Adolfo Rodríguez-Vargas
OECD
OECD Economic Surveys: Chile 2025
Abstract
Chile has set ambitious decarbonisation goals while promoting green hydrogen and lithium. To meet its targets for reduction of greenhouse gases emission and enhance climate resilience, the country needs to strengthen policies to accelerate the pace of emissions reduction and improve adaptation to climate change. Higher carbon prices and the removal of fossil fuel tax expenditures are essential. To profit from a green hydrogen industry and increasing lithium production, Chile needs to promote investment, improve business and environmental regulations, and develop technical capabilities while ensuring protection of water and biodiversity. Additionally, improving the social protection system is crucial to support vulnerable populations during the transition.
Chile’s solid policy framework has ensured macroeconomic stability and improved living standards. However, the country faces environmental pressures, as greenhouse gases (GHG) emissions have grown alongside its GDP. Additionally, hazards related to climate change, like floods and wildfires, increasingly threaten the economy and well-being.
Chile has committed to achieving net zero GHG emissions by 2050, with emissions projected to peak in 2025. Yet current efforts face considerable challenges to meet the 2025 and 2030 targets. Carbon sequestration, critical to reach net zero by 2050, is threatened by the growing frequency of wildfires. The country’s decarbonisation strategy centres on green hydrogen, expected to contribute 21% of GHG reductions by 2050, alongside a shift towards renewable energy, which has seen wind and solar power grow from 1% to 31% of total electricity generation in a decade. However, with 63.5% of its 2023 total energy supply imported, and only 4.7% of oil and 20.2% of gas produced domestically (IEA, n.d.[1]), greater reliance on renewables is needed to ensure energy security and meet climate goals.
Chile’s vast mineral resources, particularly in copper and lithium, offer growth opportunities and can support the global energy transition. While expanding lithium production will not directly cut emissions, it can generate public revenue and aid the worldwide shift to cleaner energy. However, without proper management, lithium and green hydrogen development could worsen local environmental impacts.
Chile’s National Lithium Strategy and the Green Hydrogen Action Plan 2023-2030 aim to capitalise on these resources, but success requires strengthened energy and transport polices and coordinated fiscal, regulatory, and technological reforms. Key priorities include improving infrastructure, regulatory frameworks, and workforce skills to ensure the development of lithium and green hydrogen alongside environmental sustainability and social equity. Achieving these goals will demand significant private investment and ensuring that the financial system integrates climate-related risks. Achieving a green transition that benefits all the population, while equitably distributing environmental costs, will also require targeted policies to assist those affected by decarbonisation policies, ensuring that costs and benefits are fairly distributed.
This chapter reviews Chile’s adaptation and decarbonisation progress and provides recommendations for achieving a green transition, building on previous OECD work (OECD, 2024[2]; OECD, 2023[3]; D’Arcangelo et al., 2022[4]). It discusses how Chile can leverage its advantages for green hydrogen and lithium production in a sustainable and fair way.
Climate change is already impacting the economy and the lives of Chile’s citizens and will continue to do so in the medium and long term. Temperatures have risen, water scarcity is acute in many parts of the country and climate hazards occur more and more frequently, threatening well-being, biodiversity, and infrastructure. Air pollution remains a significant health hazard. These challenges call for accelerating adaptation efforts.
Temperatures will rise in Chile in the next decades, especially in the Andes and the northern zone (Ministry of Environment and CR2, 2021[5]). A warmer, drier climate can increase the risk of wildfires, floods, and landslides (World Bank Group, 2021[6]). Close to one third of the country faces at least two climate-related risks, notably heat stress and flooding. Extreme heat has affected nearly a quarter of the population since 2018, potentially hindering labour productivity and GDP growth (Dell, Jones and Olken, 2014[7]). Wildfires, as the deadly ones in 2024, threaten a large share of the population, the third highest share in the OECD (Figure 4.1).
Air pollution in Chile is a serious public health issue, with PM2.5 concentrations among the highest in the OECD and far above the World Health Organisation’s air quality guideline of 5 micrograms/m3 of PM2.5 (WHO, 2021[8]), endangering the health of nearly 90% of the population (Figure 4.1). Chile has high levels of access to drinking water, but it ranks 16th out of 164 countries for baseline water stress (World Resources Institute, 2023[9]), as availability of freshwater is falling due to resources over-use, drought and the effects of climate change on the hydrological cycle (OECD, 2024[2]).
A policy approach that considers regional differences in risks to economic growth and well-being is key in Chile, as climate-related risks vary significantly across regions (Figure 4.2). Estimates of changes in risk under a “business as usual” scenario show that the north and the centre of the country are under higher threat of health hazards related to heat, while drought and risks to plant biodiversity concentrate in the centre. All along the coast there are settlements with higher risk of flooding. Recent research has found that around 39% of the appraisal value and 37% of properties are exposed to climate risks, including, fires, floods, drought, and coastal deterioration, with higher intensity in the centre of the country (Cortina and Madeira, 2023[10]). Climate risks could pose threats to financial stability (see Chapter 1), lowering the value of physical collateral for banks, especially if not insured, leading to increasing credit requirements and heightened market volatility (Sutherland et al., forthcoming[11]).
Higher frequency and stronger intensity of natural disasters will also impact public finances. Direct channels include the immediate fiscal cost of providing disaster relief to vulnerable households and firms, repairing, or replacing damaged infrastructure, and fulfilling explicit and implicit contingent liabilities (Sutherland et al., forthcoming[11]). Extreme weather events can also reduce output growth and government revenue by eroding the tax base (Fuje et al., 2023[12]), while also posing risks to debt sustainability (Gagliardi, Arévalo and Pamie, 2022[13]).
Source: OECD Environment Statistics.
4.1.1. Mobilising resources for investment in adaptation
The government is taking adaptation actions, as mandated by the Framework Law on Climate Change. The National Plan for Adaptation to Climate Change (PNACC) that coordinates adaptation actions across sectors, localities, and regions, is being updated and 12 sectoral adaptation plans have been published. However, limited capacity and financial resources hinder implementation (OECD, 2024[2]). Furthermore, the lack of precise information on specific adaptation financing needs makes it difficult to properly budget for expenditure in adaptation, disaster relief and prevention, leading to insufficient and ill-planned financing. Ensuring sufficient and stable funding for adaptation, including by regularly planning and budgeting for adaptation spending would enhance adaptation efforts. To further progress on adaptation, developing financing strategies, strengthening co-ordination across administrative levels, building capacity at the sub-national level, and encouraging public-private collaboration will be needed as outlined in the 2024 OECD Environmental Performance Review of Chile (OECD, 2024[2]).
Increasing private investment in adaptation is crucial. Fostering private investment in climate-resilient infrastructure should be a priority, as every dollar invested yields about four dollars of benefits (OECD, 2024[14]). Chile could take several approaches to incentivise infrastructure operators to invest more in resilience. Integrating climate resilience clauses into public-private partnerships (PPP), as Colombia did in road concessions, could help spur private investment in resilient infrastructure (OECD, n.d.[15]). Chile could require that adaptation measures are integrated into transport infrastructure design, like in Spain, Colombia, or Costa Rica, or introduce financial penalties for climate-related service disruptions in critical infrastructure, like in Sweden and Norway. Chile could also make greater use of methodological tools to integrate environmental and climate considerations into project appraisal, like New Zealand did for monetising the benefits of resilience to earthquakes, volcanic activity, and extreme weather in its transport infrastructure (OECD, 2024[14]). Chile has considerable experience strengthening resilience to earthquakes, including through investment in research and training, strict building regulations that are updated based on data, and constant education of the public. The country could leverage this experience to foster infrastructure resilience to climate change.
The public sector can also facilitate access to funding for investment in climate adaptation. The government is updating its Financial Strategy for Climate Change, to propose measures aimed at achieving its mitigation and adaptation goals. To help mobilise additional funds for green investment, including in resilient infrastructure, the government plans to create the Financing and Investment Agency for Development (AFIDE) (see Chapter 1).
4.1.2. Increasing access to insurance and knowledge about climate risks
Access to insurance for households and businesses could be improved to increase resilience to climate impacts. Moreover, widespread insurance can alleviate the negative macroeconomic and welfare impact of catastrophes and free public resources otherwise used for disaster relief or reconstruction of infrastructure. As part of a strategy to mitigate the impact of earthquakes on public finances, in 2023 the Ministry of Finance contracted insurance for around USD 630 million. However, the penetration rate for non-life insurance was 1.7% in 2022 in Chile, well below the OECD average of 5.1%. Only 3% of respondents to a recent survey had home insurance, which is critical given the risk of wildfires (CAF and CMF, 2023[16]), with households with lower levels of education less likely to have insurance (Madeira, 2023[17]). Increasing access to insurance requires raising awareness of climate-related physical risks, identifying, and supporting access to insurance for vulnerable segments, and increasing the availability of affordable insurance through insurance regulation (OECD, 2022[18]). The 2023 FinTech law (see Chapter 3) relaxes processes and requirements to foster lower-cost insurance and is a welcome step. The law explicitly allows index-based (parametric) insurance, which eases the process to claim the insurance after a sinister, and promotes insurance aimed at underserved segments of the population.
Insurance take-up can also be increased through stricter regulation. Fire insurance is already mandatory in Chile for all apartments and common areas in condominiums and is usually required by financial institutions when granting mortgages. Chile could consider extending mandatory insurance to all types of properties and other types of climate-related risks, like floods and landslides. For example, in France, flood insurance is mandatory for all properties, regardless of their location, while it is required for mortgages in Belgium and Denmark. To increase awareness of risks, sellers and landlords could also be required to disclose information on previous compensation paid on a property damaged by a natural disaster, as done in France and Australia. These measures should be complemented by tightening current regulations on new constructions in high-risk areas or by improving their enforcement, and by setting up means-tested subsidies to ensure that premiums are affordable for lower-income sectors, and that their access to credit is not curtailed (OECD, 2024[19]).
Note: A, B, C: The maps represent the proportion of comunas per region where the risk index will increase by more than 40% (60% in map C) between a historical average (1980-2010) and an average for 2035-2065 (derived from a high-emission climate scenario of “business as usual” [RCP 8.5 scenario] considering historical sensitivity and resilience factors). The predisposition to suffer impacts is considered, not its probability of occurrence. D: the risk is calculated as the multiplication of threat, sensibility, and exposition. Full methodological details available in (Pica-Téllez et al., 2020[20]).
Source: Atlas de riesgos climáticos, Ministerio de Ambiente, arclim.mma.gob.cl (Ministry of Environment, 2020[21]).
Raising risk awareness, as well as increasing knowledge about risk reducing and prevention measures is important for adaptation. Estimates suggest that one US dollar (USD) invested in prevention could save up to USD 7 in relief costs (FAO, 2021[22]). Chile has advanced in using technology to provide the population with tools to handle risks threats stemming from climate change. A Climate Risk Atlas geo-references current and projected climate-related risks at the communal level (Ministry of Environment, 2020[21]) (Figure 4.2), and the National Disaster Prevention and Response Service (SENAPRED) provides early warnings for flash floods and other climate-related events. The Ministry of Economy, Development and Tourism is also implementing an agenda to assess climate-change risks in supply chains to guide investment in adaptation measures. Chile could consider dedicating some public funding to further raise awareness among the population and develop risk reduction and prevention projects, as Colombia does with its National Adaptation Fund (OECD and World Bank, 2019[23]).
