“Redirecting private capital toward climate action is an unavoidable challenge today, especially as Climate Policy Initiative estimates that climate finance must increase nearly sixfold to meet global goals. A clear pathway to advance this is through carbon markets. It is essential to set the right incentives so funds flow to the projects that truly need them.”
As part of its efforts to tackle the climate crisis and address the challenges of air pollution throughout the country, Chile implemented a carbon tax on January 1, 2017, set at US$5 per ton of CO₂. The tax applies to companies whose facilities emit more than 25,000 tons of CO₂e (as per the latest amendment).
In this context, in October of this year, Chile’s Ministry of the Environment (MMA) officially launched the Emissions Offset System for the Green Tax (SCE). The system promotes the reduction of pollutants with global and local impact, allowing taxpayers subject to the green tax to offset emissions from fixed sources through the implementation of reduction projects.
Four key points to consider: Offset projects must be carried out within national territory; taxed sources may not sell emissions reduction certificates; projects must align with existing carbon methodologies (either created or approved by the MMA); projects already registered under international standards may be validated through the MMA to participate in the market.
Which projects should participate in the SCE? A first step is ensuring they meet the criterion of additionality. While additionality can be complex to assess, a simple rule of thumb is to prioritize projects with unresolved business models or significant financial gaps (this is known as financial additionality). Examples include: Waste management projects (synergistic with the National Organic Waste Strategy and the Health Sector Mitigation Plan); nature-based solutions (CO₂ capture); fuel-switching projects with clear financial gaps (e.g., to low-emission synthetic fuels)
The regulator should clearly define the standards, methodologies, and eligibility criteria for projects—critical elements that will send market signals and shape participation.
Experience from voluntary carbon markets shows that at a price of US$5 per ton of CO₂, only waste management projects among these three types are likely to benefit from the mechanism, as their credits typically trade between US$2 and US$5 per ton. The other two would require a much higher carbon tax to become viable—and for now, the possibility of increasing Chile’s carbon tax rate this year has already been ruled out.
What about green hydrogen, storage, or decarbonization projects? These are unlikely to be included in national or international offset markets in the short term due to the lack of established methodologies. Prices would need to exceed US$100 per ton CO₂ to bridge the viability gap. Storage projects, in particular, face challenges in proving emissions reductions due to the difficulty in defining counterfactuals, and methodologies for them are still under development. Decarbonization projects, while some do have approved methodologies (such as the Engie & IDB Invest transaction for units 14 and 15), would only be eligible if they involve the reconversion of power plants—projects involving closures are not allowed to generate credits under the current system.
While much remains to be defined about the SCE, one major pitfall would be allowing participation from offset projects that do not require carbon market revenues to be viable. Renewable energy projects with mature technology and sound economics, such as solar PV and wind, are a clear example.
To fully capture the benefits of a system like this, both the regulator and the companies seeking to offset emissions must understand the principles behind its creation—thus maximizing social, environmental, and economic benefits.
On the one hand, the regulator must provide clear guidance on the standards, methodologies, and eligibility criteria that will govern the system—critical variables that will shape market dynamics.
On the other, those seeking to offset should draw on lessons from voluntary carbon markets when selecting and purchasing credits to avoid reputational risks. Best practices in this space include using rigorous methodologies and standards to evaluate projects and prioritizing those with strong impacts and alignment with multiple Sustainable Development Goals (SDGs).
Although the early stages of the market will likely be driven by projects already registered under established standards, the best long-term practice will be to offset through greenfield projects. This will ensure the mechanism supports the development of new infrastructure that would not exist without the SCE—thereby maximizing the climate and social impact of the initiatives it helps to catalyze.
