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The World BankMarket Instruments for climate change mitigation in Chile (P130378)

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REPORT NO.: RES27287

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF

MARKET INSTRUMENTS FOR CLIMATE CHANGE MITIGATION IN CHILE

APPROVED ON AUGUST 27, 2014

TO

MEF -AGCI

ENERGY & EXTRACTIVES

LATIN AMERICA AND CARIBBEAN

Regional Vice President: Jorge Familiar Calderon Country Director: Alberto Rodriguez

Senior Global Practice Director: Riccardo PulitiPractice Manager/Manager: Antonio Alexandre Rodrigues Barbalho

Task Team Leader: Janina Andrea Franco Salazar, Patricia Marcos Huidobro

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ABBREVIATIONS AND ACRONYMS

AF Additional FinancingAGCICCSA

Chilean International Cooperation and Development AgencyCross Cutting Solutions Area

CGECPLCCPSEP2050

Consultative Group of ExpertsCarbon Pricing Leadership CoalitionCountry Partnership StrategyEnergy Policy 2050

ETSGDP

Emissions Trading SystemGross Domestic Product

GHG Greenhouse GasesGoCGPINGEIMEMMA

Government of ChileGlobal PracticeChile’s National GHG InventoryMinistry of EnergyMinistry of Environment

MRVNDC

Monitoring, Reporting, and VerificationNationally Determined Contribution

PAPAWPPIU

Partnership AssemblyPolicy Analysis Work ProgramProject Implementation Unit

PMRRETCSMA

Partnership for Market ReadinessRegister of Pollutant Emissions and Transfer SystemEnvironment Audit Agency (Superintendencia de Medio Ambiente)

SC Steering Committee



Note to Task Teams: The following sections are system generated and can only be edited online in the Portal.

BASIC DATA

Product Information

Project ID Financing Instrument

P130378 Specific Investment Loan

Original EA Category Current EA Category

Not Required (C) Not Required (C)

Approval Date Current Closing Date

27-Aug-2014 04-Sep-2017

Organizations

Borrower Responsible Agency

MEF -AGCI Ministry of Energy

Project Development Objective (PDO)

Original PDOThe objectives of the Project are to provide technical assistance to the Beneficiary in the design and implementation of a Monitoring, Reporting and Verification (MRV) framework and registry, and the design and preparation of one or more carbon pricing instruments in the energy sector.

OPS_TABLE_PDO_CURRENTPDOSummary Status of Financing

TF Approval Signing Effectiveness ClosingNet

Commitment Disbursed Undisbursed

TF-17731 27-Aug-2014 05-Sep-2014 05-Sep-2014 04-Sep-2017 3.00 1.70 1.30



Policy Waiver(s)

Does this restructuring trigger the need for any policy waiver(s)?No

Note to Task Teams: End of system generated content, document is editable from here.

I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING

A. Summary1. Chile is one of the most stable economies in Latin America with steady growth rates mainly driven by commodities export. With a population over 18 million, and US$247 billion gross domestic product (GDP) in 2016, the country averaged annual growth rates of 3.5 percent during the past twenty years. Per capita income over the same period has almost doubled in real terms. Employment and income growth significantly reduced poverty rates, although earnings and labor productivity have been distributed unevenly. Chile’s economy is characterized as being open and heavily dependent on natural resources and foreign trade. Services and the industrial sector (including the mining sector that accounts for 60 percent of exports) account for 70 percent and 26 percent of GDP, respectively, with agriculture making up the rest. GDP growth fell to 1.9 percent in 2014 and 2.1 percent in 2015, due mainly to the slowdown in the mining sector given the decline in copper prices and private consumption.1 The current Government of Chile (GoC) led by Michelle Bachelet (2014-2018), has poverty reduction and education as main priorities. However, private sector activity and reliable energy supply are considered key by the GoC to rebound the economic growth and allow increased fiscal spending to move ahead with the social reform agenda.