4.1.3. Reducing air pollution
Local air pollution in Chile remains a problem. Nearly 90% of the population is exposed to air with PM2.5 concentrations much higher than the World Health Organisation’s air quality guideline (Figure 4.1). Chile has been a pioneer in using taxes on emissions of local air pollutants, managing to reduce emissions of sulphur dioxide (SO2), PM10 and PM2.5 particulate matter compared to 2010 levels. However, emissions of nitrogen oxides (NOx) and PM2.5 have continued to rise in recent years (OECD, 2024[2]). Residential wood burning is the main source of emissions of particulate matter, especially in central and southern Chile (Figure 4.3). Using charcoal or wood for cooking or heating is very common in several Chilean regions, like Araucanía, Los Lagos, or Los Ríos, where at least 84% of households do it (Ministry of Social Development, 2024[24]).
Air pollution carries high costs. Pollution with PM2.5 particulates has been found to cause around 3 000 hospitalisations and close to 4 500 deaths in Chile each year (Huneeus et al., 2020[25]), and its economic cost has been estimated at 1.6% of GDP for Chile, and around 4% of the output of the Araucanía, Los Lagos, and Los Ríos regions (de la Maza et al., 2024[26]). As temperatures rise due to climate change, the risk of mortality related to respiratory disease for fine particulate matter (PM2.5), nitrogen dioxide and ozone is also likely to increase (EEA, 2020[27]). Climate change has already led to more frequent wildfires and longer wildfire seasons, increasing emission of GHG and particulate matter, and hampering air quality for many people.
Note: Magallanes includes Magallanes and Chilean Antarctica.
Source: (Ministry of Environment, 2023[28]) Reporte del Estado del Medio Ambiente 2023.
The government has issued a Law to Regulate Solid Biofuels, that covers their quality and conditions for sale, whose regulations are under consultation with indigenous communities to avoid affecting their traditional practices. The Ministry of Energy operates three programmes to foster a formal biofuels market and to support sellers to reach the quality standards set in the law: a fund to promote the use of drier firewood, which is less polluting; a quality seal for producers who meet standards; and a fund to promote the implementation of large-scale Biomass Centres in the Los Ríos region. Furthermore, the Ministry of Environment is promoting the exchange of wood-burning heaters for greener alternatives, like pellet stoves, which have been shown to significantly reduce the environmental impact of heating, although at a higher cost over the lifetime of the house (Larrea-Sáez et al., 2024[29]). The exchange often requires a co-payment, which could discourage poorer households from applying. To increase take-up while avoiding energy poverty, programmes for the purchase and operation of cleaner heaters could be scaled up, and co-payment requirements relaxed for poorer households.
Chile’s GHG emissions rose by 48% between 2000 and 2020, driven by carbon dioxide (CO2) emissions from fossil fuel burning, with a decrease in 2020 due to the COVID-19 pandemic, which allowed the country to meet its 2020 target (Ministry of Environment, 2022[30]). Energy industries and transport were the main contributors to emissions growth over the last 20 years and accounted for 30% and 26% of emissions in 2020, respectively (Figure 4.4). Land use, land-use change, and forestry (LULUCF) have consistently contributed to capture carbon, reducing emissions, except for 2017, when massive wildfires affected Chile and added to GHG emissions.
Chile will require stronger efforts to reduce emissions. Emissions may not meet the 2025 and 2030 targets (OECD, 2024[2]). According to Chile’s targets, GHG emissions must peak in 2025; fall by 10% with respect to 2020 to reach the 2030 target of 95 Mt of CO2-equivalent (CO2eq); and reach net zero by 2050, which requires reducing emissions by around 31% compared to 2020 (Government of Chile, 2022[31]) (Figure 4.5). Moreover, government plans to reach net zero depend critically on meeting the target of carbon sequestration by LULUCF, of 65 Mt CO2eq by 2050. However, carbon sequestration is very sensitive to wildfires, which are increasing in the country, as shown by widespread fires in 2023 and 2024.
GHG emissions, Mt CO2 equivalent
Source: OECD Environment Database.
Chile: historical GHG emissions, targets, and carbon neutrality projection, Mt CO2eq
Note: CO2eq = carbon dioxide equivalent. GHGs = greenhouse gases. LULUCF = land use, land-use change and forestry. NDC = nationally determined contribution. NDC targets are based on total GHG emissions excluding LULUCF. Chile presents specific targets for LULUCF additionally. The transition scenario reflects sectoral budgets needed to meet targets but are not projections of emissions based on current policies.
Source: (OECD, 2024[2]). OECD Environmental Performance Reviews: Chile 2024.
Main national instruments
Long-Term Climate Strategy (ECLP), the roadmap to achieve the emission goal.
The Nationally Determined Contribution (NDC), to be updated in 2025, that establishes the national mitigation and adaptation commitments in line with the Paris Agreement.
Sectoral plans for climate change mitigation and adaptation.
The Framework Law on Climate Change formalises several bodies like the Inter-Ministerial Technical Team on Climate Change and the Regional Climate Change Committees. The law also creates a National System of GHG Inventory, to monitor coherence and quality of reported emissions; a Financial Strategy for Climate Change, to guide public and private contributions to financing decarbonisation; and also introduces emission standards and tradable carbon credits. Another significant improvement of the institutional framework is the creation in 2023 of the Biodiversity and Protected Areas Service (SBAP) to oversee biodiversity monitoring in protected areas.
Source: (Government of Chile, 2022[32]). Framework Law on Climate Change; (OECD, 2024[2]). OECD Environmental Performance Reviews: Chile 2024.
Chile has significantly strengthened its institutional and legal frameworks for environmental policy recently (Box 4.1). In June 2022 Chile published the Framework Law on Climate Change, which makes carbon neutrality legally binding by 2050 and sets the legal framework to implement long-term mitigation and adaptation measures for the country to meet its multilateral commitments (OECD, 2024[2]). Despite progress on implementation of the law, several challenges remain. The approval of regulations and normative changes mandated by the law is advancing, with 17 out of 20 approved by the council of ministers. Chile has a single system for monitoring of climate policies and citizen engagement, but its implementation faces challenges regarding inter-institutional coordination for information delivery, the integration of existing platforms into a single system, and making the system accessible to all users. Furthermore, implementation of the law requires technical capacity at national and subnational levels, including personnel with relevant expertise (OECD, 2024[2]). Environmental risks vary significantly per region, yet regional and provincial administrations have played a minor role in environmental management, and local governments have little fiscal autonomy and lack resources for environmental services (OECD, 2024[2]). The Framework Law mandates local governments to develop regional and local climate change action plans that need to be aligned with national instruments.
4.2.1. Strengthening environmental policies
According to the OECD’s Inclusive Forum on Carbon Mitigation Approaches (IFCMA) stocktaking of climate change mitigation policies, Chile uses mostly taxes and subsidies rather than regulatory approaches to mitigate climate change, largely in the transport and energy sectors, the main emitters (Box 4.2). Work is underway to start a review of the effectiveness of regulatory measures to reduce CO2 emissions. Overall, more consistent price signals and more stringent regulations are needed, coupled with the phase out of fossil fuels in favour of greener options, as discussed below.
The Inclusive Forum on Carbon Mitigation Approaches (IFCMA) is the OECD’s flagship initiative to enhance the global impact of efforts to reduce GHG emissions through improvements in data collection and dissemination, and exchange of evidence-based experience on the effectiveness of different carbon mitigation approaches. One of two pilot studies that IFCMA is conducting is for Chile, including taking stock of its climate change mitigation policy instruments and estimates of the GHG emissions that these instruments cover. There are 36 main mitigation policy instruments (Figure 4.6), 9 of which are taxes and fees, and they are applied mainly in the transport and energy industries, the sectors that account for most emissions.
Note: Panel A: one instrument can be applied to several sectors.
Source: IFCMA Stocktaking of Policy Instruments, Chile pilot study.
Chile has advanced regulation in several areas, like addressing air pollution through the Environmental Regulation Programmes (PRAs) and introducing a Law on Energy Efficiency to reduce energy intensity by at least 10% by 2030, but there is scope to strengthen environmental impact evaluations to adjust existing regulations to environmental objectives, as recommended in the 2022 OECD Economic Review of Chile.
Higher carbon pricing can accelerate the shift to cleaner energy
Meeting decarbonisation targets will require higher carbon prices, along with other measures. At USD 5 per tonne of CO2, the tax on carbon emissions from stationary sources is low by international standards (Figure 4.7, Panel A) and significantly lower than the social cost of carbon, estimated by the government at USD 63.4 per tonne of CO2 (Ministry of Social Development and Family, 2024[33]). The coverage of the carbon tax also needs to be broadened, as it currently covers only a third of GHG emissions (Figure 4.7, Panel B). Since 2022, the tax applies to all stationary sources that annually emit 100 or more tonnes of PM2.5, or 25 000 or more tonnes of CO2 per year, without exclusion of any sector (OECD, 2024[2]). This is an expansion of the tax base, which is welcome, as research suggests that it will increase the tax coverage from 39% to 45% of CO2eq emissions (IMF, 2023[34]). Additionally, a 2023 reform effectively exempts power plants using renewable sources from the carbon tax as of 2024, in line with a recommendation from the previous OECD Economic Survey (OECD, 2022[35]) (Table 4.1), which is welcome since it eliminates a distortion that reversed the incentive to invest in cleaner technologies intended by the tax.
A medium-term objective of a carbon price of at least USD 35 per tonne would better reflect the true social cost of polluting, as suggested in the previous 2022 OECD Economic Survey of Chile, although even that would likely still be insufficient. Estimates suggest that setting the carbon tax at USD 15 per tonne of CO2 in 2024 and increasing linearly to USD 60 per tonne of CO2 by 2030 can bring GHG emissions in line with the NDC target by 2030, but that a more modest increase to USD 50 will fail to do so (IMF, 2023[34]). Other estimates suggest that to meet emission goals a much higher carbon tax would be needed (O’Ryan, Nasirov and Osorio, 2023[36]).
Before increasing the tax rate and coverage, the electricity price-setting mechanism needs to be reformed for carbon pricing to work effectively. Under current regulations, the tax levied on the system’s marginal power plant does not count towards the determination of the wholesale market price of electricity (spot price). The tax is excluded even when the marginal plant is fossil-fuel based, which impedes the system from differentiating between plants with higher emissions and higher costs due to the tax, and greener, more competitive plants. To avoid this distortion, the carbon tax should be included in the variable cost of all plants in the economic dispatch of electricity (OECD, 2024[2]).
Taxation on mobile sources of emissions can also be improved as today the system includes excessive exemptions, and low tax rates for diesel. The tax on the sale of new fossil-fuelled, light-duty vehicles has many exemptions, like vehicles with nine seats or more that are used for passenger transportation, vehicles used as taxis, police and armoured trucks, tractors, and trucks for loads up to two tonnes. The tax does not apply either to taxpayers who pay VAT on the purchase of those pick-up trucks if they become one or their fixed assets.
