value. Assuming about 30% of new registered vehicles are company cars, this favourable tax treatment led to approximately USD 103 million in revenues forgone in 2012; this represents about 16.5% of tax revenue from vehicle taxes in the same year.

Tax treatment of company car benefits has become gradually stricter. Still, the variable part of the taxation (related to operational costs such as fuel, insurance and maintenance) could be strengthened. This would provide stronger incentives to reduce distance travelled and yield potential environmental benefits.

Commuting expenses

Employees cannot deduct expenses related to commuting between home and work from their taxable income. Hence, long commuting distances do not benefit from implicit subsidies that can trigger additional peak-hour traffic. But employees also receive no incentive to use public transport, as would be the case if only expenses for public transport use were deductible. Free or subsidised parking spaces provided by the employer are considered to be taxable income for employees, which helps limit the use of private vehicles for commuting purposes.22

Subsidies for cleaner vehicles

In addition to exempting electric cars from the vehicle tax, Chile provides direct subsidies to encourage renewal of the fleet towards less polluting and more fuel-efficient vehicles. The Change Your Truck programme, established in 2009, provides subsidies to replace trucks more than 20 years old with new ones, destroying the old ones in circulation. The old truck had to be replaced by one of equal size that complied with the Euro III or EPA98 standards, which entailed reduced emissions per vehicle. However, when the scheme was introduced, the Euro V standard for heavy duty diesel engines was already in place, demanding 60% and 80% lower emission limits for NOx and PM, respectively. Hence, the environmental requirement of the Chilean programme was not ambitious.

During the three years of the programme implementation, a relatively modest number of vehicles (352) were replaced.23 The Ministry of Energy estimates that the new trucks could drive more than double the distance per litre of fuel than the old ones. In addition, the ministry estimates that replacing an old truck implies a reduction (relative to its emissions) of 81%, 44%, 67% and 17% of CO2, CO, NOx and PM2.5 emissions, respectively. An assessment of the 2011 programme found that the programme was not cost-effective: the value of the fuel savings (CLP 950 million) was less than the amount of grants (CLP 1.1 billion); the programme was discontinued. However, this assessment disregards the cost to society of such a scheme (i.e. the remaining value of the vehicles that were scrapped), as well as the social and environmental benefits, including emission reductions and any improvements in road safety.24 Sufficient information is not available to estimate whether the economic value of the health and environmental benefits of emission reductions exceeded the social costs of the subsidy scheme.25

The Change Your Bus programme provided regions with grants of around CLP 20 billion (around USD 40 million) between 2011 and 2014 for destroying buses at least 12 years old and replacing them with ones at least 5 years younger that had better technologies. The programme approved 3 000 of nearly 5 000 applications. While these replacements probably reduced pollutant emissions, the value of environmental and health impacts versus the value of the scrapped buses was not assessed.

3.5. Taxation of natural resources

Taxes on renewable natural resources

Chile mainly uses market mechanisms to provide incentives for the sustainable use of renewable natural resources. In particular, while there is no tax on water abstractions, water-use rights are freely tradable; this aims to ensure that market prices capture the resource value and reflect scarcity (Chapter 1). Transferable fish quotas are used to regulate use of fish resources (Chapter 5). In 2014, Chile also introduced a tax on fisheries extraction rights, based on the size of the fish quotas of each industrial operator. The amount of tax due is based on the higher of two alternative calculations. The first method depends in part on the price per tonne of each species; the second depends on the volume of transactions and the price during the previous business year. Such a tax should help secure a part of the resource rents related to the fish stocks for society as a whole.

Taxes on non-renewable natural resources

Fiscal revenues from non-renewable natural resources are substantial in Chile, amounting to 2.1% of GDP in 2013, although much less than in other Latin American countries.26 This compares with annual average revenue of 3.5% of GDP in 2005-08 (OECD/ECLAC/CIAT, 2014). The continued slide in copper prices affected mining fiscal revenues, which fell 8% in 2013 alone; they are expected to continue declining (OECD/ECLAC/CIAT/IDB, 2015).

A tax on mining patents (extraction and exploration rights), levied per hectare of land, has been long in place. It accounts, however, for a negligible share of environmentally related tax revenue (Figure 3.2). In 2006, Chile introduced a specific tax on mining. This was in line with the recommendation of the 2005 OECD/ECLAC Environmental Performance Review to increase the financial contribution of the mining sector to social expenditure and to apply the polluter pays principle. The tax amounts to a progressive percentage of the operating income of mining companies. The percentage tax rate increases with company size, measured as annual volume of (extracted and) sold copper, which in part accounts for exploitation of the natural resource. However, the specific tax on mining is more a tax on profits than on extracted minerals. As such, it falls outside the OECD’s definition of environmentally related taxes.27 For that reason, this tax is not included among the environmentally related taxes discussed in previous sections. The tax raised on average an amount equal to 0.45% of GDP between 2007 and 2013, with large variations from year to year. If the environmentally related tax revenue presented in Annex 3.A and Figure 3.2 included the specific tax on mining, it would amount to about 1.4% of GDP (which remains a low value, relative to other OECD countries).

Part of the tax and non-tax revenue from mineral resources is allocated for specific purposes. All revenue from the mining patent tax, for example, is earmarked for the Regional Development Fund and the regions that host mining activities. About 30% of revenue from the specific tax on mining has fed the Innovation Fund for Competitiveness.28 The Ley Reservada del Cobre stipulates that 10% of the value of copper exports of Codelco, Chile’s state-owned copper company, is earmarked for the armed forces, with a minimum annual financial transfer of USD 180 million (Korinek, 2013). This is equal to about 20% of the average revenues raised by the specific tax on mining between 2007 and 2013. Chile could consider reviewing these revenue-earmarking provisions with a view to enhancing government oversight, as well as efficiency and flexibility of fiscal policies.

The period of extraordinarily high commodity prices is seemingly over. Nevertheless, for many governments in Latin America, the experience highlighted the need to appropriate more rents from the exploitation of natural endowments and invest them to ensure long-term development (OECD/ECLAC/CIAT/IDB, 2015). Although hard to measure, natural resource rents are generally thought to be high in Chile (Korinek, 2013). The World Bank estimates they were 19% of GDP in 2008-12 (OECD, 2013c). While the state-owned mining company pays a large portion of taxes, overall taxation of mineral resources appears relatively low in Chile compared to other resource-rich members of the OECD (Pwc, 2016). Both the 2005 OECD/ECLAC Environmental Performance Review and the 2013 OECD Economic Survey recommended that Chile ensure that natural resource rents are sufficiently taxed; actions taken so far appear insufficient (OECD, 2015a; see also Annex A).29

4. Investing in the environment to promote green growth

4.1. Public environmental expenditure

In 2015, Chile published its first comprehensive study on public expenditure on environmental protection in co-operation with the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), covering 30 central government agencies. The study estimated public expenditure at CLP 145 billion (USD 298 million) in 2012, equivalent to CPL 8 900 (USD 18) per person; this represented 0.5% of total public expenditure by central government agencies that year (CEPAL and MMA, 2015).30 This equals an expenditure of 0.1% of GDP, below the shares of regional peers such as Colombia (0.6% of GDP) and Mexico (1%), as well as of most other OECD member countries. Such cross-country comparisons should be treated cautiously, however.31 In particular, Chile’s total environmental expenditure is likely higher, as the 2015 survey excludes large expenditure by private operators, mainly water utilities. Similarly, the survey excludes public environmental expenditure by sub-national government; these amounts, however, are likely to be relatively small given that government is highly centralised.32

Biodiversity and landscape protection attracts more than a quarter of total environmental expenditure (Figure 3.10). Water and sanitation, the sector that commonly attracts most resources, receives a relatively small share in Chile, which is explained by the large role of private operators in financing water-related infrastructure (Section 4.2). Only 4% of total environmental expenditure targets air and climate, despite the considerable health and social impact of air pollution on the country (Chapter 1) and rapidly increasing GHG emissions (Chapter 4). Capital investment, which accounted for about one-third of total environmental expenditure, concentrates heavily on sewerage (e.g. public investment to expand rural sanitation) and waste management (e.g. transfers to regional governments for investment in waste collection equipment and disposal facilities); only CLP 1.8 billion (USD 3.5 million) targeted air and climate in 2012 (Figure 3.10).