2. The country launched its Energy Policy 2050 (EP2050) in December 2015 with the vision of attaining a reliable, inclusive, competitive and sustainable energy sector, making Chile one of the first nations in the region to set long-range targets for clean generating capacity. The EP2050 aims to attain a reliable, inclusive, competitive and sustainable energy sector, through four pillars: (i) quality and security of supply; (ii) energy as a driver for development; (iii) environmentally –friendly energy; and (iv) energy efficiency and education. EP2050 has established the following targets to help reach an affordable, secure sector that helps NDCs achievement: (i) reach 60 percent of renewable energy by 2035 and 70 percent by 2050; and (ii) a 20 percent reduction in the energy consumption forecast by 2025. The country has already undertaken a set of complementary energy policies to support de-carbonization and NDC achievement to ensure more renewable energy is incorporated into the matrix (i.e. Electricity Transmission Law 20936, Non-Conventional Renewable Energy Law 20689, and Electricity Tenders Law 20805), with the aim to reach the targets of 60 percent renewable energy by 2035 and 70 percent by 2050. Furthermore, the Ministry of Energy (ME) has developed a Mitigation Action Plan for the overall energy sector, which analyzes the interaction of the current carbon tax with other energy policies and measures. However, challenges remain, especially in terms of reducing the country’s reliance on oil and coal, which currently provide about 64 percent of the primary energy matrix. 3

3. The Ministry of Energy (ME) is highly committed to transition to a low-carbon economy, and specifically supports the implementation of the Nationally Determined Contribution (NDC)2 to help achieve the sector’s greenhouse gas (GHG)

1 Central Bank of Chile - http://si3.bcentral.cl/estadisticas/Principal1/Excel/CCNN/trimestrales/excel.html 2 NDCs are countries’ GHG reduction commitments under the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC).

http://si3.bcentral.cl/estadisticas/Principal1/Excel/CCNN/trimestrales/excel.html



reduction targets. The energy sector is responsible of 77 percent of the country’s GHG emissions, and is committed to achieve a 30 percent reduction of emissions intensity (tCO2/GDP) by 2030 compared to the level in 2007, as per the NDC. The EP2050 has the following climate change goals: (i) meet the NDC GHG emission reduction goal; (ii) assess the implementation of complementary carbon pricing instruments relevant to internalize environmental externalities; (iii) implement a Mitigation Action Plan for the energy sector3; (iv) implement a Climate Change Adaptation Plan for the energy sector; and (v) periodically revise the public instruments used to achieve the GHG reduction goals.

4. Consistent with the country’s objective of discouraging the use of carbon-intensive fuels, in 2014 the Chilean government passed legislation for a carbon tax. As part of a broader tax reform, the Chilean Congress enacted Law No. 20780 (September 26, 2014) that among other, introduced a carbon tax (to be implemented starting 2017). The law establishes an annual tax on carbon dioxide (CO2) emissions from fixed sources made up of boilers and turbines with a thermal power greater or equal to 50 MW (megawatt thermal capacity). The tax affects the country’s larger electricity generators. The tax is equivalent to US$5 for each ton emitted, and covers about 40 percent of total GHG emissions in the country. Implementation of the carbon tax started in January 2017 and is led by the Ministry of Environment (MMA) in close coordination with the Environment Audit Agency (Superintendencia de Medio Ambiente, SMA), the Ministry of Finance and the ME. Although the carbon tax was the pricing instrument chosen by law by the GoC, its implementation design had not been developed, and the Bank, through the PMR Chile Project, supported the implementation design. Carbon tax revenues are expected to be about US$143 million for the first year of tax collection (i.e. 2018),4 however, its impact on the overall reduction of GHG emissions will most likely be limited due to shortcomings in its design as explained below (see paragraph 8).

5. The proposed Additional Financing (AF) would support the ME to continue to assess and refine the carbon tax scheme, to consider options for expanding it to other sectors, and/or complement it with other carbon pricing instruments. The proposed AF would consist of a PMR grant to help broaden the scope and increase GHG reduction impact of the Chilean carbon tax instrument by: (i) enhancing the existing carbon tax scheme in the energy sector to include other sectors and subsector and/or explore an increase of its rate; (ii) implementing an integrated MRV Platform, specifically for the energy sector, to account for more of the sector’s GHG emission sources and understand sectorial contribution to the Chilean NDC under the Paris Agreement; and (iii) assessing further carbon pricing schemes for the energy sector in Chile. The proposed US$1.98 million AF grant to the Market Instruments for Climate Change Mitigation in Chile Project (PMR Chile Project - P130378), was allocated by the PMR Partnership Assembly (PA) on March 22, 2017. This financing is additional to the original US$3 million PMR Chile Project,5 for a total of US$ 4.98 million. Counterpart resources to the proposed AF would be of US$200,000 through in kind contribution.

