Roadmap for Implementing a Greenhouse Gas Emissions Trading System in Chile: Core Design Options and Policy Decision-Making Considerations

This report was also published by the World Bank and is available here.

Motu and partners were contracted by the World Bank through its Partnership for Market Readiness (PMR) initiative to "Draft a proposal for the implementation in Chile of a Greenhouse Gas Emissions Trading System (ETS)". The specific objective in the terms of reference is to "Propose a detailed roadmap, including its design elements, to inform decision-making for an advanced model of an ETS in Chile". This is one of a set of four related reports commissioned to assist the Chilean government in preparing its "market readiness proposal" (MRP) for submission to the World Bank.

This report is the first step in a process that aims to clarify how an ETS could work in Chile and what the environmental, economic and social impacts would be. This process will allow the Chilean government and key stakeholders to assess, in a more informed way, whether an ETS would be desirable in Chile, as well as the optimal design of an ETS to achieve policy objectives and priorities. Given that Chile intends to move forward with a climate policy, an ETS presents several environmental, economic, and political advantages relative to other instruments, but also some challenges.

This report addresses each of the core components of an ETS: sector coverage; point of obligation for regulated sectors; the level of ambition; linking to other markets and use of (domestic and international) offsets; emissions trading phases; and allocation of units. Cost containment, price stabilisation and potential use of border carbon adjustments are not covered in detail in this report. Design options are analysed from a largely conceptual basis, but drawing on lessons learned in operating schemes and taking account of Chile"s national circumstances to the extent of available information, as well as highlighting critical points of divergence in scheme design depending on the underlying policy goals. The design options are brought together in a decision-making framework out of which we identify a smaller number of central options that appear to make the most sense for Chile. Each of the sections on core components identifies issues where Chile-specific research is needed to better inform key design decisions and technical implementation of the scheme ultimately chosen. Research needs for the next phase of policy development are discussed. We conclude with a high-level discussion of process going forward, both in terms of education and learning to enable an informed national debate, and in terms of developing broad (political, industry, and public) support for more serious consideration of an ETS as an option for Chile.