The design of excise taxes on fossil fuels has multiple distortions and is inefficient. Fuel excise effective carbon rates are among the lowest in the OECD (Figure 4.7, Panel A), and excise taxes apply only to motor vehicle fuels, but fuel for the air, sea and rail transport sectors is exempt. Large-size cargo transport by truck and diesel for off-road vehicles also receive tax refunds. The tax rate for diesel is much lower than for gasoline (Figure 4.7, Panel C), which is not consistent with the difference in their carbon content (EIA, 2023[37]), and has led to Chile’s per capita consumption of diesel to double the regional average. Broader carbon pricing on mobile sources could correct these distortions to help meet climate goals. First, the excise rate on diesel could gradually increase to be on par with that of gasoline, as recommended by the OECD (OECD, 2022[35]). Second, sectoral exemptions on the excise tax should be phased out, and exemptions on the tax on the sale of new vehicles could be reduced. Other alternatives are applying the carbon tax for stationary sources in the transport sector, but at a higher level; an ETS, or a hybrid system of higher carbon tax and an ETS (IMF, 2023[34]).
The Tax Modernisation Law introduced a carbon offset mechanism that allows companies to lower their carbon tax burden. Since September 2023, companies can offset their carbon emissions through government-certified GHG abatement certificates linked to projects developed in Chile (or in the municipality in the case of local pollutants). Projects must be approved by the Ministry of the Environment and the emission reductions they will generate must be verified by an external third party. Certificates are sold to companies, who proceed to request the compensation of emissions before the Superintendence of the Environment. The law establishes three general criteria for the projects to be eligible for offsets. First, emission reductions must be additional to any environmental or sector regulation that the taxpayer faces. Second, the reduction in emissions should be measurable and verifiable by the Ministry of Environment. Finally, emission reduction projects should operate during the time that the taxpayer is liable to the green tax. The initiative is slowly taking off, and as of 2024, 8 projects had been certified for the system. During its initial phase, the system will consider existing projects already registered in three internationally recognised standards: the Clean Development Mechanism (CDM) of the UNFCCC, the Verified Carbon Standard (VCS) of Verra, and the Gold Standard for the Global Goals from the Gold Standard Foundation. To avoid greenwashing, appropriate verification of emissions reductions needs to be in place and offsets should continue to be limited to projects located in Chile.
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru. Panel A: Effective carbon rates are averaged across all GHG emissions, excl. LUCF, including those emissions that are not covered by any carbon pricing instrument, for each of the 79 countries. Effective Average Carbon Rates account for free allocation of allowances in emissions trading systems. All rates are expressed in 2023 EUR using the latest available OECD exchange rate and inflation data. Prices are rounded to the nearest eurocent. Other GHG emissions data are from CAIT (Climate Watch, 2024) while the data on CO2 emissions from energy use are based on the IEA World Energy Balances (IEA, 2023). ETS coverage and free allocation estimates are based on the OECD’s Effective Carbon Rates 2023, with adjustments to account for recent coverage changes, newly added countries and systems. Panel C: Differential between excise taxes as a share of final price.
Source: OECD Carbon Pricing and Energy Taxation Database; Pricing Greenhouse Gas Emissions 2024 (OECD, 2024[38]); IEA Database on energy prices and taxes.
The government plans a reform to address carbon pricing, including revising the rebate system for the fuels excise tax and the design of the electricity dispatch system. The reform is also expected to include a “cap-and-tax” scheme, to be based on the Output-Based Pricing System Regulations of Canada, in which companies whose emissions surpass benchmarks will either pay the carbon tax or compensate emissions with offsets, while companies with emissions below benchmarks will issue certificates to be sold. The “cap-and-tax” is seen as a first step towards an Emissions Trading System (ETS) which would reduce emissions and help to meet mitigation commitments (Benavides et al., 2021[39]; IMF, 2023[34]). The framework law already introduced emission standards and tradable carbon credits. Chile should accelerate the development of an ETS and increase carbon prices, as the current carbon tax rate limits certificates to abatement efforts whose cost is below USD 5 per tonne of CO2 (OECD, 2024[2]).
Fiscal support to fossil fuels should be reduced.
Although some subsidy programmes aim to help decarbonise the economy, like those promoting electromobility in taxis, buses and trains, there is still considerable fiscal support for fossil fuels that undermine decarbonisation efforts, like a refund scheme for the diesel excise. Support measures for fossil fuels averaged 0.23% of GDP over 2017-2022, 0.16 percent points corresponding to tax expenditures and the rest to direct transfers. This figure is below the average of 0.42% for the other Latin American OECD countries for the same period (OECD, 2023[40]).
The Stabilisation Mechanism of Fuel Prices (MEPCO) limits fluctuations in domestic prices of gasoline and diesel when international fuel prices change. It does so by adjusting the taxation on diesel and gasoline, depending on international oil prices and the exchange rate. A similar mechanism, the Petroleum Price Stabilisation Fund (FEPP), targets kerosene, which is widely used for heating. These mechanisms should remain neutral to avoid providing support for fossil fuels and weaken incentives to switch to greener sources of energy. Before 2021 and during the first half of 2023, MEPCO effectively stabilised prices without significantly subsidising fossil fuel consumption. During the first seven months of 2023, when international oil prices were below local prices, MEPCO helped raise an additional USD 0.7 billion in taxes on fossil fuels (OECD, 2024[2]). Chile’s long-term focus should be on building resilience and investing in the clean energy transition with emergency relief for fossil fuel price volatility phased out eventually (OECD, 2024[2]).
4.2.2. Improving sectoral policies to accelerate decarbonisation
Decarbonisation efforts should focus on the energy sector. At present, around 30% of Chile’s emissions are caused by energy industries, as fossil fuels remain the main source of energy supply, with 67% of the total in 2023 (Figure 4.8, Panel A). Decarbonising the transport and mining sectors, maintaining carbon sequestration capacity, and improving energy efficiency in buildings will also be key to meet climate goals.
Electricity: making the most of renewables potential
Chile can leverage further its remarkable potential for renewable energy generation at relatively low cost. The country is developing a hydrogen industry that can help decarbonise hard-to-abate sectors like heavy industry and cargo transport. According to National Green Hydrogen Strategy, more than 20% of carbon emissions could be efficiently mitigated with the use of green hydrogen by 2050.
A phase-out of coal-fired plants is ongoing: eight of these plants closed between June 2019 and December 2023, and by 2025 ten more will be ready for closure or reconversion, leading to a 65% decrease in installed capacity from 2019 levels. By 2040, the remaining 10 coal-fired plants will close or reconvert. The phase-out of coal-based power plants requires ensuring that the power sources that replace them maintain the security of supply requirements, which will involve additional investment costs for the electricity sector (Hauser et al., 2021[41]). In November 2024, the Ministry of Energy put to public consultation its Electricity Decarbonisation Plan, focused on modernising the electricity market and network, accelerating the reconversion of coal-fired plants, and engaging with communities affected by decarbonisation of power plants. Chile should complete the closure of remaining coal-fired plants adopting a stepwise plan and clear timeline.
Chile intends to reach 80% of electricity from renewable sources by 2030 and 100% from renewables and other energy sources with carbon capture in 2050, phasing out coal by 2040. Renewables already account for most of Chile´s electricity generation (Figure 4.8, Panel B), as the country has progressed in exploiting its considerable advantages. Its photovoltaic power potential is the highest in the OECD (Figure 4.9, Panel A), and it has the best onshore wind resources in the world, concentrated in the southern Magallanes region (Ministerio de Energía and GIZ, 2014[42]), along with high offshore wind technical potential (Figure 4.9, Panel B). Growing demand for electricity will put additional pressure on renewable generation. Electrification of transportation and some mining processes, and the government intention to develop a green hydrogen industry will require significantly increasing the current capacity. Producing green hydrogen is particularly electricity-intensive, as the annual production of a million tonnes of green hydrogen requires 20 gigawatts (GW) of renewable power generation (Gielen, Lathwal and López Rocha, 2023[43]). The Energy Transition law, under discussion in Congress, aims to increase the contribution of renewables to the energy mix through efficient development of transmission networks, by improving tender processes and promoting energy storage.
Note: Total energy supply includes all the energy produced in or imported to a country, minus that which is exported or stored. It represents all the energy required to supply end users in the country. Panel B: Other sources include solar thermal and geothermal.
Source: International Energy Agency.
Chile should accelerate the expansion of transmission lines to further integrate the electricity market to ensure the take up of renewable electricity. Lack of transmission lines from renewable generation in the north and south to the centre of the country meant that up to 290 GW hour of solar- and wind-generated electricity were not used in 2022 and has also led to electricity price disparities between supply and consumption areas (OECD, 2024[2]). Recent research has shown that market integration through grid expansion reduces regional price disparities, boosts investment in renewables, and lowers generation costs and pollution (Gonzales, Ito and Reguant, 2022[44]). Modernising the electricity market and grid infrastructure is one of the goals of the Decarbonisation Plan being implemented by the Ministry of Energy. Reducing administrative barriers and ensuring coordination with local governments and communication with local communities, are crucial for the efficient planning and execution of grid expansion projects, while also safeguarding the environment and the well-being of residents. The transmission line project to connect Kimal (north) to Lo Aguirre (centre), which is key to advance decarbonisation of the electricity mix, is in the environmental assessment phase and is expected to begin operation in 2030.
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru. Panel A: Data for Chile exclude land south of parallel 45°S. The estimation excludes land with identifiable physical obstacles to utility-scale photovoltaic plants. Panel B: includes potential fixed and floating foundations.
Source: World Bank (2020), Global Solar Atlas; World Bank (2020), Global Wind Atlas.
Increasing energy storage capacity will also help to optimise renewable energy generation and deployment, given the inherent variability in solar and wind power generation. Chile is making progress on increasing short-term storage capacity, but also needs to further develop long-duration energy storage solutions. By late 2023, most solar and wind projects submitted for environmental assessment included energy storage facilities, and in 2024 the largest storage battery park in Latin America opened in northern Chile. Battery parks and similar short-term storage can usually manage intra-day intermittence, which is especially helpful for solar power. However, wind generation can have longer periods of intermittence requiring long-duration energy storage (LDES) solutions that can handle intermittences of days or even weeks. A supporting policy framework for LDES development needs to include creating pathways for access and uptake, providing long-term market signals on the trajectory of the energy system, and establishing clear revenue mechanisms that enhance the viability of projects (LDES Council, 2023[45]). The government aims at having 2 GW of total storage capacity installed over 2025-2027. Chile updated in 2024 its regulations for capacity transfer between energy producers to also include energy storage systems. This amendment defines a remuneration scheme which will help potential investors in energy storage to estimate future revenues, reducing uncertainty and promoting investment. The reform of rules on coordination between producers, and operation is pending and should be prioritised.