Most environmental expenditure occurs outside the auspices of the MMA. The Ministry of Agriculture accounts for the largest share (31%), mainly through the National Forest Corporation (CONAF), which administers Chile’s protected areas (Chapter 5). The Ministry of the Interior, which finances sewage networks and channels resources through regional governments (e.g. for waste management), accounts for 26% of environmental expenditure. The MMA financed 22% of total environmental expenditure in 2012.

The 2015 survey includes only 2012 data. The Ministry of Finance’s budget classifications by government function (DIPRES, 2015) allows the analysis of environmental expenditure over time, although the classification differs from the one used by CEPAL and MMA (2015). Environmental protection expenditure of the central government increased by 174% (in real terms) between 2000 and 2014 (Figure 3.10), more than the total budget (139%). While spending for biodiversity protection increased significantly (Chapter 5), spending on pollution abatement decreased (by 2%) over that period. Public expenditure on water supply increased by 280%, reflecting consecutive years of water scarcity and the increasing priority to secure water supply. In 2014, public spending on water supply was 30% higher than on environmental protection (Figure 3.10).

Chile would benefit from building on these first expenditure accounting efforts. It could periodically repeat the exercise and integrate results into the broader National Environmental Information System (Chapter 2). This would help identify trends in environmental expenditure over time, as well as aid analyses on the effectiveness and efficiency of spending. It could also extend the survey to the sub-national government level and the private sector, given the large share of private environment-related infrastructure investment (notably water supply and sewage; see Section 4.2). Implementation of the Pollution Release and Transfer Register (PRTR) provides a starting point for data collection and analysis for private expenditure and investment. As efforts in this area evolve, mechanisms will be needed to ensure that expenditure analysis feeds into future budget allocation decisions so that budget allocation meets environmental policy priorities.

4.2. Investing in environmental and low-carbon infrastructure

Overview

Chile has a well-developed infrastructure, notably when compared to other Latin American countries. Extensive private investment, largely through public-private partnerships (PPPs) in the form of concessions, has spurred infrastructure expansion since the early 1990s, although public investment has also increased.

Infrastructure needs remain large, however. The Chilean Construction Chamber estimates that Chile needs to invest USD 113 billion in infrastructure between 2014 and 2023 (the equivalent of 5% of GDP on average per year) to maintain its competitiveness; especially in urban roads and public transport systems, energy and water resource development (CCHC, 2014).

While overall government investment is low compared to other regional economies,33 public investment on infrastructure is on the rise. A major public investment package of USD 4 billion was launched in 2009 in response to the global financial crisis, without any environmental or climate component (Robins et al., 2009). In 2014, partly in order to revive the weakened economy (Section 1), President Bachelet presented a National Infrastructure Plan of USD 28 billion until 2021. The plan includes investment worth USD 18 billion in public works such as highways, airports, ports and water reservoirs; this would increase public works spending by a percentage point of GDP (Esposito and Gregorio, 2014). The plan also includes investment in environment-related infrastructure such as public transport. Rather than explicitly aiming to reduce environmental pressures such as greenhouse gas emissions (Chapter 4), however, it mainly seeks to accommodate patterns of demand for transport. Overall, public investment programmes do not systematically consider environmental and climate components or sustainability criteria and indicators in implementation.

Transport infrastructure and urban public transport

Chile’s transport infrastructure has improved considerably over past decades. Concession-based PPPs have helped attract large private investment in the expansion and upgrade of roads, ports, airports and public transit. Investment has focused heavily on the road network in the core regions around Santiago; private involvement in road infrastructure investments in peripheral regions has been low (OECD, 2009). Road pricing applies to most motorways and for the urban highways around Santiago (Box 3.2).

Investment in the rail system has been limited, although reforms in the 1990s revitalised rail freight transport by transferring operations to the private sector. Passenger services virtually disappeared, with the exception of six systems in the central region (and urban rails in Santiago, Valparaíso and Concepción). Maritime transport plays a more important role than in many other economies, given Chile’s geographical location and physical geography. Ports handle approximately 95% of export volume, with domestic supply chains relying heavily on road transport. A new major port on the central coast of Chile will stress hinterland transport infrastructure; and major investment in rail appears needed to avoid congestion (OECD/ITF, 2015). Nonetheless, low-carbon means of transport, such as electric railway and sea freight, remain underused and represent a potential way to improve transport services (OECD, 2009).

Different initiatives and investments have improved, upgraded or expanded the range of public transport in Chilean cities. Much emphasis has been placed in Santiago, as well as Chile’s next major cities, Valparaíso and Concepción (OECD, 2013c). Urban mobility transport in Santiago changed significantly in 2007 with the integrated transport system Transantiago (Box 4.3). However, despite the expansion of its public transport system and the most extensive metro network in South America, Santiago’s roads and metro networks are persistently congested and air pollution from traffic densities is high (Chapter 1). The vehicle fleet grew by 40% over the 2000s in Metropolitan Santiago and is projected to continue growing. Capacity bottlenecks are expected to worsen in several segments of the road network (Box 4.3).

In recent years, the government launched new transport related plans, namely the Santiago 2025 Master Plan and the Plan for Public Transport Infrastructure (Box 4.3). Both plans focus on public transport, which is welcome. They may help address rising GHG emissions from transport and the city’s air quality problems, while reducing economic costs from congestions and social inequalities with respect to mobility.

Investment in renewable energy and energy efficiency

The 2014 Energy Agenda set the goals of generating 20% of energy from non-conventional renewable energy sources (i.e. excluding large hydro), or NCREs,34 and of reducing energy use by 20% compared to business-as-usual by 2025. The economic and social benefits of greater renewables penetration are potentially large: they include increasing GDP by up to USD 1.6 billion between 2013 and 2028, creating 7 700 additional jobs and mitigating 9 000 tonnes of PM2.5 emissions as compared to a baseline scenario (NRDC, 2013).

Investment in renewables has increased sharply in recent years. Factors explaining this growth include: the favourable geographic conditions, the cost-competitiveness of renewable energies with conventional sources and a supportive regulatory framework (Chapter 4). Investment in renewables reached a record high of about USD 2.4 billion in 2015, according to Bloomberg New Energy Finance (Figure 3.11). While investment has focused on small hydro in the 2000s, wind and solar have accounted for the bulk of investment since 2010 (Figure 3.11). The value of imported solar photovoltaic modules increased almost ten-fold in 2008-13, with China and Malaysia supplying more than 80% of imports in 2013 (Borregaard et al., 2015). Chile ranks among the top ten renewable energy export markets for US exporters for 2015-20 (US Department of Commerce, 2012). With a large number of projects in the pipeline (Table 4.4), the outlook for investment and growth in the sector is impressive. Nevertheless, non-conventional renewables are still far from matching their potential, as various financial, technical and regulatory barriers persist (Chapter 4).

The government has facilitated investment in NCREs through a quota obligation,35 investment in research and development, and promotion of market transparency (Chapter 4). In addition, tax and financial incentives have promoted solar thermal systems and other renewables, including in rural areas (Box 4.1). The government has also supported investment to improve energy efficiency in the building and government sectors, among others (Box 4.2). The enactment of a carbon tax (Section 3.3) will further support the competitiveness of renewables.

