Environmental and Resource Economics

, Volume 25, Issue 3, pp 287-317

First online:

Climate Policy without Tears CGE-Based Ancillary Benefits Estimates for Chile

  • Sébastien DessusAffiliated withWorld Bank
  • , David O'ConnorAffiliated withOECD Development Centre

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This study examines a hithertoneglected set of benefits from climate policy,viz., the reduction in emissions of localair pollutants and the associated healthbenefits, in this case for residents ofSantiago de Chile. By using an economy-widemodel, we are able to compare these monetisedbenefits to the direct costs of carbonabatement, thereby determining the scope for “no regrets” CO2 reductions. Sensitivityanalysis is performed in recognition of theuncertainty surrounding certain key parameterand exogenous variable values – notably,households' willingness to pay (WTP) forreduced mortality and morbidity risk, and thesubstitution elasticities among energy sourcesand between energy and other inputs. Ourresults suggest that, even with the mostconservative assumptions (low WTP, lowelasticities), Chile could reduce CO2emissions by almost 20% from the 2010 baselinewith no net welfare loss, though a 10%reduction is closer to “optimal”. If insteadChile were to target a 20% reduction inparticulate concentrations, a particulate taxwould incur slightly lower costs than anequivalent carbon tax to achieve the samehealth benefits. While the latter is asecond-best method of addressing localpollution, the welfare loss of choosing thisinstrument could be fully compensated by carboncredit sales at a world market price of$20/tC.

ancillary benefits carbon tax CGE modelling climate change “no regrets” abatement