A Market-Based Environmental Policy Experiment in Chile

Abstract

Despite the increasing interest in the use of emissions trading for pollution control, empirical evidence reduces to a few experiences in the US. This paper studies the “"emission-offsets trading program”" established since 1992 to control particulate in Santiago-Chile. While the program is doing well from an environmental perspective, thanks, in part, to the price-based introduction of natural gas, the market is poorly performing because of high transaction costs, uncertainty and low enforcement. However, the scarcity rents created by the allocation of grandfathered emission rights to incumbents have proved very effective for the completion of the emissions inventory.