In parallel, the Economic Development Agency (CORFO), an autonomous government agency for industrial policy development, and the National Energy Commission (CNE) have developed diverse financial instruments to support investment in renewable energy development (Box 3.3). These have helped kick-start the financing of renewables projects in Chile, but finance barriers continue to restrain faster development of renewables capacity. In the solar technology sector, a lack of regulations on certifications or standards for solar modules (which would support longevity, safety and related market guarantees) results in greater risk in terms of guarantees that local Chilean financial institutions often cannot afford (Borregaard et al., 2015). Due to limited local finance, many international organisations like the European Investment Bank, the Inter-American Development Bank or the World Bank have taken the lead in developing projects, notably for larger ones. For example, until recently, most large-scale solar projects were supported through multilateral financing institutions (Borregaard et al., 2015). Private investors from the United States, Europe and China have also been involved (BNEF, 2012).

Box 3.3. Renewables support through the Economic Development Agency

Since 2008, CORFO, in co-operation with the German development bank KfW, has provided long-term, low-cost funding to commercial banks for on-lending to non‐conventional renewable energy projects. By 2011, 15 projects, mostly small hydro, had benefited from support totalling USD 140 million. Even though only 2 of 23 commercial banks participated in the programme, it helped kick-start the financing of renewables projects in Chile. Today, one-third of operating banks in Chile are actively involved in the financing of renewables projects, including wind, photovoltaic and small hydro (Violic, 2015). The loan programme was extended in 2011 (with USD 90 million); three years later, it was expanded to provide targeted support to solar projects (with USD 133 million).

CORFO has also been providing financial support to renewable energy projects in pre-investment stages. In 2005-09, it subsidised up to half of the total cost of pre-feasibility studies (with a USD 60 000 cap) and pre-investment studies (USD 160 000 cap); this benefited 217 wind, biomass, biogas, geothermal and small-scale hydro projects (IEA/IRENA, 2014). Between 2008 and 2010, CORFO received a budget of USD 2 million from the Ministry of Energy and the National Energy Commission to continue the programme.

Since 2012, the Renewables Energy Center (now CIFES), under CORFO, has developed three new contests to subsidise pre-investment studies of renewable projects, with the support of KfW. The last three tenders provided co-financing of up to 40% to 121 individual projects with a total capacity of 3 462 megawatts (MW) (mostly wind and solar projects). The last tender, held in 2014, involved CLP 780 million (about USD 1.4 million) of investment (Ministry of Energy, 2014).

Water and sanitation

Water and sanitation in Chile has high levels of access and good service quality, though these remain low in some rural areas (Chapter 1). Privatisation of the urban water and sanitation sector, beginning in the late 1990s,36 went hand in hand with significant investment in the sector, which was estimated at USD 3.5 billion for 1999 to 2009 (UK Trade & Investment, 2011). Roughly 40% of this volume targeted wastewater treatment, which helped increase the share of the population served with wastewater treatment services from 21% to over 96% between 2000 and 2014 (Chapter 1). In 2014, total investment in the sector was reported at USD 320 million, half of which was in drinking water supply and the other half in sewage and wastewater treatment (SISS, 2015a).

Investment is expected to drop considerably after 2020. In 2020-25, annual average investment is expected to be 80% below the 2014 level (SISS, 2015b).37 The share targeting wastewater treatment is projected to decline to 3% in 2021-25, despite the currently limited level of tertiary wastewater treatment infrastructure (Chapter 1). Public water supply will receive the lion’s share (70%) of projected investment, reflecting the priority of securing water supply.

Drought and water scarcity have prompted severe water supply shortages in recent years (Chapter 1) and stimulated significant investment in safer supply sources, both from water companies and the water-intensive mining industry. The mining industry has heavily invested in alternative water sources, notably seawater, and water efficiency and reuse.38 The use of seawater (desalinated or salt water) increased almost ten fold between 2009 and 2014; it served 16% of mining water supply, while the average water reuse rate increased from 69% to 74% (Cantallopts, 2015). The 2015 National Policy for Water Resources plans to build 11 new desalination plants to increase public water supply in two northern regions (Antofagasta and Atacama), which requires USD 114 million of investments (MISP, 2015). Investment will also be needed to reduce inefficiencies in distribution (as almost one-third of water is lost before reaching consumers; see Chapter 1), also with a view to reduce the need for costly investment associated with risk mitigation and emergency response measures.39

With the first companies partly privatised by the early 2000s, the government began opting for concessions in 2001. Concessions, usually granted for 30 years, are based on a model grounded on the principles of self-funding and efficiency. Water operators were allowed to set water tariffs at a level that allows them to fully recover the cost of service provision, thereby enabling investment in coverage and quality of service. Rates cannot be differentiated for reasons other than associated costs, protecting consumers from monopolistic charges. The marginal costs are calculated separately for drinking water supply and sewage treatment, and the calculation formula is to be revised every five years. Water tariffs consider the value of water, determined by the market price of traded water-use rights, thereby reflecting water scarcity and encouraging water conservation in resource-scarce areas.40 According to the International Benchmarking Network for Water and Sanitation Utilities (IBNET), revenues recover almost twice the operating costs of water supply and sewage utilities; they can thus generate surpluses to self-finance a portion of their investments. This share is higher than in other countries in the region (Figure 3.12).

The tariffs applied by utilities to supply and treat water rose considerably in the early 2000s. They continued to rise alongside the expansion of new wastewater treatment services. Reported revenue per client rose by 43% between 2005 and 2013 (SISS, 2015a). Rising prices encouraged an 18% reduction in drinking water consumption per household in urban areas between 2000 and 2014 (SISS, 2015b). The government subsidises vulnerable households through a deduction of the bill.41 In 2011, 15% of water company clients benefited from this subsidy at a cost of USD 80 million (Donoso, 2015). The current average tariff is USD 1.4 per cubic metre (m3), which is high compared to other Latin American countries (Figure 3.13). Tariffs are almost double in some northern regions, reflecting water scarcity, as well as in the far south, possibly reflecting difficult conditions for providing water supply and sewerage to users (SISS, 2014).

In rural areas and remote communities, water and sanitation is largely operated by municipal authorities and investment financed publicly through the Rural Drinking Water Programme.42 Rural water user committees (RWCs) manage water provision in their areas, which includes tariff setting. Unlike urban water providers, RWCs are not regulated. This has led to tariff levels that cover operating costs, but which are too low to recover maintenance costs, let alone the costs of investment needed to attend growing demand. This, in turn, has led to deteriorated infrastructure, increasing the need for further subsidies to restore the quality of systems to former levels (Donoso, 2015). Due to consecutive years of drought, several rural water supply installations in northern and central Chile have not been able to supply water to the population. In 2015, 13 of Chile’s 15 regions used cistern trucks to secure water supply to approximately 400 000 people, at an estimated monthly cost of USD 4.5 million to local authorities (MISP, 2015). Urban water suppliers, by contrast, have been able to supply all water demands. A bill to regulate rural sanitation services and strengthen the institutional framework, for instance, by creating a new sub-directorate of the Ministry of Public Works, is yet to be approved.

Waste management

As in most OECD member countries, the management of urban solid waste is a municipal responsibility and financed through municipalities’ budgets. Municipalities usually award contracts to private operators for collection and disposal of waste. They have the power to charge residents a fee for waste services, based on both fixed and variable costs associated to the service. Low-income households (with income below 225 UTM,43 about USD 15 500) are automatically exempt from payment; wealthy households (above 900 UTM) pay through land taxes. Municipalities may partially or totally waive the payment based on users’ socio-economic conditions. Most municipalities took this option: an estimated 80% of households are exempted from the charge. In 2012, the revenues of such fees were estimated at CLP 87 billion (USD 179 million) (OECD, 2014d). No information is available on what percentage of municipalities’ total costs associated with waste management is covered by the charge. Many municipalities report that available resources are insufficient to finance adequate waste management programmes.

