Effectiveness of a CO2 tax on industrial emissions

Highlights: • The CO₂ tax applied in Chile is not very ambitious in terms of coverage and incentives. • Taxes between US$10/tonCO₂ and US$30/tonCO₂ are more effective in reducing emissions. • Taxes higher than US$30/tonCO₂ increase collections but not reductions of emissions. • Low taxes do not induce fuel changes and high taxes encourage the use of biomass. • It is important to find the tax rates according to the context of each country. - Abstract: This study quantifies the amount of taxes collected and the reduction in emissions that implementing a CO₂ tax on industrial sources in Chile would generate. An optimization problem is used to simulate the situation that each source faces (of choosing the technology and fuel) in order to reduce the cost of the new tax. For this process, investments in boilers or dual burners have been considered, that allow for a change in fuel. The results indicate that taxes up to US$10/ton CO₂ do not greatly modify the use of fuels in industrial sources. If taxes between US$10/ton CO₂ and US$30/ton CO₂ are implemented, then emissions are reduced rapidly. With taxes higher than US$30/ton CO₂, emission reductions stagnate. It can be concluded that taxes that are too low or too high are effective in raising revenue but not in reducing emissions.