Developing the green hydrogen industry
Chile’s potential for renewable generation has made green hydrogen a key part of its decarbonisation plans, as it is expected to contribute 21% of GHG reductions by 2050. Hydrogen does not pollute the air when burned and can be produced by applying electricity to water in a process called electrolysis. If the electricity used comes from renewable sources, the product is green hydrogen. Hydrogen can also be turned into synthetic fuels like ammonia, methanol, or methane. Given that it is highly reactive, hydrogen is expected to help decarbonise hard-to-abate sectors like mining and heavy transport.
The government launched an ambitious hydrogen strategy in 2020, aiming to reach 5 GW of electrolysis capacity by 2025 and 25 GW by 2030 (Box 4.3). Four years later, the strategy is falling behind its goals. Total capacity of operational projects is unlikely to reach the goal set for 2025. As of December 2023, there were only six projects in operation in Chile, three projects in final investment decision or under construction, and 72 projects in the concept stage, under feasibility study or under environmental assessment (IEA, 2023[46]; H2 Chile, n.d.[47]). Recent modelling suggests that to profit from its green hydrogen potential, Chile should start as soon as possible to develop hydrogen production through electrolysers, keep investing in wind and solar generation, reinforce the power transmission grid, foster the use of hydrogen for long-haul trucks and interprovincial buses, and develop seasonal hydrogen storage and hydrogen cells (Ferrada et al., 2023[48]).
The successful development of a green hydrogen industry can boost employment in several regions, attract investment, increase exports, and support growth. Additional revenues from the industry could be used to help diversify the economy and protect the environment. However, realising current plans requires additional technological progress in several areas, including desalination of seawater, improving regulation, and training enough workers with the skills needed for the industry. Moreover, Chile needs to improve licensing processes to provide certainty to firms and attract investment, ensure the provision of an adequately prepared workforce, and develop appropriate infrastructure, including ports and pipelines.
The Magallanes region, which is poised to become a green hydrogen hub, has shallow ports that lack infrastructure and move little sea freight. The Action Plan for Green Hydrogen aims to develop additional port infrastructure, with better road and rail connectivity, and mandates the state-owned oil company (ENAP) with transforming existing fuel-logistics installations to be used for green hydrogen. The government expects that the Magallanes Pact, announced in 2024, will help develop critical infrastructure, human capabilities, and productive linkages through collaboration between local and national governments, and green hydrogen projects in the region.
Estimates suggest that green hydrogen production costs in Chile are around USD 2 / kg (COCHILCO, 2022[49]), while estimates for other parts of the world range from USD 3 / kg to USD 10 / kg (Lee and Saygin, 2023[50]). However, developing a green hydrogen industry will require significant investments, whose financing and execution will determine how cost-effectively can Chile scale up its production capacity. A common rule of thumb is that the annual production of a million tonnes of green hydrogen requires 10 GW of electrolysers and USD 30 billion in investment (Gielen, Lathwal and López Rocha, 2023[43]). This would mean that reaching the strategy goal of 25 GW electrolysis capacity by 2030 requires an investment of around USD 75 billion, or 22% of GDP. An investment of this size requires diversifying and sharing risks, for example through public-private partnerships and blended finance, to avoid compromising already strained fiscal finances (see Chapter 1 and section 4.4). Chile has announced a financial facility of USD 1 billion to help GH2 investment projects reach their final investment decisions.
There is room to lower electricity costs for green hydrogen projects. More than 50% of the cost of producing green hydrogen comes from renewable energies, so it is key to ensure that energy supply and prices are stable and predictable (Frankfurt School of Finance & Management, 2023[51]). The cost of energy to make viable green hydrogen projects assumed in the 2020 Strategy did not include other costs of energy like transmission system costs and ancillary services. Adding these costs results in uncompetitive final prices for hydrogen and ammonia. A promising measure to lower electricity supply costs is implementing grid enhancement technologies (GET) (Finat, 2024[52]). These technologies include control devices, sensors, and analytical tools that improve the efficiency in the transmission of electricity across the existing infrastructure, reducing congestion when electricity demand is high, and helping delay the need for building new transmission lines. Allowing generators of non-conventional renewable energies to participate in the market for ancillary services that support the transmission of power from generators to consumers, which is possible under current regulation, can also lower costs (Finat, 2024[52]).
Building an enabling environment is also key to attract funding for green hydrogen, especially regarding the ease of doing business and regulatory transparency. Regulatory and administrative burdens remain comparatively high in Chile (see Chapter 1), with complex sectoral permitting processes that lack systematised and readily available supporting information, with long durations (Figure 4.10), multiple rounds of observations, and high rates of rejection (CNEP, 2023[53]). Environmental impact assessments are long, taking on average 25 months, and institutions can make observations in matters outside their remit, delaying investments. For example, a desalination plant, crucial for large-scale electrolysis of sea water, can take more than 11 years before it can start working (CNEP, 2023[53]).
Two recent initiatives to improve and update regulation for decarbonisation and energy transition can increase Chile’s attractiveness for green hydrogen projects. The bill of the Law for Sectoral Authorisations aims to cut by a third the time to obtain all permits to start a business (see also Chapter 1). It establishes maximum periods for all procedures, introduces proportionality criteria, clarifies the rules for the application of “silence is consent” provisions, requires an assessment of admissibility before starting a permit review process, and creates a one-stop-shop for all permits. Another bill of law strengthens the technical nature of the environmental assessment process by eliminating political bodies from the decision chain. Additionally, to streamline processes and reduce timelines, the government has allocated additional resources to hire professionals and implement management measures in public services dealing with the most critical bottlenecks.
Support from the government can lower the high capital burden for investors in green hydrogen projects until the market can attract more private capital. The government is providing funds to boost green hydrogen production through several programmes (Box 4.3), and the Action Plan will create tax credits to promote green hydrogen projects that foster the transfer and development of new technologies, including decarbonisation of production. Direct support can be more transparent than tax incentives and their effectiveness must be regularly evaluated to ensure that public funds are being used efficiently. Including green hydrogen in national taxonomies can also help attract investors.
The government has received nine expressions of interest from companies to set up production plants for electrolysers and plans to provide incentives for these companies from 2024. The government is also funding R&D on green hydrogen to reduce knowledge gaps on technology and infrastructure, scale up capacity and reduce costs. Corfo and the regional government of the Magallanes region are running the programme “Green Hydrogen Transforms Magallanes”, to establish an R&D pole on green hydrogen and its derivatives, and expects to attract scientists, technicians, and specialised personnel. Corfo expects to replicate this programme in the Bío-Bío region.
Legal vs. effective reviewing time, average 2018-2022, months
Note: SERNAGEOMIN: National Service of Geology and Mining, DGA: General Directorate for Water.
Source: (CNEP, 2023[53]) Análisis de los permisos sectoriales prioritarios para la inversión en Chile.
On the demand side, the government wants to assess potential demand for hydrogen and its derivatives by developing a long-term planning methodology. Other initiatives include gauging demand in the industrial sector through reconversion and processes adaptation to switch to hydrogen and using green hydrogen in mining trucks. The government is preparing regulations to encourage hydrogen demand, including for fuel stations, hydrogen quality standards, and road transportation of hazardous loads. A careful assessment of whether using hydrogen makes sense is needed to avoid promoting its use in applications where it might be replaced by cheaper or more convenient alternatives.
Safety considerations could discourage some workers or communities from engaging in the hydrogen sector. The Action Plan aims to increase coordination between the Ministry of Health and the Superintendency of Electricity and Fuels to speed up the approval of permits regarding worker and community exposition to risks. Reducing gaps and overlaps on supervision by both entities should be prioritised. Furthermore, improving communication to reduce gaps between perceptions and reality of risks, establishing training standards for safe hydrogen handling, and ensuring that technical education curricula comprehensively cover hazard reduction, can help assuage safety concerns (OECD, 2023[54]). Reducing the environmental impact of the green hydrogen industry is also key to increase its attractiveness. In Chile, water for electrolyser plants in the Magallanes region would come from desalinated seawater, which would produce substantial amounts of leftover brine. Disposing brine in the sea can harm the surrounding marine environment. Regulations associated with the extraction and desalination of seawater should be strengthened, including the management of environmental impacts (OECD, 2024[2]). Recent technical breakthroughs have allowed to produce hydrogen directly from untreated seawater and to use brine to make valuable chemical byproducts. Fostering innovation through continued support for R&D and technical education can prepare the hydrogen industry to implement these advances under local conditions to reduce environmental impacts.
Goals of the National Strategy
The Strategy was launched in 2020. An advisory board with experienced public policy and climate action experts will advise the Ministry of Energy. The Strategy foresees three waves of implementation:
Wave I: 2020-2025: Domestic ramp up and export preparation. The goal is to have an electrolysis capacity operating and under development of 5 GW, and to be the top destination for green hydrogen investment in Latin America.
Waves II & III: 2025-2030 & 2030 onwards. The goal is to produce 25 GW by 2030, with the lowest cost in the world, and becoming leaders in export of green hydrogen and its derivatives.
The Action Plan
First window (2023–2025): which aims at establishing the regulation required and strengthening ties with potential customers. This will require an efficient permitting system, setting fiscal incentives, amending regulation, establishing environmental and social standards, and promoting local demand.
Second window (2026–2030): focused on starting to develop productive capacity, with attention to local development. This phase entails establishing tailored land management instruments, establishing the required regulation, and training enough workers.
Government funding for green hydrogen development
The Chilean government provides funding for green hydrogen production through several initiatives:
Corfo, the Chilean Economic Development Agency, is promoting R&D in green hydrogen (20 initiatives in evaluation), innovation in technology (36 initiatives in evaluation), and increasing competencies in green hydrogen. It has also provided USD 50 million in direct subsidies to firms developing green hydrogen projects larger than 10 MW with operation starting before 2025.
Facility for the Development of Green Hydrogen and its Derivatives: The facility (USD 1 billion) aims to provide collateral and credit for financial entities to support green hydrogen projects, including wind and solar plants, transmission lines and desalination facilities, as well as fostering local demand for green hydrogen, providing capacity building, supporting innovation and entrepreneurship, and strengthening local supply chains and export capability. The facility was set up with USD 250 million from Corfo, and credits from the Inter-American Development Bank (USD 400 million), the World Bank (USD 150 million) and USD 100 million each from the KfW Development Bank and the European Investment Bank.
Source: (Government of Chile, 2020[55]). National Green Hydrogen Strategy. (Government of Chile, 2024[56]). Plan de Acción de Hidrógeno Verde 2023-2030, and Corfo.
Transport: stepping up progress towards electromobility goals
Decarbonising the transport sector, which currently represents 26% of GHG emissions and has high emission intensity (Figure 4.11, Panel A), will be key to meet climate goals. However, energy consumption by transport rose 35% since 2010, to reach one third of total consumption in 2020. Chile’s GHG emissions scenarios for 2020-2030, based on sectoral carbon emission budgets under current plans, allow transport emissions to increase the most relative to other sectors. This suggests that it will be difficult to meet the target of reducing transport-related GHG emissions by 40% by 2050 compared to 2018 levels (OECD, 2024[2]). Chile should set more stringent GHG emission targets for the transportation sector, along with investing in public transport infrastructure and promoting affordable electromobility.