In 2012, the central government transferred about CLP 10 billion (USD 21 million) to regional governments (see also Section 4.1) for construction of sanitary landfills, closure of uncontrolled dumps, recycling centre construction, acquisition of equipment for residential solid waste collection, and the like (CEPAL and MMA, 2015). More investment in environmentally sound waste landfills will be needed soon, as waste generation is increasing, while nearly all collected waste is landfilled (Chapter 1). The government plans to double the number of sanitary landfills installed in the country, with a view to increasing access to sanitary landfills from 30% of municipalities to 75% between 2010 and 2020 (Fernández, 2013). A stronger focus on waste prevention and recycling may reduce the need for additional capacity.

Investment in waste prevention, recovery and recycling has generally been modest. Chile does not have a recycling industry with developed markets and a competitive cost structure. In some segments, such as polyethylene terephthalate (PET), Chilean recycling facilities import the large majority of their raw material due to lack of domestic supply. The low level of market development can be explained by the lack of incentive structures for waste recovery and recycling. In particular, privately operated landfills are paid a fixed amount per tonne of waste disposed by the municipality, which is lower when disposed waste volumes are large. This means that municipalities have few incentives to reduce waste disposed of in landfills. Some municipalities have introduced contracts for differentiated collection; a major recycling initiative in the Metropolitan Region has successfully increased recycling rates of some products (Box 3.4). Yet most municipalities limit their waste management to disposal, with little consideration to prevention or recovery and recycling (AmCham Chile, 2012). Chile should, therefore, consider reviewing the financing structure for municipal waste management.

Box 3.4. Santiago Recycles

Santiago Recycles (Santiago Recicla) is Chile’s most important waste recycling programme. Launched in 2009 by the National Environmental Commission, the government of Santiago Metropolitan Region and the Casa de la Paz Foundation, it seeks to integrate public and private action for efficient and sustainable waste management throughout the region. The programme’s main goal is to increase the recycling of household solid waste to 25% in 2020, up from only 14% in 2009. It is based on municipal initiatives and inter-municipal co-operation. To date, 41 municipalities have invested in the first phase of the programme’s action plan. This phase is oriented towards recuperation of paper, cardboard, glass, aluminium and metal scraps, PET and Tetra Pak beverage containers. The plan also includes projects to encourage civil participation and raise awareness of the value of recycling.

Source: OECD (2013), OECD Urban Policy Reviews: Chile.

A draft Waste Framework Law, under discussion since 2009, aims to gradually implement extended producer responsibility (EPR) programmes (Chapter 1). This may provide momentum for investment in the sector and will likely reduce the financial burden on municipalities. Municipalities will need to secure finance to strengthen administrative capacities and to raise awareness and build a culture for recycling among citizens. The National Solid Waste Programme (Chapter 1) provides resources for implementing integrated and sustainable municipal solid waste management; the Undersecretariat for Regional and Administrative Development (Subdere) is developing a four-year investment plan, with the involvement of various regional and local institutions (Subdere, 2014). Taxation of waste production and/or favourable treatment of recycled products (notably of streams not covered under the EPR programmes) would further help encourage investment in waste recovery, and separation and recycling.

5. Eco-innovation, green markets and employment

5.1. Eco-innovation

General innovation policy and performance

Chile’s innovation system has improved since 2005, when the country began formulating and implementing explicit policies for innovation. Chile will need, however, to further strengthen its innovation capacity to diversify the economy, improve productivity, further raise living standards and close the income gaps with more advanced OECD member countries (OECD, 2015a, 2015c).

Gross domestic research and development expenditure (GERD) increased with the establishment of the Innovation Fund for Competitiveness in 2005, which is partly financed by revenue from the specific tax on mining (Section 3.5). It was less than 0.4% of GDP in 2014, however, the lowest value in the OECD and significantly below the OECD average (see Basic Statistics). Investment in innovation relies on public money and focuses largely on the publicly funded university sector. At 0.14% of GDP in 2013, business enterprise expenditure on research and development (BERD) was the lowest in the OECD (OECD, 2015d).

Innovation performance of businesses, measured by patents, trademarks and copyrights, has improved, but remains well below OECD levels, particularly among small and medium-sized enterprises (SMEs). This reflects the structure of Chile’s economy, which is based on natural resources and has a relatively small manufacturing sector compared to other OECD countries (Chapter 1). It also reflects persistent bottlenecks in Chile’s innovation system such as skills shortages, weak industry-science co-operation, fragmented policies and lack of institutional coherence (OECD, 2015c, 2014a). The 2014 Growth, Innovation and Productivity Agenda seeks to address longstanding weaknesses in these areas, with a view to enhancing the productivity and diversity of the economy.

Performance of eco-innovation

Of total GERD, 9% targeted the environment in 2012, one of the highest shares among Latin American countries (OECD, 2015d; RICYT, 2015). Environmental GERD more than doubled in real terms over 2009-12 (Figure 3.14), faster than in any other research branch. The increase was driven by massive growth in expenditure by private non-profit organisations such as foundations and charities; they accounted for almost half of environmentally related research and development (R&D) expenditure in 2012. Conversely, the government R&D budget allocated to the environment decreased by 26% over 2009-12 (Figure 3.14), to 2.2% of total government R&D in 2013, slightly below the OECD average (Annex 3.A). By comparison, the public R&D budget for agriculture (which may include research in the area of water technologies) increased to reach 12% of government R&D outlays in 2013, one of the largest shares in the OECD, reflecting the importance of agriculture to the Chilean economy.

Patenting activity in environment-related technologies is limited but growing. The number of environment-related patent applications, albeit small, increased almost twice as much as that of patent applications in all technology fields. This was driven by a strong increase in renewable energy technologies, common to many OECD member countries, yet also by water pollution abatement technologies (Figure 3.14).44 In 2010-12, 13% of patent applications filed by Chilean inventors were environment-related; slightly higher than in 2000-02 (11%) (OECD, 2015e), and above the OECD average (10%).45 Few Chilean patent applications are considered higher value,46 but 16% of these were environment-related in 2010-12, the third highest share in the OECD, after Denmark and Luxembourg (Annex 3.B). This indicates that Chile has been gradually developing a specialisation in environment-related inventions.47

Setting up a framework for eco-innovation

Chile does not have a formal eco-innovation strategy. However, it has identified several environmentally-relevant sectors as priority areas in strategic innovation policy documents, such as the recent Programme for Business Innovation for Strategic Sectors.48 CORFO and Fundación Chile, a public-private non-profit organisation, also run innovation programmes targeting environment-related sectors. Policy efforts to promote eco-innovation have been sector-specific and focused particularly on renewable energy technologies, which, together with growing worldwide interest, helps explain the recent increase in patenting activity in this field (Figure 3.14).49 Chile has also made significant efforts to strengthen research-industry linkages, international co-operation and technology diffusion through the renewables promotion centre CIFES (Chapter 4) and the recent establishment of International Centres of Excellence in this area (Box 3.5).

Box 3.5. Attracting investment in (green) technology and innovation: International Centres of Excellence

In 2009, Chile launched a call for the installation of International Centres of Excellence (ICEs) in the country. ICEs are joint R&D institutions, bringing together cutting-edge international players with local partners. They aim to ease access to international resources, skills and technology, while promoting a local environment for innovation, building local skills and strengthening links between research and Chilean businesses.

By early 2015, 13 ICEs had been established, including for activities related to green growth. The Centre for Solar Energy Technologies, for example, is jointly operated by the German Fraunhofer Institute for Solar Energy Systems and the Catholic University of Santiago. It was inaugurated in May 2015. Supported by CORFO with USD 12 million over eight years, the centre will conduct applied research on solar electricity generation, solar heat for industrial use and solar water treatment; test high radiation solar technologies; and provide quality assurance (i.e. standards and certification). The Chilean government also approved an ICE on marine energy in mid-2015, with the French-based DCNS Group and several Chilean institutions as executing partners. With USD 13 million of co-financing from CORFO, the project is expected to be funded with USD 20 million over eight years.

