Pigouvian taxes to internalize environmental damages from Chilean mining-A computable general equilibrium analysis

In several countries, mining taxes are applied as a mechanism to collect resources but without adequately evaluating their economic impacts. From a theoretical perspective, the implementation of royalties can be justified in the non-renewable nature of mining resources. In contrast, Pigouvian taxes aim to make productive activities internalize their environmental damages. This study illustrates the general equilibrium effects on the Chilean economy of replacing the current royalty on copper mining with Pigouvian taxes, considering various environmental damages. For the above, a computable general equilibrium model is developed and calibrated with a Social Accounting Matrix base year 2016. The results show that the internalization of all environmental damages would generate a significant drop in mining activity and electricity generation, contributing to reducing greenhouse gas emissions. Also, it is observed that the fall in GDP and increase in the real exchange rate would modify the production of other tradable and non-tradable sectors, benefiting non-copper export sectors. The fall in economic activity reduces the payment to productive factors, although the impact is greater on capital and skilled labor. The fall in income is more remarkable in the richest households than in the poorest households, which improves income distribution but increases poverty. Finally, the results on poverty reflect the need to implement monetary transfers to the poorest households.

Automated summary

This study analyzes the general equilibrium effects of replacing the current royalty on copper mining with Pigouvian taxes in Chile, and finds that internalizing environmental damages would significantly reduce mining activity and electricity generation, thus reducing greenhouse gas emissions. It also affects the production and trade of other sectors, improving income distribution but increasing poverty.