Public transportation outside Santiago needs to improve. The efficiency of Chile’s train services was ranked 61 out of 103 in the 2019 World Economic Forum’s Global Competitiveness Report, far below OECD countries. Outside Santiago, there is little integration between buses and other transportation means, with exceptions like Valparaíso and Concepción. The Trains for Chile project will link communities in Valparaíso with the Greater Santiago area by 2030, but Chile needs to keep expanding investment in sustainable public transportation and improve its accessibility, efficiency, and coverage in urban areas with a specific focus on small- and medium-sized cities (OECD, 2024[2]).
Chile has an ambitious Electromobility Strategy aiming that by 2035 all new urban transport units and sales of light vehicles and heavy machinery will be zero-emissions, by 2040 all sales of machinery and all urban public transport buses, and by 2045 all inter-city buses and land freight units. To reach the targets, progress needs to pick up, as light and medium electric cars were only 3% of sales in 2023 (Figure 4.11, Panel B), one of the lowest shares in the OECD (IEA, 2023[57]). Reducing access to high-emitting vehicles and deploying sufficient public charging infrastructure is needed to speed up the uptake of greener vehicles (ITF, 2023[58]).
Fiscal incentives, such as tax incentives, can increase the uptake of low and zero-emission vehicles, but must be carefully designed to avoid some of their pitfalls and only be used after careful cost-benefit analysis. Low- and zero-emission vehicles pay reduced or no vehicle circulation tax in Chile, and owners can apply a shorter useful life for tax purposes. However, there is evidence that a sizable portion of subsidies can go to consumers who would purchase a low-emission vehicle even without the incentives (Fournel, 2023[59]). Incentives should be targeted at the most polluting vehicles, like schemes where buyers of low-emission vehicles receive a financial payment to retire their less efficient models (Fournel, 2023[59]; Camara, Holtsmark and Misch, 2021[60]), or, preferably, to programmes aimed at heavy vehicles, like the “Change your truck” programme implemented in Chile in 2009-2011. For these schemes to reduce emissions, subsidies should not apply for the purchase of fossil-fuel vehicles and be conditional on the vehicles to be retired (Linn, 2020[61]). Several OECD countries have subsidy programmes for the acquisition of electric trucks, like the Netherlands, where the amount depends on the size of the company buying the vehicle, or France, where grants can reach up to 40% of the cost of a new electric truck (IEA, 2023[62]).
Chile will need to increase its electricity charging infrastructure. Growth in electric vehicles depends on the ability to match rising charging demand with accessible, reliable, and affordable infrastructure, either through private charging in homes or at work, or publicly accessible charging stations (IEA, 2023[63]). Chile has a reasonable amount of charging points for the size of the current electric vehicle stock, but 70% of public charging infrastructure is in the metropolitan area. The Ministry of Energy and the Energy Sustainability Agency are working on infrastructure plans at a national level and in the northern regions to identify suitable locations for the installation of more charging points, that should be no further than 100 km from intercity highways. This can contribute to increase the use of electric vehicles, and facilitate the electrification of long-haul freight, which currently lags that of urban freight. A functional interoperability platform for charging systems began operations in November 2024, which will allow users to find information on location, type of infrastructure and price of available charging stations, all of which should be fully compatible with any electric vehicle.
Decarbonisation of public transportation has made notable strides, but most of the advance is concentrated in the metropolitan region, where most of the population resides. As of early 2024, around 37% of public buses in Santiago were electric, well above the world and OECD-Europe shares, and that number is expected to rise to 55% by the end of 2026 (Figure 4.11, Panel C). The city has the largest fleet of electric buses outside of China, but the rest of the country only has electrified 1.4% of its fleet.
Developing a functional electric bus ecosystem outside Santiago should be a priority. A bill of law under discussion in Congress requires that at least 50% of resources from the Regional Support Fund are directed to public transportation. Other cities could benefit from the lessons learned from expanding sustainable transport in Santiago. However, discussions and design of projects are very centralised, and the institutional framework for urban projects is atomised between ministries, regional governments, and municipalities, which can lead to lengthy processes to execute investment due to poor coordination. Achieving economies of scale in electrification of bus fleets in smaller urban centres can also be difficult, as regional companies are smaller and many lack capacity to invest in vehicles that usually become cheaper to operate than diesel alternatives only after seven years. Bridging skills gaps in project management between regional and central administrations, regulating regional companies’ operation through contracts with the State, and providing economic incentives to small companies outside Santiago to buy electric buses can help accelerate the pace of electric infrastructure deployment in Chilean regions.
Note: LAC is a simple average of Colombia, Costa Rica, and Mexico.
Source: A: ITF Transport Statistics database B: (ANAC, 2023[73]), Reports on sales of low-emission vehicles 2022 and 2023; (ANAC, 2023[74]). Automotive Market Reports 2021, 2022, 2023 C: Government of Chile projections, Eurostat, IEA Global EV Data Explorer.
Emission standards for new vehicles can help reduce emissions from road transportation. Chile was the first country in Latin America to incorporate the EURO VI emissions standards for new light-duty vehicles, which is expected to reduce PM2.5 and NOx emissions by 51% and 55%, respectively, by 2030 (OECD, 2024[2]). However, this might lead to slower fleet renewal rates, particularly in the north, where average vehicle age is higher and purchasing used cars is more common (De Vicente, 2022[64]). To reduce incentives to buy or sell old vehicles and boost renewal of the fleet, Chile could set higher registration fees for older and more polluting vehicles (OECD, 2024[2]).
Mining: decarbonising production processes
Identifying obstacles to green energy adoption in mining and enacting regulatory measures to overcome them will be key. Mining is one of the main users of energy in Chile and the National Mining Policy sets the goal of it being carbon neutral by 2040. As of 2022, 92% of copper operations were subjected to the Law of Energy Efficiency, and 72% already had energy management systems in place (COCHILCO, 2024[65]) . There is considerable demand for low-temperature heat in copper mining processes that can be supplied with renewable energy with appropriate design and integration. Renewable sources already account for nearly all electricity consumption in medium-scale state copper-mining operations, and 85% in large-scale private ones (Figure 4.12, Panel A), and it could surpass 70% for all the industry by 2027 (Figure 4.12, Panel B). However, large state-owned operations still have a wide gap to close on renewables use. In 2022 only a fifth of the electricity consumption by Codelco, the state company and largest copper producer in the world, was from renewable sources. Codelco has pledged to have a 100% renewable electric supply and to reduce emissions by 70%, compared to 2019 levels, by 2030; and to become carbon neutral by 2050. To fulfil those commitments, it has taken several steps in 2024, including awarding a large public tender for renewable energy. The Ministry of Mining sent for public consultation a plan to address emission mitigation challenges in the mining sector, including the decarbonisation of mining operations and the promotion of energy efficiency in the sector, as well as adaptation measures.
Source: Panel A: (COCHILCO, 2023[66]). Informe de actualización del consumo energético de la minería del cobre al año 2022. Panel B: (COCHILCO, 2024[65]). Proyección del consumo de energía eléctrica en la minería del cobre 2023-2034.
Substituting fossil fuel for electric alternatives in transport of personnel and equipment can also help to decarbonise mining. As of 2022, 86% of large-scale private mining operations, 75% of Codelco operations and 50% in medium-scale private mining operations had electromobility or low-emission plans. Green hydrogen can help abate fossil fuel use in transportation. The Ministry of Mining is identifying obstacles to the use of green hydrogen in mining trucks, and regulatory gaps in mining safety, as it can help to establish regulatory measures to aid green hydrogen adoption.
Initial costs of renewable energy deployment can be a significant obstacle to greening mining, especially for smaller operations, as thermal energy requires tailored solutions for each production process. Electromobility implies acquiring new vehicles and installing support infrastructure, and staff must be trained or hired to implement the new technologies. Also, if the renewable resource is far from the mine, it might be less competitive than traditional energy. Initiatives like the “PAMMA Small-Scale Sustainable Mining” scheme can help smaller firms bridge funding gaps to transition to cleaner energy.
Forestry: enhancing capacity to prevent forest fires
Reducing the incidence of wildfires is key to safeguard a sizable carbon sink in Chile (Figure 4.13, Panel A) that is essential to meet its decarbonisation goals (Figure 4.5). Carbon sequestration is very sensitive to wildfires, as shown by the widespread fires of 2017 that led to positive LULUCF contribution to emissions and to an all-time peak in net emissions. Since then, an additional 1.8% of forests, grassland and scrubland has burned, half of it in 2023 (CONAF, 2024[67]). Over the last decade wildfires in Chile have become larger and more widespread in comparison with the previous three decades, with longer fire seasons. The gradual increase in temperatures has contributed about 20% of the area burned in the last three decades, and it is estimated that by the end of this century, sustained temperature increases and reduced rainfall could lead to an average climate similar to that experienced during the 2016/2017 megafire season (González et al., 2020[68]).
Note: LAC is a simple average of Colombia, Costa Rica, Mexico, Argentina, Brazil, and Peru.
Source: Panel A: OECD Environment Database. Panel B: Global Land Analysis & Discovery (GLAD) lab, University of Maryland, accessed through Global Forest Watch, database from (Tyukavina et al., 2022[69]).
Land management practices compound climatic risks. Monoculture plantations of non-native, highly flammable evergreen species, which are common in Chile, can increase wildfire risk (Barquín et al., 2022[70]). Widespread conversion from native to foreign and monoculture plantations, and expansion of wildland-urban interface areas, including informal settlements in forest zones, were factors behind the rapid spread of the devastating 2024 fires (Kimutai et al., 2024[71]). In 2023, 52% of the area burned in Chile was plantations and only 15% were native forests (Gómez-González et al., 2024[72]). The 2017 fires affected non-native pine and eucalyptus more extensively and more severely than the native vegetation (Bowman et al., 2019[73]). Lack of water also has contributed to the browning of non-native trees, increasing their flammability.
Improving management of forest resources is key to preventing forest fires. Reducing the accumulation of combustible material in wooded areas, and strengthening land-use planning and building regulation, can enhance wildfire prevention. For example, buffer zones in wildlife-urban interface areas can be set up, and development in fire-prone areas can be tightened through zoning regulations (OECD, 2023[74]). The government strategy to strengthen forest fire management includes a plan for reducing wildfire risk in urban-forest interface areas and geo-referencing critical infrastructure. Chile has increased its budget for firefighting in recent years, but ensuring stable public resources for wildfire prevention should also be a priority (OECD, 2023[74]).
Chile must improve its laws to manage forests and plantations resources, and to foster recovery of native forests. The scope for wildfire prevention in current laws is limited, as it only applies to certain types of forests and plantations; there is no legal basis for requiring fire prevention measures, and implementation has been patchy. Furthermore, the National Forestry Corporation (CONAF) has limited functions. A Law on Wildfires being discussed in Congress aims to strengthen prevention strategies and landscape management. The bill defines wildlife-urban interface areas in land-use planning instruments, strengthens existing forest management instruments, and establishes a new regime of penalties. CONAF has also increased the number of Analysis and Diagnostic Units to research wildfire causes, now covering 43% of fires, which contributes to design better prevention measures (CONAF, 2024[75]).