Source: Häberle, 2015, “R&D for solar technologies in Chile”.

Overall, environment-related innovation is in its infancy in Chile and suffers from a generally weak innovation environment and policy framework, as discussed in the previous section. Recent and ongoing reforms of environmental governance and management – with expanded use of pollution taxes and other market-based instruments and stricter law enforcement – are expected to encourage the development or adoption of more environmentally friendly technology. Ambitious policy that is stringent, predictable and flexible enough for firms to meet environmental objectives will positively influence environmental-friendly entrepreneurship and innovation (OECD, 2011). Setting long-term objectives and associated measures for eco-innovation can help ensure that capacity for research, innovation and entrepreneurship on environment-related technology develops as the general innovation environment matures.

5.2. The environmental technology, goods and services market

More stringent environmental policy and external market demand encouraged the development of an environmental goods and services (EGS) market in Chile. Chilean companies increasingly recognise environmental sustainability as an important element of business competitiveness, which is reflected in the growing number of environmental certifications and products with eco-labels (Chapter 2). International commitments (such as on climate change and biodiversity) and growing citizen concern for their health and the environment have also helped strengthen the EGS market (Martínez-Fernández, 2013).

The information base on the EGS sector is thin and there are no official statistics. The most comprehensive characterisation of the sector, conducted in 2011, estimated the Chilean “environment industry” market at USD 3.5 billion and 1.7% of GDP in 2010 (USAID and APEC, 2011; see Table 3.1). The actual market volume of Chile’s EGS sector is likely to be significantly larger, however, as the study did not include important market segments such as renewable energy, energy efficiency and relevant green products and services like sustainable agriculture and tourism. The environment industry grew faster than the rest of the economy prior to the financial crisis (at an annual growth rate of 7-9% from 2004-08); similar growth rates were projected for the early 2010s.

Table 3.1. Characterisation of the Chilean EGS market, 2010

Market size (USD million)

Imports

Exports

Industry (USD million)

Companies (no.)

Employees (no.)

Equipment

Water equipment and chemicals

507

60%

8%

221

160

1 260

Air pollution control equipment

140

65%

6%

52

50

330

Instruments and monitoring systems

40

65%

4%

15

40

90

Waste management equipment

80

70%

7%

26

130

160

Services

Solid waste management

380

1%

1%

380

800

7 000

Hazardous waste management

120

2%

0%

118

80

1 380

Consulting and engineering

161

20%

19%

160

250

1 860

Remediation

30

25%

18%

27

40

320

Analytical services

15

10%

5%

14

60

210

Water utilities, WWT

2 010

0%

0%

2 012

400

16 000

Total

3 483

15

2

3 024

2 010

28 600

Note: Market size indicates revenue generated by worldwide companies from Chilean customers. Industry size indicates revenue generated by Chilean companies, including domestic markets and exports (market size minus imports plus exports).

Source: Based on USAID and APEC (2011), Chile Environmental Industry 2011.

Consistent with its policy of a flat import tariff (Section 6), Chile does not apply reduced import tariffs for EGS. Yet its large number of regional trade agreements (Section 6) results in low tariff barriers for most EGS imports, easing access to advanced environment-related technology. In market segments with sufficient market drivers and demand, such as water, this has allowed for significant technology transfer, which has put systems on par with those in the more advanced OECD economies. Imports provided more than 60% of water, waste and air pollution technology in 2010 (Table 3.1); local manufacturers supply most commodity equipment such as pipes, pumps and valves. In aggregate, imports of EGS equipment outnumbered exports by a factor of about 20 to 1 in 2010 (USAID and APEC, 2011). This hints at weak domestic capacity to produce high value innovation and technology (see Section 5.1).

Various policies stimulate demand for EGS, including Clean Production Agreements, green public procurement and eco-labelling initiatives (Chapter 2). However, these policies have often been piecemeal. With the notable exception of renewable energies, there has been limited policy focus on the potential synergies between greener production and consumption, competitiveness and growth opportunities. The development and implementation of the National Programme on Sustainable Consumption and Production (Box 3.1) promises to strengthen policy coherence in this domain.

Inconsistent environmental regulation and enforcement remain barriers to the domestic EGS sector (USAID and APEC, 2011; see also Chapter 2). Opinion surveys reveal that limited supply and a lack of information and credibility prevent consumers from purchasing “green products” (UNAB-IPSOS, 2012). As experience of other countries shows, further strengthening the stringency, transparency and enforcement of environmental regulation would help boost demand for EGS and improve Chile’s eco-innovation performance (Sauvage, 2014). Chile would also benefit from developing a definition, objectives and indicators for the EGS sector; this would improve analysis of linkages between environmental policies, economic growth, competitiveness and employment.

5.3. Green jobs

New professional profiles will continue to emerge as the EGS market expands and environmental policies progress. USAID and APEC (2011) indicate that Chile’s EGS industry employed 28 600 workers in roughly 2 000 private companies in 2010 (Table 3.1). As in other countries, most green jobs are related to water and solid waste management, sectors that are typically labour intensive. Waste management, sustainable agriculture and eco-tourism are sectors with good employment prospects, as well as higher-skill sectors such as renewable energy or environmental engineering and consulting services (Martínez-Fernández et al., 2013).

Market openness and integration in global EGS markets have contributed to the development of a competitive environmental consulting and engineering market. In the water sector, exposure to the world’s leading equipment companies has made Chilean consulting firms considerably more competitive and qualified to design, implement and manage water and wastewater projects and infrastructure, both domestically and regionally (USAID and APEC, 2011). Multinational consulting and engineering firms have frequently chosen Chile as a regional hub in Latin America thanks to its more advanced market, plentiful engineers and overall more sophisticated and competitive service business compared to other Latin American countries. Much of the consulting and engineering business in Chile is related to mining.

Nevertheless, many businesses, especially SMEs, lack knowledge and skills to comply with environmental regulation (Chapter 2), and claim a lack of training in this area (Martínez-Fernández et al., 2013); hiring specialists can be prohibitively costly. This points to a mismatch between education and training and labour market demands in this domain. Similarly, many officials in charge of public procurement lack training or education on environmental issues (Martínez-Fernández et al., 2013).

Offer of tertiary education programmes in environmentally relevant subjects has increased in recent years (Martínez-Fernández et al., 2013), even though many degree programmes, including the master’s in business administration, still lack sustainability components. The National Training and Employment Service (SENCE), which promotes labour skills, offers technical courses with environmental relevance, although in less than 100 of its more than 3 000 technical training agencies. In 2013, an estimated 1.6% of about 1 million individuals trained by SENCE took courses relating to green skills (Government of Chile, 2013). The majority of green courses offered were not connected to job profiles or specific training plans; SENCE does not have a cluster for “green skills” or specific funding arrangements for these jobs. To date, the absence of an integrated national or sectoral programme related to green jobs has hampered the development of training offers (Government of Chile, 2013). Chile needs to co-ordinate relevant public ministries and agencies (e.g.  for the environment, industrial development and education) to foster professional knowledge and green skills needed in industry and business.

An open and export-oriented economy, Chile applies no export restrictions other than those falling under international agreements (e.g. endangered species, hazardous waste) and a flat import tariff of 6%. Numerous preferential trade agreements (see below) have contributed to a three-fold increase in the value of trade since 2000, which reached almost 70% of GDP in 2013 (see Basic Statistics). Ores and metals, mostly copper, and agricultural products dominate the export portfolio (Figure 3.15); main import products are fuels and manufactured goods. Chile attracts significant volumes of foreign direct investment (FDI); it received third largest amount in Latin America in 2014 (USD 20 billion) following Brazil and Mexico, and the largest relative to the size of its economy (8% of GDP). Mining attracts nearly half of FDI, yet foreign investment has also been important for road and energy infrastructure development, sectors in which the government is keen to further promote FDI.

