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Prices that Clear the Air: Energy Use and Pollution in Chile and Indonesia

Emission reductions could be provided by cleaner technologies as well as substitution towards less polluting inputs and goods. We develop a model to assess the scope for emission reductions by input substitution. We then apply the model to manufacturing in Chile and Indonesia-two developing countries considering air pollution control strategies. We estimate substitutability in input demand in manufacturing--using standard techniques-and combine these with emission factors to assess the potential for emission reductions via demand' changes. For sulphur oxides (SO) and suspended particulates (TSP), emission elasticities with respect to the price of heavy fuels range from -0.4 to -1.2. A price increase of 20 percent would reduce emissions of SOx, and TSP by 8 to 24 percent. While these results indicate how emissions can be reduced by presumptive taxes on fuels-clearing the air as well as the markets for energy-such a strategy preferably should be accompanied by other instruments that stimulate cleaner technologies. Similarly, emission standards should be accompanied by presumptive taxes on goods and inputs. Emission taxes, if feasible, optimally combine inducements along both avenues.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Air Emissions (other than greenhouse gases); Energy and the Environment – Policy and Regulation

JEL Codes:
Q54 - Climate; Natural Disasters and Their Management; Global Warming
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Air pollution, Chile, Indonesia, Fuel prices, Sulfur dioxide (SO2), input demand model

DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No3-5

Published in Volume19, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.