To achieve its carbon sequestration goal, Chile should also continue efforts to prevent degradation of its native forests. The country has increased its forest cover since 2000, and it is implementing the National Strategy of Climate Change and Vegetal Resources to enhance sustainable land management and foster the preservation of native forests. The Strategy aims to reduce degradation of at least 264 000 hectares of vegetal resources between 2017 and 2025, and to reach a reduction of 20% in GHG emissions from deforestation and forest degradation by 2025, compared to the 2001-2013 baseline. As part of the Strategy, by 2025 CONAF plans to establish the results-based payment schemes for environmental services.
An ETS can also be leveraged to ensure carbon capture by land-use change and forestry. In New Zealand, where LULUCF is included in the ETS, the sector increased their carbon stock by the equivalent to reducing gross national emissions by 30% in 2018 (OECD, 2022[76]). Some forests can be voluntarily registered into the ETS and can earn emissions units that represent the carbon captured but are also liable to repay units if the carbon stock falls. Most landowners with exotic forest land face deforestation liabilities under the New Zealand ETS (OECD, 2022[76]). However, a feature unique to the New Zealand ETS is that there are no limits on forestry units, and ETS pricing does not reflect the durations of carbon storage of native compared to exotic forests, and risks such as fires. Including LULUCF in an ETS should be done in a way that gives clarity to the market on the costs and benefits of exotic and native forests and their potential to offset gross emissions (OECD, 2024[77]).
Agriculture: continue reducing emissions and controlling water pollution
Agriculture emissions have continuously fallen and further progress is welcome. This is the only sector that has reduced its GHG emission over the last decade, by around 14% over 2010-2020, and the GHG emissions intensity of agricultural output of Chile is one of the lowest in the OECD. The Ministry of Agriculture has implemented mitigation initiatives like the efficient use of fertilisers and sustainability standards with mitigation actions for dairy, poultry and pork production which also includes soil management practices (OECD, 2024[2]). Chile does not have agriculture-specific mitigation targets that can be used to gauge reduction in agricultural emissions, but it can take additional actions to make the sector more sustainable, productive, and resilient. For example, Chile could scale up and target investments in extension services, and innovations on sustainable productivity and climate-smart agriculture, particularly those that reduce emissions of methane, a greenhouse gas far more potent than CO2, to fulfil its commitment under the Methane Pledge (OECD, 2023[78]). To ensure an efficient use of public resources, improved co-ordination across ministries and agencies that support the agricultural sector is key, as well as better co-ordination, communication, and accountability between regional and national governments to avoid overlapping efforts (OECD, 2023[78]).
Agriculture and aquaculture are also important sources of water pollution. Chile should broaden the coverage of wastewater regulation by developing specific emissions standards for agriculture and aquaculture. Agriculture also generates pollution in surface water, where high levels of nitrates and pesticides have been observed, warranting stricter monitoring and the possibility to introduce economic instruments for water management, like taxes on water effluents, pesticides and fertilisers (OECD, 2024[2]).
Residential buildings: improving energy efficiency
Lack of proper thermal insulation causes heat losses that increase energy consumption. Estimates suggest that around two thirds of homes in Chile have low energy efficiency and lack appropriate insulation, and that nearly 90% of public and corporate buildings do not meet minimum energy efficiency standards (Calvo et al., 2019[79]; Universidad de Talca, 2019[80]).
Plans for energy efficiency requirements in residential buildings should be more ambitious. The 2021 Law of Energy Efficiency is expected to contribute 7% of cumulative reductions in GHG emission by 2050. The National Energy Policy requires that all new buildings have zero net energy consumption by 2050, which could be brought forward to 2030, as it is the case for public new buildings that must be net zero by then. Regarding residential buildings, 35% of existing homes need to comply with new regulation on thermal standards for buildings. Moreover, regulation mandates that only 10% of existing homes comply with a net-zero thermal regulation standard by 2050, which is far too low and should be increased (OECD, 2024[2]). Chile should tighten energy efficiency requirements in residential buildings, while ensuring access to poorer households to affordable and sustainable energy-efficiency upgrades.
Waste management: reducing landfilling and fostering recycling
Chile’s waste management system has made progress but remains inefficient and must be modernised. Chile has high waste collection coverage, but it landfills a higher percentage of its municipal solid waste (92%) than any other OECD country. Organic material in landfills produces carbon dioxide and methane at equal parts. Chile has an ambitious waste management goal of 66% organic waste recovery rate by 2040. To meet that target, Chile must modernise landfill facilities with stricter environmental standards and review sanitation tariff schemes while ensuring affordability (OECD, 2024[2]). Approving the bill for the valorisation of organic waste would be a significant step forward, as it would strengthen differentiated waste management practices at the territorial level, and discourage harmful waste management practices (OECD, 2024[2]). The introduction of a landfill tax is also welcome.
Chile must significantly scale up its recycling efforts. The country aims at achieving a 40% recycling rate by 2030, but today that rate is less than 1%, well below the 25% for the OECD. The implementation of extended producer responsibility (EPR) schemes should help to promote recycling of major waste sources, but to further encourage waste reduction and recycling initiatives, Chile should tailor environmental awareness campaigns to specific community needs, and develop a long-term investment strategy for waste separation and treatment infrastructure (OECD, 2024[2]).
Lithium production has become increasingly important for Chile. Exports of lithium have grown from 0.9% of total exports -of goods in 2020 to 7.1% in 2023, and lithium production now accounts for 1% of fiscal revenue (see Chapter 1). Under the current legal framework lithium can be exploited directly by the State, by its companies or institutions, or by private companies through administrative concessions or special operation contracts. Currently, only two companies exploit lithium in Chile, both private and operating with contracts with the public agency, Corfo.
Chile is well positioned to benefit from increased world demand for lithium, as it has the largest share of known lithium reserves and produces around a quarter of world lithium (Figure 4.14). Global demand for lithium is expected to grow more than fifteen times between 2020 and 2040, especially due to growth in demand for electric vehicles and storage (IEA, 2022[81]). Although increasing Chile’s lithium industry will not directly contribute to lower emissions and reach national decarbonisation targets, it can significantly contribute to sustain the worldwide drive towards cleaner energy, while increasing jobs and investment, and presenting opportunities to move up in the lithium value chain and boost growth in Chile. Developing lithium-related activity beyond extraction to bring more value added to the economy could also trigger growth that translates into additional tax revenues.
Chile’s large reserves are located in the Atacama salt flat (10.5 million tonnes) and the Maricunga salt flat (0.4 million tonnes) in the north of the country, with 3.3 million tonnes in 9 Andean and pre-Andean salt-flats, and data on lithium presence in other 13 salt flats and 36 areas not yet studied (Cabello, 2022[82]). As a reference, the worldwide production of lithium was 106 thousand tonnes in 2021. Chile’s production costs are estimated to be the lowest among producing countries (Figure 4.15), given its high concentration of lithium and low magnesium content (Choe et al., 2024[83]). Despite these advantages, Chile’s share of world lithium production has fallen over the last decade (Figure 4.14, Panel C), as Australia’s development of its industry has outpaced Chile’s, helped by a more straightforward legal framework.
Source: UN Comtrade; US Geological Survey, January 2024.
Increased recycling of lithium will shrink the industry of lithium production going forward. The end-of-life recycling rates for lithium are 0.5% today, compared with 45.5% for copper (IEA, 2022[81]), but it is projected that lithium recycling from batteries will begin in earnest by 2030 (Figure 4.16), and that it will grow more than three-fold in the following decade, so that by 2045 the share of recycling will become substantial (McKinsey & Company, 2023[84]). Chile’s position in the cost curve could protect its lithium mining industry, but nonetheless Chile should move swiftly to ensure an adequately prepared workforce, develop technical capabilities, improve licensing processes, and make environmental assessments less susceptible to political influence, to profit from its notable advantages in lithium production.
Lithium production cost by type of deposit and grade, USD / tonne of lithium carbonate equivalent
Source: (Ambrose and Kendall, 2020[85]) Understanding the future of lithium: Part 1, resource model.
To boost the development of the lithium industry, the government published the National Lithium Strategy (Box 4.4) in 2023, which foresees significant state involvement, and different business models for public-private partnerships. The strategy aims to sustainably increase lithium production in several salt flats, while promoting production linkages upstream and downstream, and using revenues to finance further expansion. Some progress in implementing the strategy has been achieved over 2023-2024, as the Strategic Committee for Lithium and Salt Flats was established in 2023, and a review of the institutional and regulatory framework is underway. A public research institute on lithium was created in 2024 and is currently under implementation.
The State will participate in lithium production through Codelco and Enami, the national mining companies (Box 4.4). The government declared the Atacama and Maricunga salt flats as strategic, so that the State will have a majority stake (50%+1) in operations there through Codelco. In May 2024 Codelco signed an agreement with the largest lithium producer in Atacama to partner in lithium production from 2025 until 2060. The state mining companies have created subsidiaries to handle partnerships with private firms in other salt flats. Since April 2024, 36 firms have expressed interest in lithium projects in salt flats open for exploration or exploitation, through special contracts of operation.
A key challenge is the national mining company Codelco financial strains and lack of expertise in lithium production. Codelco’s debt has increased considerably, and its copper output fallen significantly (Figure 4.17). This is despite efforts since 2010 to boost copper output through strategic investments, that have led to significant cost overruns and technical setbacks that yielded less copper than expected (CESCO, 2023[86]; Cambero and Villegas, 2024[87]). In early 2024, S&P Global Ratings, Fitch and Moody’s Investor Service have all downgraded Codelco’s credit rating. Improving Codelco’s financial position and strengthening its corporate governance by enhancing the executive board’s technical expertise and independence can improve the company’s ability to be an effective partner in lithium production.
Amount of spent lithium-ion batteries from electric vehicles and storage in the Sustainable Development Scenario, GWh
Source: (IEA, 2022[81]). The Role of Critical Minerals in Clean Energy Transitions.
The government risks spreading itself too thinly in its efforts to develop the lithium industry by committing to several high-profile initiatives. Chile should prioritise and concentrate its public resources in some key activities, such as improving the state mining companies’ lithium knowledge and expertise, setting up the planned National Lithium and Salt Flats Technological and Research Institute, and monitoring the environmental impact of lithium extraction. Partnerships with private companies should help to transfer knowledge to state mining companies lacking expertise in lithium. Additionally, the national research institute would help state companies to acquire knowledge on characteristics and geologic processes in salt flats, to develop extraction technologies to be used there, and to create new products. The government should better assess the benefits and drawbacks of setting up a national lithium company.
Lithium production is vulnerable to water stress, and contributes to exacerbate it, given its high water requirements. Chile’s reserves of lithium are found in water deposits with a high concentration of salt (brines), and lithium is extracted through several stages of solar evaporation, and then processed in chemical plants to obtain lithium compounds. Producing one tonne of lithium carbonate in the Atacama salt flat requires extracting 600 000 litres of brine from the ground (SQM, 2021[88]). Although this is considerably less than the water used by other methods in other countries, the Atacama region is one of the driest environments in the world.