Trade openness and integration into global markets allowed Chile to import environmentally friendly technologies that have helped reduce air and water pollution from industrial activity (Section 5.2). Moreover, access to low-cost solar photovoltaic panels has helped Chile rapidly increase its renewable energy capacity (Figure 3.11; Chapter 4) as the country lacks domestic manufacturing capacity. At the same time, with a large share of exports stemming from natural resource-based sectors, the opening of the economy has raised concerns about potential impacts of trade liberalisation on the natural resource base and the environment. Studies point to a reinforcement of environmental pressures through trade liberalisation due to greater production and exports, as well as scales of operation in sectors like mining, forestry, some agricultural activities and tourism (Borregaard, 2004; O’Ryan et al., 2010).

Environmental dimensions in regional trade agreements

By mid-2015, Chile had concluded 24 regional trade agreements (RTAs) with 65 countries. Seventeen of these contained environmental provisions of varying scope and depth (Table 3.2). The first RTAs with environmental dimensions – concluded with Canada, the European Union and the United States – included strong requirements, which Chile was willing to take on in return for economic integration and access to new export markets. They involved obligations to promote high standards of environmental protection, to enforce environmental laws effectively and to not derogate such laws to attract investment.50 The negotiations of these RTAs drove reform, encouraging Chile to overhaul and codify its environmental legislation (OECD, 2007; OECD/ECLAC, 2005). Chile has proactively supported the integration of environmental provisions in more recent trade agreements. Most agreements since the late 2000s include substantive environmental provisions in a dedicated environment article or chapter (Table 3.2).51

Table 3.2. Environmental provisions in Chile’s trade agreements

RTA

Year

Environmental provision

Scope of environmental provision

Bolivia

1993

Venezuela

1993

Mercosur

1996

1997

X

Co-operation agreement

Mexico

1999

X

Note in preamble

Central America

2002

European Union

2003

X

Article in the homonymous chapter

Korea

2004

X

Note in preamble; memorandum of intent

2004

X

Note in preamble

United States

2004

X

Co-operation agreement

Trans-Pacific Strategic Economic Partnership (P4)

2006

X

Co-operation agreement

China (People’s Republic of)

2006

X

Memorandum of intent

India

2007

Japan

2007

X

Joint statement

Cuba

2008

Panama

2008

X

Co-operation agreement

Peru

2009

X

Note in preamble

Australia

2009

X

Article in homonymous chapter

Colombia

2009

X

Chapter

2010

Turkey

2011

X

Article in homonymous chapter

Malaysia

2012

X

Article in homonymous chapter

Viet Nam

2014

X

Article in homonymous chapter

Hong Kong (China)

2014

X

Chapter

Source: Based on Ministry of Foreign Affairs (2015); “Acuerdos Comerciales” website (October 2015); and Ministry of Foreign Affairs (2014), “Ex-Post Assessment of the Environmental Provisions of RTAs Subscribed by Chile”.

Environmental provisions in RTAs resulted in various co-operation projects. These included the Pollutant Release and Transfer Register (through the Chile-Canada and the Chile-US agreements), as well as various environment-related capacity building activities (Ministry of Foreign Affairs, 2014; OECD/ECLAC, 2005).52 Under the Chile-US agreement alone, 77 environmental co-operation activities have been carried out since 2005. Chilean officials stated that activities under RTA-related instruments have helped strengthen institutional capacity and environmental management more generally.

Chile has participated in extensive assessments of the environmental impacts of its RTAs with the European Union (Box 3.6) and the United States, at the initiative of these partners. Similar exercises could be envisaged for agreements with emerging and developing economies, as they can help evaluate the effectiveness of environmental provisions in trade agreements. They can also help identify environmental pressures arising from expanding productive sectors, particularly those that cannot be identified through project-focused environmental impact assessments, and to formulate specific preventive or reactive actions. This, in turn, would likely increase public acceptance of trade agreements. Civil society has criticised environmental provisions in Chilean RTAs, or associated co-operation agreements, for being too general and lacking clear links to the implementation of trade and investment provisions. Criticism has also been raised with respect to insufficient co-ordination of policies and institutions; lack of specific action plans and concrete funds for public-sector capacity building; and weak monitoring and reporting procedures, including little or no public involvement (George, 2011).

Box 3.6. Sustainability assessment of the Chile-EU Association Agreement

The European Commission undertook two ex-post analyses of the environmental provisions of the RTA with Chile. The first analysis found it has encouraged exporters in some industries (notably the fruit and wine sectors) to adopt higher environmental and social standards; this was due to larger trade volumes with European buyers who were putting increased pressure on exporters to demonstrate compliance. The second study also identified improvements in environmental standards and management practices, but cited numerous instances of continuing environmental deterioration in sectors where Chilean exports have risen. In both cases, however, the second study conceded it was difficult to distinguish the influence of the RTA from other factors. It concluded the RTA’s negative impact on the environment seems marginal; higher environmental standards imposed through trade with the European Union (as well as United States, Canada and Japan) have helped reduce the pollution intensity of some sectors.

Source: Based on George (2013), Developments in Regional Trade Agreements and the Environment: 2012 Update.

7. Environment and development co-operation

7.1. Chile as a recipient of development co-operation

Chile both receives and provides development co-operation. As an upper-middle income country between 1993 and 2012, Chile received less official development assistance (ODA) than most other countries in the region. Net ODA inflows averaged at less than 0.1% of Chile’s annual gross national income (GNI) over 2005-13; per capita ODA reached USD 4.50 in 2013, the third lowest value in Latin America.

One-third of total ODA disbursements to Chile over 2005-14 targeted environment-related sectors. Most of this finance targeted renewable energy development (which alone accounted for 29% of total ODA disbursements), with a peak in 2010-11 (Figure 3.16). Water and sanitation and general environmental protection together accounted for about 6% of ODA disbursements to environment-related sectors. Despite being relatively low, ODA and other international finance have been an important source of funding for Chile’s efforts on climate change mitigation and biodiversity conservation (Chapters 4and 5). As Chile is now considered a high-income country, it will likely be ineligible for ODA as of 2017.53 This will make financial contributions to Chile less attractive for bilateral donors, as public international finance would no longer count as ODA. As a result, Chile will have to expand its use of domestic public resources and private finance to pursue environmental objectives.

7.2. Chile as a provider of development co-operation

Chile has been providing bilateral development co-operation since 1993, mostly in the form of technical assistance and scholarships and mainly in Latin America and the Caribbean (LAC). In recent years, Chile has emerged as a leading proponent of triangular co-operation: according to the Ibero-American General Secretariat, it was the top provider of triangular South-South co-operation within LAC in 2013, as measured by the numbers of projects executed. It was also among the top five providers in bilateral South-South co‐operation in the region (SEGIB, 2015).

Chile is an observer to the OECD Development Assistance Committee (DAC) and hence not obliged to report statistics on the volume of ODA provided. OECD (2014c) estimated that Chile’s total concessional finance for development (“ODA-like” flows) doubled over the past four years, reaching USD 49 million in 2014. This equals about 0.02% of GNI, lower than the share of DAC members with similar per capita income levels such as Greece (0.11% in 2014) or Poland (0.08%). However, as is the case with other emerging donors, several government agencies directly provide and finance bilateral technical co-operation, which is not reflected in the OECD estimate. The Chilean International Co-operation Agency for Development (AGCID) estimated total development assistance at USD 57 million in 2013 (OECD, 2014b).

