Emissions Trading in Santiago , Chile : A Review of the Emission Offset Program of Supreme Decree

Santiago, Chile was subject to serious air quality problems in the late 1980s and early 1990s as a result of increased industrial and transportation emissions. In an effort to improve air quality, the government implemented a number of policies including an emission trading program to reduce and cap emissions of particulate matter smaller than 10 microns (PM10) from stationary sources. The emission trading program was viewed by many as a way to provide industry with flexibility to develop source-specific approaches to meet the reduction target at a lower cost and to reduce government administrative requirements. The environmental objective of the program, to reduce PM10 emissions from stationary sources by 50%, was met by 1998. However, some academics, industry groups, and government officials have questioned the efficiency and effectiveness of the program, citing obstacles such as frequent rule changes, a lengthy and uncertain transaction approval process, and lack of market activity, which discourage trading and do not allow industry to take full advantage of cost-saving opportunities provided by the emission trading program. As an environmental program, it should be judged first and foremost on its achievement of the environmental goal. Developing the market is secondary, but it can make achieving the environmental objective more cost effective. This paper reviews the program and highlights design alternatives for future emission trading programs in Santiago that may yield positive environmental benefits at lower cost. 1 The author is a Senior Policy Analyst with the U.S. Environmental Protection Agency. The views expressed in this paper are those of the author and do not necessarily reflect the views of the U.S. Environmental Protection Agency. 2 The author would like to thank Claudia Blanco Vidal and Marcelo Fernandez of CONAMA and Sam Napolitano, Constance Downs, Reynaldo Forte, and Melissa Weitz, of U.S. EPA. The persons above provided useful information and thoughtful comments on earlier drafts of the paper. Any errors or omissions, however, are the sole responsibility of the author.