Lithium production could contribute to exacerbate already high water stress and decrease water availability for the unique flora and fauna in Chile. There is no scientific consensus that brine extraction from the salt flats does not affect the adjacent wetlands and aquifers. The extraction can cause fresh or brackish water to flow into the spaces left by the extracted brine, which could contribute to decrease water availability for the unique flora and fauna of the region, and for irrigation or human consumption (Blair et al., 2022[89]). Ideally, the government would monitor and assess the impacts of lithium extraction, however, lithium-rich brines are classified as a mineral under Chilean laws, which makes difficult for the government to gather data and assess the environmental impact of lithium extraction.
Source: Panel A: COCHILCO, mining production statistics; Panel B: Codelco financial statements 2013-2023.
The Lithium Strategy mandates the creation of a network of protected Andean salt flats because the wetlands in Chilean Andes, which contribute to fragile salt flat ecosystems and provide a carbon sink, could be affected by increased lithium production (OECD, 2024[2]). In March 2024 the Council of Ministers for Sustainability and Climate Change published the list of salt flats and lagoons that will be under a protected status, which will take the protected area from the current 8% to 33%, in line with the target set by the Convention on Biological Diversity. The strategy also mandates that biodiversity and hydrogeological baselines are developed to assess the impact of lithium production. The development of public baselines is ongoing and in November 2024 the government launched work for the lithium industry baseline for the Antofagasta region, to be carried out by a local university.
Given the potential effects of lithium extraction on water stress and the environment, the Lithium Strategy expects using new and more environmentally friendly extraction and processing technologies. Currently, the main new technology is direct lithium extraction with brine reinjection (DLE/R). However, this technology requires reinjecting brine into the ground, and its use must be carefully designed and executed to avoid harming the environment, or mixing spent brines with fresh, lithium-rich ones, or with aquifers for human consumption. This method has advantages (shorter production times, lower space requirements, no weather dependence), but it is not yet widely used in production, its implementation must be tailored to the hydrogeological characteristics of each salt flat, and extraction equipment can be expensive (Nicolaci et al., 2023[90]). Moreover, the additional costs and technical uncertainties associated with this technology might discourage firms, delay investments, or make Chilean lithium lose competitiveness. When establishing new partnerships with private companies for lithium extraction, the government should not push for specific technologies to be implemented, but rather prioritise technologies that use water efficiently and that have the least environmental impact.
The government should strengthen its regulatory and technical capacity to monitor water use and to assess the potential environmental impact of lithium extraction. In Chile water governance is fragmented, as there is no integrated national authority in charge of decisions for the water sector based on professional and technical recommendations, and efforts must be increased to align and co-ordinate all agents intervening in water management. (OECD, 2024[2]). Knowledge gaps in hydrogeology could be bridged by leveraging knowledge and local relationships developed by the private sector. The government hopes that the new National Lithium and Salt Flats Technological and Research Institute will help close those knowledge gaps over the medium term. The institute is expected to establish association agreements with universities, and to study new methods of lithium extraction, their impact on the salt flats, and processes associated with the lithium value chain, among other intended lines of research. Providing stable funding and ensuring that the institute’s agenda remains aligned with the government and national mining companies’ capacity needs is crucial for its long-term success.
Chile launched a National Lithium Strategy in April 2023 to boost the development of the lithium industry through public-private collaboration.
Goals
Sustainably increasing production in the Atacama salt flat, and in other salt flats within 6-8 years.
Developing a new institutional framework to update regulations on salt flats and lithium, with special attention to water and renewable energy use. Biodiversity and hydrogeological baselines will be developed before the start of projects to ensure proper assessment of impacts.
Promoting production linkages upstream (prospecting, extraction) and downstream (refining, new materials development).
Using revenues from the public-private model to finance growth-enhancing investments.
Increasing the number of companies operating in Chile’s salt flats.
Further integrating Chile in the value chain beyond mining and refining.
Strategic actions
Creation of a Public Technical Research Institute for Lithium and Salt Flats.
Development of public-private collaboration.
In the Atacama salt flat Corfo grants lease contracts (two in operation: SQM and Albemarle), while in Pedernales salt flat Codelco can establish subsidiaries or set up public-private partnerships to start production.
In other salt flats special contracts of lithium operation (CEOL) will be necessary. The State has tasked Codelco to look for a solution to start production in the Maricunga salt flat, and Enami has requested a CEOL for the “Altos Andinos” project.
Modernisation of the institutional framework.
Community involvement in the development of the strategy, especially indigenous communities.
Source: (Government of Chile, 2023[91]). National Lithium Strategy.
The financial sector has a central role to play in the green transition by channelling resources to build or retrofit infrastructure and carry out research and development, among other needs. Mobilising green finance is particularly important for Chile, which aims not only to decarbonise its economy while making it more resilient to climate risks, but to develop a new industry, green hydrogen, and scale up lithium extraction. Chile has made progress in greening its financial system and attracting resources for decarbonisation. Additional progress is needed in ensuring that the financial system identifies and incorporates climate-related risks and opportunities in their business models, increasing financing for adaptation, and providing enough training in sustainable finances to support sustainable growth.
4.4.1. Greening the financial system
Chile’s Financial Strategy for Climate Change is structured around three pillars: greening the financial system, promoting financing of green initiatives, and strengthening competitiveness of the “greened” financial system (Ministry of Finance, 2022[92]). A Public-Private Roundtable on Green Finance led by the Ministry of Finance has helped to establish an agreement to incorporate risks and opportunities stemming from climate change in private sector decisions and setting up a roadmap for a green finance taxonomy (Box 4.5). The Ministry of Finance created the Office for Sustainable Finance in 2022 to direct public and private financial flows to activities aligned with Chile’s decarbonisation agenda, promote domestic financial innovation, and advise the Ministry on sustainable development and climate finance. Chile’s regulators have also incorporated new disclosure requirements to include sustainability issues in reporting and investment decisions (see Chapter 1).
Despite progress in raising awareness of the need to incorporate environmental, social or governance (ESG) issues into the financial system’s decisions, financial sector participants point to significant gaps in knowledge about ESG matters that hinder further advancement. Other lagging areas are in the incorporation of ESG factors in lending decisions and risk models, and data gaps about customers’ preferences regarding sustainable investment. Specific training programs are needed to increase understanding and integration of ESG aspects into strategic decision-making, as financial sector participants coincide that there are knowledge gaps among boards and senior management of organisations. This results in companies providing information that is very heterogeneous and difficult to analyse, increasing the risk of greenwashing (Ministry of Finance, 2024[93]). To address this, a taxonomy of environmentally sustainable economic activities is being developed. There is also little explicit standardisation in reporting metrics, which hampers integration of information into investment decisions. Fully adhering to ISSB standards, for instance, would facilitate information comparison and integration into the global financial markets, which could foster foreign investment.
The Green Agreement of the Chilean financial system
The Green Agreement (Acuerdo Verde) was established in 2019 by the financial sector, the government, and financial regulators as a voluntary, long-term commitment to incorporate risks and opportunities stemming from climate change in the business decisions of the signatories. The goals of the Agreement are to contribute to financial stability, support Chile’s climate commitments, and turn Chile into a regional hub for green finance. The Agreement was renewed in 2024 for five years.
As of 2023, over 70% of the commitments made by participants were completed or very advanced, and in the case of the public sector, almost 100% were fulfilled. Although there are advances in raising awareness of the need to incorporate ESG issues into the financial system’s decisions, participants noted that significant gaps persist in knowledge about ESG matters that hinder further progress. Other lagging areas are in the incorporation of ESG factors in lending decisions and risk models and gathering data about customers’ preferences regarding sustainable investment.
A taxonomy of environmentally sustainable economic activities for Chile
The Green Agreement set a roadmap for the development of a Taxonomy of Environmentally Sustainable Economic Activities. Chile, as other Latin American countries such as Colombia and Mexico, is developing its taxonomy based on the EU taxonomy and will cover nine sectors. The Ministry of Finance is leading and overviewing its development.
Source: Ministry of Finance.
4.4.2. Channelling financing towards green projects
Achieving Chile’s transition goals will require substantial resources, for which traditional financing might be insufficient. The cost of implementing Chile’s Long-Term Climate Strategy is estimated to be around 18.6% of GDP through 2050 (Ministry of Finance, 2024[94]). Market actors expect that debt-related instruments like loans and bonds will be the most deployed in transition finance-related transactions, far surpassing equity (OECD, 2022[95]). Chile has advanced in issuing thematic debt instruments, including issuing green bonds, sustainable bonds, sustainability-linked bonds, and social bonds. Chile is the largest issuer of sovereign green bonds in Latin America and the first Latin American country that issued green bonds back in 2019, accounting for 14% GDP over 2014-2023 (Figure 4.18, Panel A). Between 2018 and 2023 the share of ESG debt on total gross debt of the central government went from zero to 36% of the total (Figure 4.18, Panel B). Demand for Chile’s sustainable bonds is several times the allocated amount, and the greenium for its sovereign emissions is estimated at 8 basis points (Ando et al., 2023[96]). Proceeds finance mostly clean transportation projects. The country has also received funds as part of blended finance initiatives.
The planned taxonomy of environmentally sustainable activities will help channel financing towards green projects (Box 4.5). Providing appropriate capacity building for participants to ensure its proper implementation as well as establishing a permanent structure for regularly updating it as planned can help improve ESG labelling and reduce the risk of greenwashing. Involving the private sector in the development, as Chile is doing, is also key to ensure legitimacy and building acceptance of the taxonomy.
Ongoing work on the taxonomy includes defining the technical criteria to select activities, particularly during the transition. This work should avoid creating carbon-intensive lock-in, that is, promoting high-emission investments despite availability of low-emission alternatives. That could happen if the taxonomy ends up including technologies with marginal improvements but that remain emission-intensive (OECD, 2022[95]). To prevent carbon lock-in when defining transition economic activities, the taxonomy should include sunset clauses, whereby an activity counts as a transition activity until a set date and must meet stricter requirements thereafter. Carbon assets should be future-proofed so that new or retrofitted carbon infrastructure is enabled for the use of low emission technologies, like green hydrogen (OECD, 2023[97]). The taxonomy can also help to assess the additionality of green projects, that is, whether they would not have been funded through conventional finance.
Note: ESG stands for environmental, social or governance.
Source: Panel A: Climate Bonds Initiative, Interactive data platform; and IMF International Financial Statistics; Panel B: Ministry of Finance.
Chile has several bond frameworks aligned with international standards, including for Green Bonds and Sustainable Bonds. Chile also published and updated its Sustainability-Linked Bond (SLB) Framework and issued the first-ever sovereign SLB in 2022, amounting to USD 2 billion, but there is scope to further develop the domestic market for thematic bonds and ESG bonds. To that end, the Santiago Stock Exchange established a Thematic Bonds segment in 2018, updated in 2023, gives courses on ESG topics and produced a “Guide for Responsible Investment and Reporting”. In 2022 it also started collaborating with the Climate Bonds Initiative to promote and develop standards for sustainable bonds. Several sovereign emissions of ESG bonds in Chilean pesos are meant to provide the market with benchmarks. Raising awareness among investors of the availability of green bonds as an investment option can also help foster its development.