The Co-operation Strategy for International Development 2015-18 defined principles, objectives and sectoral priorities for Chile’s development co-operation activities for the first time. “Inclusive and sustainable development” is one of three strategic axes, under which “environment, natural resources and energy” is listed as a thematic area.54 Institutional strengthening for climate change, renewable energy sources, and sustainable water use and sanitation are emphasised (AGCID, 2015). While the AGCID does not track aid flows to sectors or socio-economic objectives, the Ibero-American General Secretariat estimates that 10% of Chile’s development co-operation activities in Latin America targets environmental objectives, one of the highest shares among providers in the region (SEGIB, 2014). As Chile’s development co-operation system matures, and demand to share its experiences grows, Chile should work to mainstream environmental and sustainability criteria in the design and implementation of its development policies and programmes. It should also move towards screening technical co-operation projects for potentially negative environmental impacts. Management information and statistical systems can be designed to monitor environmental finance or sustainability in project design.

Recommendations on green growth

Greening taxes and subsidies

• Increase the tax rates on petrol and diesel; gradually reduce the petrol-diesel tax gap and phase out the tax refund for the diesel used by heavy goods vehicles.

• Assess the fuel price stabilisation mechanism to ensure it does not function as an implicit fossil fuel subsidy.

• Consider revising the new tax on emissions of local air pollutants and CO2 from large stationary sources: i) increase the tax rate on CO2 on the basis of pre-defined steps, to better reflect the social cost of emissions; ii) include additional emission sources, such as copper smelters and other industrial plants; iii) assess the interactions between the electricity price-setting mechanisms and the CO2 tax, and consider the adjustments needed to safeguard the full effectiveness of the tax; and iv) expand the geographical basis of the air pollution component of the tax to relevant airsheds.

• Explore the introduction of a cap and trade system for relevant pollutants and emitters that are not covered by the new tax on emissions of local air pollutants and CO2.

• Broaden the coverage of the vehicle tax to commercial vehicles; delink the environmental and price elements of the vehicle tax; consider increasing the rates of the energy efficiency and NOx components of the tax.

Environment-related expenditure and investment

• Conduct systematic surveys of public environmental protection expenditure, building on the experience gained with the 2015 survey; extend the survey to sub-national institutions and private expenditure; develop a system for systematically evaluating effectiveness of environmental expenditure.

• Ensure that major investment programmes systematically consider environmental and climate objectives, include sustainability criteria to guide implementation and indicators to monitor environmental impacts.

• Continue to encourage investment in public water supply infrastructure with a view to securing drinking water supply, reducing water distribution losses and enhancing resilience against water shortages; maintain investment to improve wastewater treatment capacity, especially in rural areas.

• Continue to invest in urban public transport systems to counteract the continuous shift from public to private passenger transport and reduce congestion and emissions of GHGs and air pollutants.

Eco-innovation, green markets and employment

• Consolidate initiatives for promoting eco-innovation into a coherent strategy or framework and set long-term objectives for eco-innovation; strengthen co-ordination of industrial development, innovation and environmental policies across the government with a view to integrate eco-innovation into broader growth and competitiveness strategies and programmes.

• Develop statistics and indicators for the environmental goods and services sector, including employment, with a view to informing the evaluation of environmental policies, and policy making more generally.

• Improve the national labelling system for environmentally sustainable products; accelerate the definition of environmental criteria for public procurement.

• Develop programmes on jobs and skills that include profiles, training plans and activities for green jobs; improve co-ordination between relevant ministries and agencies (i.e. education, industrial development, environment) and consider linking the concept of green jobs to the National Training and Employment Service.

• Continue to promote environmental considerations in trade policies; assess effectiveness of environmental provisions in regional trade agreements.

• Ensure that environmental and sustainability criteria are mainstreamed throughout international development co-operation activities and that results are monitored and evaluated.

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US Department of Commerce (2012), “Chile’s Renewable Energy and Energy Efficiency Market: Opportunities for U.S. Exporters”, Market Intelligence Brief, International Trade Administration, US Department of Commerce, Washington, DC.

Violic, R. (2015), “Renewable energy supply financing RE projects in Chile”, presentation at Banco BICE, Bonn, 3 June 2015, https://unfccc.int/files/bodies/awg/application/pdf/05_chile_rodrigo_violic.pdf.

Annex 3.A. Data on green growth performance

Notes

← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

← 2. Investment in the mining sector increased from 2% of GDP in 2002 to almost 7% in 2012.

← 3. In April 2010, Chile was hit by a magnitude 8.8 earthquake near the northern coast, prompting a tsunami and a series of strong aftershocks.

← 4. The 2006 Fiscal Responsibility Law instituted a rule linking public spending to long-term government revenue, based on GDP estimates and long-term prices of copper and molybdenum. During surplus years, excess tax revenue and profits from the state-owned copper mining firm are put into two sovereign wealth funds according to formula approaches. During deficit years, the stabilisation fund is used to cover government expenditure, which must be approved by the Chilean Congress.

← 5. The 2015 stimulus measures increased public spending by 10% compared to 2014 (OECD, 2015a).

← 6. This accompanies fully implementing existing environmental legislation, developing new policy tools to fill gaps, developing sectoral strategies (e.g. for tourism, energy, mining and agriculture) and implementing the best regulatory practices.

← 7. Total taxes on income, profits and capital gains for individuals and firms equalled 6.5% of GDP in Chile in 2014, compared to an OECD average of 11.7%. In addition, social security contributions were equal to 1.4% of GDP, compared to an OECD average of about 9%.

← 8. This refers to revenues raised on energy products (including motor vehicle fuels), motor vehicles and other taxes on transport activities, as well as other taxes ofenvironmental relevance, such as taxes on air and water pollution, waste and hazardous chemicals, and taxes related to natural resource management.

← 9. Freight transport by rail is subject to VAT, and thus benefits from a refund of taxes paid on the diesel used. But as passenger transport by rail is exempted from VAT, there is no refund for taxes paid on diesel used for this purpose.

← 10. According to Agostini and Jiménez (2015), the tax on petrol and diesel was introduced in 1986 primarily to help finance reconstruction of the country after a major earthquake in 1985.

← 11. These shares include all vehicle categories, also heavy goods vehicles, for which there are hardly any alternatives to diesel engines.

← 12. This is because the authors assumed that only trucks use diesel. Trucks travel a shorter distance on a litre of fuel than passenger cars, which substantially reduces driving-related externalities, such as accidents, per litre of diesel use.

← 13. This survey only represents the population in Greater Santiago and the 14 other regional capitals, covering 57% of the total population of the country. Income levels and expenditures on motor vehicle fuels are likely lower in other parts of the country, which would tend to strengthen the robustness of the findings.

← 14. When ranking households by current income, the poorest decile of the population spent 0.4% of its income on transport fuels, the fifth decile spent 0.6%, the ninth decile spent 1% and the tenth decile spent 0.8%. When ranking households by current expenditures, the poorest decile spent 0.1% ofexpenditures on transport fuels. The respective numbers for the fifth, ninth and tenth deciles were 0.7%, 1.3% and 1.2%, respectively.

← 15. Agostini and Jiménez (2015) looked even more specifically at the distributive impacts of only the tax on petrol, and reached similar conclusions as Flues and Thomas (2015).

← 16. This is even more the case for Brazil, where energy tax revenues are very modest.

← 17. The Fuel Price Stabilisation Fund (FEPCO), applied in 2005-10, and the Consumers’ Protection System (SIPCO), applied in 2011-14.

← 18. A tax on actual emissions of different pollutants from the vehicles could be even more efficient, but is not technologically feasible with current technologies.

← 19. New diesel light vehicles must also comply with the NOx limits of the EURO 5 or EPA Tier 2 bin 5 standards. Imports of second-hand vehicles are not allowed, except in the free trade zones located in the north and south of the country.

← 20. The graph stops at a vehicle retail price of around USD 50 000, but the tax per unit of pollutants continues to increase linearly with higher retail prices.

