Following Mexico's initiative to discourage the use of carbon-intensive fuels, Chile's government has passed an environmental tax law with the objective of encouraging a shift to the use of clean air technologies. The government's intention in passing this reform is for companies to incorporate technologies that will reduce pollutants or simply change the fuel they use.
As part of a comprehensive tax reform, the reform contemplates two new types of green taxes:
Taxes on emissions from fixed sources. The law establishes an annual tax on emissions from fixed sources. This takes into account two categories of externalities: (i) the local damages to public health – emissions into the air of particulate matter (PM), nitrogen oxide (NO) and sulfur dioxide (SO2); and (ii) global damage due to climate change – emissions of carbon dioxide (CO2) from fixed sources made up of boilers and turbines with a thermal power greater or equal to 50 MW (megawatt thermal capacity) considering the limit superior to the fuel's energy value.
In the case of PM, NO and SO2 emissions into the air, the taxes will be the equivalent of 0.1 US dollars per ton emitted or the corresponding proportion of said pollutants, increasing the result by applying a formula that takes into account the social cost of pollution such as the costs associated with the health of the population. In the case of CO2 emissions, the tax is equivalent to 5 US dollars for each ton emitted.
In order to determine the tax burden, the Superintendence of the Environment will certify in March of each year the amount of emissions by each tax payer or contributor during the previous calendar year. Each tax payer or contributor which uses any source that results in emissions, for any reason, shall install and certify a continuous emissions monitoring system for those elements listed in the first subparagraph.
Taxes on highly polluting light vehicles. An additional tax is imposed upon the importation of highly polluting light vehicles that use diesel as fuel with the objective of encouraging the use of vehicles that produce fewer pollutants. The importation of vehicles designed or adapted to use petroleum diesel, whether habitual or not, will pay an additional tax which will result in a one-time fixed cost on the importation of vehicles. This tax will be applicable only to light vehicles – basically, automobiles and light trucks.
An analysis of the impact of the new green taxes
The application of these new taxes upon local and global emissions has generated conflicting positions from different market players. These taxes have obvious costs for the country but with vague benefits, particularly with respect to the reduction of CO2 emissions. Chile has a cleaner matrix than the average of OECD countries and other developed nations. The question is, thus, if the primary emitting countries have not committed to concrete actions in this regard, is it convenient for Chile to be the pioneer in applying measures that will undoubtedly prove costly for the Chilean economy?
In the case of generating electricity – a necessary input for all productive activities – the tax increase will translate into higher rates for clients and, if we consider that the rates are already relatively high in relation to the rest of the OECD countries, especially for the industrial sector, increasing costs will undoubtedly affect Chilean competitiveness.
The impact of this tax for electricity-generating companies is directly related to diversification of the energy matrix, diversification of the geographical location of the operations of each company, and the contractual structure of each generating firm. Concerning contracts, the transfer of this tax burden to clients can only occur in those cases where there are contracts that contain clauses that allow adjustment of rates in the event of regulatory changes. This would exclude spot and regulated clients.
According to a report by the analyst Alfredo Parra of EuroAmerica Estudios, if this tax is considered on the basis of the effective generation of different firms, for the main firms – Endesa, Colbun, ECL and AES Gener – the magnitude of this burden, taking into account 2013 figures, would have been USD$186M (Endesa USD$35.3M, Colbún USD$21.7M, ECL USD$41.9M and AES Gener USD$87M).
Although the tax could serve to correct the externality, there are many doubts about its implementation. A tax that depends on a specific emission factor (by neighborhood and by contaminant) is being considered and multiplied by the social costs by neighborhood and by contaminant – with social costs being understood as public health costs. Implementing a policy without carefully analyzing its direct and indirect consequences could lead to undesired results that will later be difficult to reverse.
Even though the environmental regulation has some positive elements – such as the utilization of a policy to encourage a reduction of local pollutants – there are many doubts with respect to the proper implementation of same.
This legal update was contributed through Norton Rose Fulbright by partners Elisabeth (Lisa) DeMarco, Simon Currie, Elisabeth Eljuri and through Carey & Allende by partner Luis Felipe Arze.
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