Blended finance is another opportunity to expand green investment. To position itself as a prime destination for blended finance, Chile will have to compete with regions with high potential like Africa or the Pacific Island nations. Chile can boost its attractiveness for blended finance by seeking improvements in several areas, in line with the recommendations from the Network for Greening the Financial System. Granting enough resources to bodies tasked with fostering good investor relations and improving governance can help attract private financing. Training public sector officials can reduce knowledge gaps compared to private stakeholders. Reducing unnecessary regulations can lower investor uncertainty on timing and profitability of projects. Finally, making carbon pricing more stringent can complement advances in reporting standards and transition taxonomies, to strengthen prerequisites for climate investing.
Chile should devote more resources to adaptation. A recent survey among municipalities shows that only 10% of ongoing projects relate to adaptation needs (CDP, 2023[98]). None of the seven projects financed in Chile by the Green Climate Fund concern adaptation initiatives, unlike other Latin American peers like Mexico, Colombia, or Costa Rica, where multiple adaptation or cross-cutting projects are financed (Green Climate Fund, n.d.[99]). Increasing green finance on adaptation can strengthen preparedness for climate change risks. Chile’s green bond portfolio is concentrated in mitigation projects, with little going to adaptation initiatives. Around 95% of funds from green bonds during 2019-2022 went to clean transportation, including the electrification of the Santiago transport system and sustainable mobility projects, while only 0.1% went to water management projects. State-contingent debt instruments could also help Chile to manage public debt when faced with natural disasters. These instruments can be linked to the occurrence of natural disasters, so that they trigger an automatic reduction in the sovereign’s debt service burden, preserving policy space to undertake relief measures (IMF, 2017[100]).
Decarbonising the economy will reduce output and employment in carbon-intensive sectors and increase the costs of some goods and services, which will have distributional effects that must be addressed to ensure support for climate policies and contain effects on well-being. Over 2015-2019 about 6% of OECD employment was in occupations that are especially concentrated in high-emission industries, where employment is expected to contract at an average annual rate of more than 2% over the next decade due to ambitious emission reduction targets (OECD, 2024[101]). Displaced workers in high-emission industries face a decline in earnings that is 24% higher than those in low-emission industries (OECD, 2024[101]). Ensuring a coordinated, targeted, and well-funded policy response to assist the population affected by decarbonisation is the best way to garner support for climate policies.
4.5.1. Preparing workers for a greener economy
Chile’s green transition will impact employment in several sectors, by growing the share of employment in wind, solar and transmission sectors and shrinking the share of employment in coal plants and hydropower (Box 4.6). A comprehensive policy response is needed that includes public training programmes or incentives for employers to reduce skills shortages, boosting training and skills development programs, updating the offer and content of vocational education and training programmes, and increasing spending in active labour market programmes to facilitate the reallocation of workers. Incentives for jobseekers and workers could include providing information, advice, and guidance (OECD, 2023[102]). Policies should lower barriers to job mobility through more flexible labour and housing markets, and assistance to laid-off workers should be provided before or right after dismissal (OECD, 2023[103]). Several OECD countries provide examples of relevant initiatives (Box 4.7).
Developing a green hydrogen industry requires sufficiently skilled workers to set up, operate, and improve equipment based on novel technologies, some of them still in development. Chile’s Action Plan for Green Hydrogen Development includes several measures to better prepare the labour market. First, a labour demand study will be carried out by several ministries in 2024 to identify gaps in professional profiles that will be required throughout the value chain. Then, for 2024-2025 programmes to train technicians in high-school vocational institutions in regions primed for green hydrogen development are planned, and the ministries of energy and education are developing a secondment programme abroad for industry workers. Furthermore, the ministries of education, energy, and economic affairs are designing a programme to set up laboratories with electrolyser equipment in technical high schools and state technical education institutions, starting in the Magallanes region. The Action Plan also includes a line of work focusing on sustained incorporation of women to the hydrogen industry. Monitoring and evaluation of these programmes are key to ensure cost-effectiveness, and for their eventual deployment in other regions of the country. Higher education institutions should adjust their curricula to prepare professionals to work in the hydrogen industry both in technical careers, as the Catholic University of Chile has done with its Diploma on Hydrogen Technologies, and in non-technical careers by proposing case studies, activities and elective modules on hydrogen (The Green Skills Consortium, 2023[104]).
Ensuring a well-prepared workforce will be critical to fulfil Chile’s ambition to boost its lithium industry. Labour demand in large-scale mining for 2023-2032 is projected at 34 000 people, while the offer of human capital for that period is estimated at around 20 000 people, including higher education and high-school technical graduates (CCM - Eleva, 2023[105]). Gaps are wider in occupations related to equipment maintenance and operation, while there is a projected surplus of graduates in geology and mine extraction, but a shortage in the maintenance and operator specialties (CCM - Eleva, 2023[105]). Reinforcing work-education initiatives can help better align educational offer with demand, for example by strengthening the Ser Minería talent attraction programme, and by increasing and promoting internships and apprenticeships. The Council for Mining Competencies (CCM) has recommended adding Industrial Chemistry as a technical high-school specialisation to help prepare the workforce for increasing lithium production, as well as reinforcing digital competences across all degrees (CCM - Eleva, 2023[105]). Universities should keep strengthening their hydrogeology curricula, as the University of Chile has done.
As the share of renewables in electricity generation grows over the coming decades, employment in renewable energy sectors will increase significantly. The OECD ENV-Linkages model (Château, Dellink and Lanzi, 2014[106]) was used to assess these impacts.
Under current decarbonisation plans, wind and solar power will grow from 38% of total electricity generation in 2025 to 77% in 2050, while hydro electricity’s share will halve over that period and coal-fired plants will close over the next decade (Figure 4.19, Panel A). In 2050, total employment in the economy would be 0.95% lower under current decarbonisation plans compared to what they would be if no climate action is undertaken, but employment in wind and solar power would be 1.7 and 1.1 times higher, while in hydro power it would be 21% lower (Figure 4.19, Panel B). Taken together, employment in these renewable sectors would be 43% higher under the decarbonisation scenario compared to implementing no decarbonisation policies, or around 16 thousand workers.
Note: The OECD ENV-Linkages model was calibrated to match the IEA-Stated Policies Scenario (STEPS), which includes Nationally Determined Contribution under the Paris Agreement, as well as a scenario where Chile does not enforce any climate policy action.
Source: OECD ENV-Linkages model.
Labour market policies
Canada. The sustainable jobs bill approved in 2024 aims to prepare workers for new jobs during the transition to a lower-carbon economy, by creating an advisory partnership council, the publication of an action plan every five years, and the creation of a sustainable jobs secretariat to ensure policy coherence across federal departments.
Australia. The JobTrainer fund from 2020-22, endowed with AUD 1 billion, offered free or low-fee training in priority certifications and allocated AUD 105 million to the New Energy Apprenticeships and New Energy Skills programs to deliver 10 000 energy apprentices and tailor skills training to the specific needs of new energy industries (OECD, 2023[107]). Jobs and Skills Australia also conducted a capacity study on the workforce needs for the transition to help train workers a clean energy economy.
European Union. The Social Climate Fund was set up to mitigate the social impacts of a new emissions trading system for buildings and road transport, which is expected to start in 2026 and amounts to 4.3% of the 2021-27 EU budget. The European Social Fund+ will allocate 4.9% of the 2021-2027 EU budget to support employment and skills.
Chile. Pillar III of the “Pacto Fiscal”, aims at boosting development of sectors with potential to diversify the economy, plans to strengthen skill building and training by expanding the “Talento Digital” programme to reach 50 000 additional students.
Redistributing revenues from carbon taxes
Austria. The EUR 32.50 per tonne carbon tax measure enacted in 2022 recycles all revenue as cash payments, using location-based targeting, whereby residents in regions with greater dependence on carbon-heavy receive more support.
New Zealand. In 2022 a Climate Emergency Response Fund was set up based on proceeds from its emissions trading system to fund initiatives that reduce vulnerability or exposure to climate change or that address distributional effects of climate change and mitigation policies.
Canada. British Columbia has a Climate Action Tax Credit, which is a quarterly payment that aims to offset the impact of the carbon taxes paid by individuals and families. Other eight Canadian provinces redistribute carbon tax revenues back to households through the Canada Carbon Rebate.
Switzerland. A carbon tax of CHF 12 per tonne was introduced in 2008 and raised in steps to CHF 120 per tonne in 2022. Currently raises annual revenues of about CHF 1.2 billion, with two-thirds distributed as a lump-sum transfer, in the form of reduced health insurance rate.
Ireland. A EUR 48.50 per tonne carbon tax was established in 2010, with a “soft” type of earmarking, meaning political commitment to use a share of revenues for raising social assistance benefits for households with children, and to provide retraining for workers in carbon-intensive sectors.
Source: OECD Employment Outlook 2024: The Net-Zero Transition and the Labour Market.
4.5.2. Supporting populations affected by the green transition
To mitigate the employment and social impacts of the green transition in Chile it will be key to improve income protection for dismissed workers and to increase the coverage and adequacy of cash transfer programmes, as recommended in 2022 OECD Economic Survey (OECD, 2022[35]), and to ensure that workers are well equipped to re-enter the labour market. Early interventions targeted at workers at risk of dismissal can limit the incidence and consequences of job displacement (OECD, 2024[101]).
Strengthening the carbon tax should be done gradually, and targeted assistance to poorer households and energy-intensive or trade-exposed sectors should be provided. Several OECD countries use revenue from the carbon tax to assist vulnerable populations (“revenue recycling”, Box 4.7), which has been shown to improve well-being (OECD, 2024[101]). Communicating how revenues from the tax will be used can increase support, like in Canada, where British Columbia significantly increased the carbon tax in 2024, but will reallocate revenues through tax credits for low and middle-income families.
Programmes targeted at communities where employment losses are expected to occur can increase acceptance of decarbonisation plans, like areas in Chile where coal-fired plants have closed or are scheduled to close. These programmes should entail coordination between environmental and labour market policies and municipalities, include measures to develop a comprehensive adult learning strategy, use timely labour market data, and capitalise on the public employment service (OECD, 2023[103]; OECD, 2023[108]). Chile has a Strategy for a Just Transition in the Energy Sector to foster changes in the labour market, develop new technologies, and diversify production in municipalities where coal-fired plants will close. Enough funding, monitoring, and coordination between institutions involved will be needed to ensure that gains from these plans are not short-lived. Chile can draw from the experience of other OECD countries to refine its strategy, in particular from programmes supporting populations affected by phasing out coal. For example, Germany pledged 1.2% of GDP between 2019 and 2038 to support regions affected by coal mines closing regions, focusing on infrastructure, innovation, and job markets (D’Arcangelo et al., 2022[4]). The US will close half of its coal capacity by 2026, and the Inflation Reduction Act gives a bonus credit for clean energy production in communities where coal mines or coal-fired electric generating units have closed. To achieve productive reconversion in transition zones it will be key to channel investment in non-polluting industries that help maintain levels of development and local employment in those areas, as Pillar III of the Fiscal Pact intends (Box 4.7).
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