3 The GHG Mitigation Plan has already been designed under the initial phase of the PMR Chile Project. 4 About 0.06 percent of the country’s 2015 GDP. 5 Approved by the Bank’s Executive Director Board on August 27, 2014.



B. Project Status6. Chile joined the PMR in 2011, and was allocated US$3 million for the implementation of the small-recipient executed PMR Chile Project. The Project was approved by the Bank’s Executive Director Board on August 27, 2014, became effective on September 5, 2014, and is scheduled to be completed by September 4, 2017. The core objectives of the Project are to: (i) support the implementation of the Chilean carbon tax, including the establishment of procedures and methodologies for measurement, reporting and verification (MRV) of GHG emissions; and (ii) build knowledge in the public and private sectors about implementing and monitoring of MRV systems. Within the GoC, the ME is the lead implementation agency regarding technical matters, overall oversight of the Project, and day-to-day supervision, while the recipient of the funds and the bearer of fiduciary responsibilities is the Chilean International Cooperation and Development Agency (AGCI) within the Ministry of Foreign Relations. AGCI and the ME signed a subsidiary agreement outlining their respective obligations and arrangements for the Project. The Project included the following components: (i) Component 1: Regulatory, economic and institutional analyses to assess the viability of one or more carbon pricing instruments for the energy sector (totaling US$1.81 million of which US$1.20 million are PMR TF resources and US$0.61 ME); (ii) Component 2: Design and implementation of an MRV framework and registry (totaling US$1.56 million of which US$1.10 are PMR TF resources and US$0.46 ME); (iii) Component 3: Stakeholder engagement and communications strategy, and capacity building (totaling US$0.51 million of which US$0.40 million are PMR TF resources and US$0.11 million ME); and (iv) Component 4: PMR Implementation Coordination (totaling US$0.50 million of which US$0.30 million are PMR TF resources and US$0.2 million ME).

7. Although the carbon tax was the carbon pricing instrument chosen by law by the GoC, its implementation design had not been developed and the PMR Chile project provided support in its operational design. The PMR Chile Project was instrumental to design the implementation of the carbon tax, including: (i) design and implementation of the carbon tax MRV framework and registry system; (ii) identified the facilities affected by the carbon tax and worked with them to help them understand the process by which they would be monitored; (iii) conducted a series of regulatory, economic and institutional studies to analyze the impacts of the carbon tax and its interaction with other policies (from where the shortcomings to the law were diagnosed); and (iv) provided technical training on the use of the carbon tax MRV framework and registry, as well as various capacity and dissemination events.

8. Component 1 of the PMR Chile Project has helped to further understand the impact of the existing carbon tax scheme in the country’s energy matrix and emission reductions, and is providing a thorough understanding of how this tax could evolve, be enhanced and be complemented with other carbon pricing instruments and/or related policies. The implementation of the carbon tax has been a fundamental first step towards a low carbon economy, and has helped the GoC to provide a clear signal of its climate change commitments. Its implementation has been instrumental to help the private sector internalize its impact and understand that the country is committed to decarbonizing its economy. Component 1 helped to identify implementation challenges of the carbon tax, as well as some design shortcomings, such as: (i) narrow scope: the current tax only covers 40 percent of the GHG emissions of the country, and does not consider other high carbon-intense sectors (i.e., transport, mining, or steel); (ii) low price level of US$5 per ton of CO2

6 may not be enough to incentivize the development of a cleaner energy matrix in the country; (iii) limited impact on energy dispatched, as the carbon tax is not included in the calculation of the marginal cost.

9. Component 2 of the PMR Chile Project has been instrumental for the implementation of the carbon tax through the establishment of a Monitoring, Reporting and Verification (MRV) System. The actual implementation of the carbon tax required strong cross-sectoral coordination among the Ministry of Finance, as the entity in charge of the broader tax reform,