← 21. In countries that include electricity generation under a binding emission cap (such as the European Union’s emission trading system for greenhouse gases, EU ETS), emissions from power generation associated with the use of electric vehicles would be already accounted for.

← 22. The calculation of this income dependson whether the parking space belongs to the firm or a third party. If the company owns the asset, the minimum value of the benefit is 11% of the fiscal appraisal in effect on 1 January of the year when the tax is declared. If a third party owns the parking space, the value of the benefit corresponds to the amount paid by the employer.

← 23. The programme was implemented in 2009, with total grants of CLP 1.8 billion (USD 3.2 million), and 2011, with total grants of CLP 1.1 billion (USD 2.3 million). In 2012, it was implemented only for the Aysen region, involving grants of CLP 200 million (USD 0.4 million).

← 24. For a discussion of the costs and benefits of some scrapping schemes for passenger vehicles, see ITF (2011).

← 25. A partial assessment can still be conducted based on reported emission reductions and the tax rates on new vehicles and air emissions from stationary sources as “proxies” for the values of emission reductions. The scheme was more beneficial to society than the 2011 assessment suggested. Unless the remaining value of each scrapped truck was more than approximately USD 70 000, benefits would have exceeded costs – even when only looking at emission reductions. This calculation used the relatively high tax rate (USD 17.5 per kg) for NOx emissions stemming from a passenger vehicle costing USD 10 000 as a starting point for valuations. Using the Swedish NOx tax rate on stationary sources (USD 7.3 per kg), quantified benefits would be larger than costs if the remaining value of the scrapped trucks waslower than USD 20 000; this seems likely, given the age of the scrapped trucks.

← 26. Fiscal revenue from natural resources amounts to over 8% of GDP in Bolivia, Mexico and Venezuela.

← 27. The OECD considers environmentally related taxes levied on tax-bases (e.g. products, resources) of environmental relevance. A tax levied per tonne of a mineral extracted would clearly fall within the scope of this definition; a tax on the profits of some companies would normally not do so.

← 28. The Fund has raised almost USD 215 million per year since its establishment.

← 29. The 2005 OECD Environmental Performance Review recommended to “consider a mechanism for proper capture of resource rents associated with mineral exploitation” and the 2013 OECD Economic Survey recommended that Chile “carry out a review of natural resource rents and ensure that they are taxed sufficiently to ensure sustainable development”.

← 30. These values are larger than those stipulated in the Ministry of Finance’s budget allocation for 2012, when expenditure for environmental protection (in nominal prices) amounted to CLP 105 billion (or 0.38% of GDP). This is explained by a different methodology (including a more detailed classification of expenditures) applied within the CEPAL and MMA (2015) methodology.

← 31. The analysis on public environmental expenditure in Colombia and Mexico, for example, covered the whole government (i.e. federal, state and local governments).Mexico’s study also included household expenditure.

← 32. On average, the central government accounts for more than 95% of total public expenditure in Chile, including all expenditure domains.

← 33. Government investment in Chile amounted to 1.4% of GDP in 2013, significantly below the Latin American average of 11% (OECD, 2014d).

← 34. The Chilean government uses the term non-conventional renewable energy sources for solar, wind, geothermal, biomass, tidal power and hydropower below 40 MW.

← 35. The quota obligation, introduced in 2010 and strengthened in 2013, requires electricity companies to gradually increase the share of renewables in their power supply with a view to reach 20% in 2025 (Chapter 4).

← 36. In contrast to many other OECD member countries, urban water supply and wastewater treatment services were fully privatised in Chile between 1989 and 2004. The market share served by private water companies increased from 10% to 95% between 1997 and 2008.

← 37. Total investment for 2015-25 is projected at USD 1.4 billion, less than half of volume invested over 1999-2009 (SISS, 2015a).

← 38. The Chilean Copper Commission (COCHILCO) estimates that up to USD 10 billion may be invested in desalination technologies by 2025 (El Mercurio, 2014). This has implications for energy needs and potentially ecosystems and biodiversity (see Chapters 1and 5).

← 39. Risk mitigation measures for the Metropolitan Region (e.g. water reserve tanks and the construction of a damn) are estimated to require USD 140 million; this, in turn, would increase tariffs of 1.5 million customers by 2.5% (SISS, 2014).

← 40. Water tariffs include a fixed and a variable part. The variable tariff for each water provider considers the market price of traded water-use rights. Fixed tariffs also vary according to water scarcity: they represented nearly USD 2/m3 in the dry north and less than USD 1/m3 in the southern areas (Donoso, 2015).

← 41. The central government transfers money to municipalities for them to cover a share of poor households’ water bill (from 15% to 85%, with the poorest families getting the highest share). The subsidy may cover up to either i) 20 m3 of monthly consumption, or ii) 85% of the total bill, above which poor households must pay the full tariff so as not to distort price signals (except beneficiaries of the Chile Solidarity Programme who are fully covered).

← 42. Since 1991, the Rural Drinking Water Programme targets water and sanitation in “concentrated towns” (towns with over 300 inhabitants and a minimum density of 15 households per km2) and “semi-concentrated towns” (towns with at least eight inhabitants and a minimum density of eight households per km2) (Donoso, 2015).

← 43. The monthly tax unit and annual tax unit (or UTM and UTA, respectively) are indexed account units used in Chile for the payment of taxes and fines. Their value is adjusted monthly for inflation. As of December 2015, a UTM was 44 955 CLP (or about USD 69) and a UTA was 539 460 CLP (or about USD 824).

← 44. Better innovation performance in water pollution abatement may be related to the expansion of the wastewater treatment services over this period (see Section 4.2).

← 45. Data are based on three-year averages.

← 46. Higher value patents are those that seek intellectual protection in at least two jurisdictions. Chile counted a total of 25 higher value patents in 2012. The number has fluctuated between 10 and 39 per year since 2005.

← 47. The specialisation in environmental technologies is also measured by the “revealed technology advantage” (RTA) index, which compares a country’s share of patents in a particular technology field to its share in all patent fields. The index is equal to zero when the country holds no patents in a given sector; 1 when the country’s share in the sector equals its share in all fields (no specialisation); and above 1 when a specialisation is observed. Chile has an RTA in environment-related technologies of 1.2, the seventh highest value in the OECD (OECD, 2015d).

← 48. The Programme for Business Innovation for Strategic Sectors defines solarenergy and sustainable aquaculture as strategic sectors, along traditional export-oriented activities such as mining, agriculture and construction.

← 49. Energy-related SMEs, in co-operation with university research centres, are some of the main beneficiaries of InnovaChile: the agency supported more than 120 innovation projects with about USD 40 million to transfer, improve or develop renewable energy technology between 2005 and 2010 (Pueyo et al., 2011).

← 50. The agreement with Canada involved the establishment of a joint commission to implement, monitor and assess environmental co-operation, and provided for public access and consultation structures (Gallagher and Serret, 2011; George, 2013).

← 51. The agreement between Chile and Malaysia (2012), for example, establishes co-operation in areas of common global or domestic interest (such as climate change, air pollution and environmental impact assessment) and provides that countries shall not relax or fail to enforce their environment laws and regulations to encourage trade and investment.

← 52. On areas like climate change, biodiversity, protected areas, restoration of contaminated sites, waste and air management, environmental data, strategic environmental assessment and civil society participation.

← 53. According to the World Bank’s country classification, Chile became a high income economy in 2012 (the classification is based on GNI per capita in USD; see http://data.worldbank.org for details). The OECD Development Assistance Committee (DAC) revises its Listof ODA Recipients every three years and removes countries that have exceeded the World Bank’s high-income threshold for three consecutive years at the time of review. Chile will therefore likely graduate from the list in the next review in 2017.

← 54. This accompanies other domains such as social development, local development, agricultural development, disaster risk reduction, and strengthening of democratic institutions.