Carbon Taxes and Misallocation in Chile

Speaker: Ernesto Pastén (Central Bank of Chile)
When: Wednesday, April 16 – 12:30 PM (Santiago)
Where: Sala Consejo (401) – Beauchef 851, 4th floor | Department of Industrial Engineering

Abstract:
Carbon taxes are subject to a classic free rider problem: the benefits are global while the costs are often local. In an inefficient economy, however, carbon taxes may exacerbate or mitigate 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 among firms producing higher quality products, with quality being intensive in primary inputs but not in fossil fuel use. As a result, imposing a unilateral carbon tax may beneficially reallocate inputs away from low-markup, low-quality firms toward high-markup, high-quality firms. We calculate that a unilateral carbon tax in Chile could thus improve allocative efficiency, consumption, and overall welfare.