6 Compared to average rates of US$50-60 per ton of CO2e. Carbon tax rates vary greatly worldwide, ranging from 3 US$/tCO2e in Mexico to 120 US$/tCO2e in Sweden. Countries and jurisdictions with carbon tax schemes include: British Columbia, Denmark, Estonia, Finland, France, Iceland, Ireland, Japan, Latvia, Mexico, Norway, Poland, Portugal, Slovenia, Sweden, Switzerland and UK. Source: State and Trends of Carbon Pricing, October 2016, World Bank Group - http://documents.worldbank.org/curated/en/598811476464765822/pdf/109157-REVISED-PUBLIC-wb-report-2016-complete-161214-cc2015-screen.pdf

http://documents.worldbank.org/curated/en/598811476464765822/pdf/109157-REVISED-PUBLIC-wb-report-2016-complete-161214-cc2015-screen.pdf

http://documents.worldbank.org/curated/en/598811476464765822/pdf/109157-REVISED-PUBLIC-wb-report-2016-complete-161214-cc2015-screen.pdf



the MMA, SME,7 and the ME. The PMR Chile Project has successfully helped the GoC coordinate the work among the different government institutions in the development of the MRV system that enabled the implementation of the carbon tax. The carbon tax MRV System was built upon the existing Register of Pollutant Emissions and Transfer System (RETC, for its acronym in Spanish, which is managed by the SME and the MMA), that included air and water pollution emissions, to which it added a systematic GHG accounting system. The PMR Chile Project supported the design and implementation of a specific carbon tax MRV system -and related tools and guidelines- for GHG emissions generated from fixed sources made up of boilers and turbines with a thermal capacity of 50 MW or more. Without the specific carbon tax MRV system the implementation of the carbon tax would have not been possible. In addition, the component also supported a series of workshops and training sessions for the private sector and relevant entities to understand how the carbon tax works, how to implement the carbon tax MRV system, and its implications in their businesses. Annex II includes a list of all the activities financed by this component.

10. The PMR Chile PDO and implementation progress ratings remains satisfactory and moderately satisfactory, respectively. The PDO has been met since the PMR Chile Project has significantly contributed to the implementation design of the carbon tax, before it officially entered into force on January 1st, 2017. The Project has supported the: (i) design and implementation of an MRV framework and registry, which is currently being used by facilities affected by the carbon tax; and (ii) the implementation of a carbon pricing instrument (carbon tax) that started in January 2017. The intermediate indicators supporting the above mentioned objectives have also been met. Although the Project faced initial delays, in particular regarding the establishment of the Project Implementation Unit (PIU), it was finally launched in September 2015. As of May 19, 2017, the Project has disbursed 57 percent and has committed 90 percent of the funds. All pending consultancies would be completed by late August. The overall risk rating of the PMR Chile Project is low. The Project has not overdue audit reports.

C. Rationale for the Additional Financing11. Chile has a strong political commitment to employ carbon pricing instruments as part of its strategy to meet its GHG mitigation objectives. Political support for carbon pricing is high at the national and sectoral level. Carbon pricing in general, and the PMR in particular, are identified in the country’s National Sustainable Consumption and Production Strategy as tools to achieve low-cost mitigation from energy use across sectors. In 2014, the country passed South America’s first carbon tax as part of broader tax reform, and will charge facilities with 50 MW or more of thermal capacity, that use turbines or boilers, with a levy of US$5 for every ton of CO2 emitted. With the launch of this tax, Chile cemented itself as a leader among emerging economies looking to put a price on carbon to manage GHG mitigation. Moreover, Chile is a member of specific coalitions and roundtables that promote discussion and implementation of carbon pricing, such as the Carbon Pricing Leadership Coalition (CPLC), the Carbon Market Platform and the New Zealand Ministerial Declaration on carbon markets. Chile’s participation in these initiatives, along with the formal request from the government to the World Bank requesting technical assistance to strengthening the implementation of the carbon pricing instruments in the country, shows its ownership of the Project.

12. The PMR Chile Project played a pivotal role in the implementation of the country’s carbon tax, but as currently structured, it will likely have limited scope for achieving GHG mitigation and helping the country reach its NDC objectives. Studies conducted under the PMR Chile Project and the PMR’s Policy Analysis Work Program (PAWP) have shown that the current carbon tax framework could be enhanced to help meet Chile’s NDC mitigation goals. This creates a need to continue exploring how carbon pricing instruments can be used to further galvanize cost-effective mitigation. The proposed AF identifies specific next steps that would strengthen the current carbon tax scheme to expand its scope of action and have a

7 The MMA is responsible for the annual list of entities that are subject to the carbon tax and local contaminants, as well as for the issuance of a regulation for administrative procedures to implement the carbon tax and ensure operation of the overall MRV system. Whereas the SME is in charge of defining the system´s characteristics for measuring and monitoring of CO2 and other pollutants, and the requirements to certify those emissions (ex post) that are reportable for carbon tax purposes.



bigger impact on the country’s climate change mitigation agenda, specifically targeted under proposed Component 5.

