Climate policy without tears: CGE-based ancillary benefits estimates for Chile

This study examines a hitherto neglected set of benefits from climate policy, viz., the reduction in emissions of local air pollutants and the associated health benefits, in this case for residents of Santiago de Chile. By using an economy-wide model, we are able to compare these monetised benefits to the direct costs of carbon abatement, thereby determining the scope for "no regrets" CO2 reductions. Sensitivity analysis is performed in recognition of the uncertainty surrounding certain key parameter and exogenous variable values - notably, households' willingness to pay (WTP) for reduced mortality and morbidity risk, and the substitution elasticities among energy sources and between energy and other inputs. Our results suggest that, even with the most conservative assumptions ( low WTP, low elasticities), Chile could reduce CO2 emissions by almost 20% from the 2010 baseline with no net welfare loss, though a 10% reduction is closer to "optimal". If instead Chile were to target a 20% reduction in particulate concentrations, a particulate tax would incur slightly lower costs than an equivalent carbon tax to achieve the same health benefits. While the latter is a second-best method of addressing local pollution, the welfare loss of choosing this instrument could be fully compensated by carbon credit sales at a world market price of $20/tC.