Carbon Taxes and Misallocation in Chile

Speaker: Ernesto Pastén (Banco Central)
Cuándo: Miércoles 16 de abril – 12:30 PM (Santiago)
Dónde: Sala Consejo (401) – Beauchef 851, piso 4 | Departamento de Ingeniería Industrial

Abstract:
Carbon taxes are subject to a classic free rider problem: the benefits are global but the costs are often local. In an inefficient economy, however, carbon taxes might exacerbate or ameliorate existing domestic distortions. In Chile, we find that fossil fuel use across firms is negatively correlated with their revenue productivity (i.e., revenue relative to inputs). We present evidence suggesting that this pattern may reflect higher price-cost markups at firms that produce higher quality products, with quality being intensive in primary inputs but not fossil fuel use. As a result, imposing a unilateral carbon tax may helpfully reallocate inputs away from low-markup, low-quality firms towards high-markup, high-quality firms. We calculate that a unilateral carbon tax in Chile could thereby increase allocative efficiency, consumption, and welfare.