13. Carbon pricing is not sufficiently mature in Chile. There is room to expand its scope and/or combine it with other carbon pricing instruments; MRV systems need to be linked to specific mitigation targets under the NDC; MRV and institutional capacity needs further strengthening; implementation of a carbon tax has catalyzed awareness and debate about carbon pricing in Chile, especially among the private sector. The proposed AF would support this aspect under Component 6.

14. Chile is at the cutting edge of using carbon pricing instruments, and therefore technical and worldwide expertise provided by the Bank is key to ensure successful implementation of a well-designed carbon tax. The AF is expected to fill an important knowledge gap in Chile’s “readiness” to use carbon pricing instruments. This includes knowledge about how carbon pricing works as an efficient tool to drive GHG mitigation in Chile, in particular the result of the activities implemented under the PMR. Stakeholder engagement undertaken during the design and implementation of the Chilean carbon tax has raised awareness within government, the private sector and civil society on MRV technical and institutional requirements. Furthermore, as the existing carbon tax is expected to be strengthened by expanding its scope or by complementing it with other carbon pricing instruments, important knowledge gaps arise. Activities under this AF aim to reduce these through the implementation of proposed new components. Specifically, the AF would grant Chile access to technical and international expertise on more sophisticated carbon pricing instruments, and integrated MRV systems. It could also serve as an example to follow for other countries in the region and worldwide that are working under the PMR.

II. DESCRIPTION OF PROPOSED CHANGES

A. Summary15. No changes are proposed to the existing Project Development Objectives (PDO). The PDO remains to provide technical assistance to Chile in the design and implementation of a Monitoring, Reporting and Verification (MRV) framework and registry, and the design and preparation of one or more carbon pricing instruments in the energy sector. The proposed AF’s objectives are fully aligned with the parent Project’s PDO and would not require changes to Project objectives and design, including implementation arrangements.

16. No changes are proposed to the existing PDO indicators. Since the proposed new components are aligned with the PDO, the PDO Indicators continue to be: (i) one or more carbon pricing instruments and associated infrastructure recommended to the Government and concrete activities to develop specific elements proposed; (ii) MRV framework and registry established within the energy sector; and (iii) knowledge, awareness and capacity developed in the public and private sector in relation to the design and implementation of carbon pricing instruments.

17. The intermediate Project indicators have been updated to facilitate result’s measurement of the proposed new components. The new intermediate indicators include: (i) design and establishment of an integrated MRV Platform (MRV 3.0) specifically for the overall energy sector (that goes beyond the carbon tax); and (ii) design of a climate policy simulator tool for the energy sector in the country.

18. An extension of the Project’s closing date from September 4, 2017 until August 31, 2019 would be needed to complete the implementation of the proposed Additional Finance. The proposed activities would be implemented through support to two existing components (3 and 4 for communication and administrative support) and two new components (Component 5 - Enhancement and complementation of the existing carbon tax scope and reporting system; and Component 6 – Assessment of alternative carbon pricing schemes for the energy sector). The PDO indicators target dates would be extended until the proposed new closing date. The intermediate indicators would also be extended until August 31, 2019,



except for two (design and implementation of MRV system and design of a bottom up registry), as these would not be applicable under the new proposed activities.

B. Higher-Level Objectives to which the Project Contributes19. The proposed AF is fully consistent with the WBG goal of promoting shared prosperity and the Chile Country Partnership Strategy (CPS) FY11-16. It directly contributes to meeting the objective of facilitating investments in the productive sectors and improving regulations in the use of natural resources, as mentioned within the strategic objective of ‘Promoting Sustainable Development’ in the CPS. In addition, the Project is aligned with the draft System Country Diagnostic (“Transition to a Prosperous Society”) as it would help increase productivity growth and achieve a sustainable path for growth and inclusion.

C. Project Description20. The proposed AF activities complement ongoing PMR Chile Project activities and strengthen Chile’s position as a leader in the use of carbon pricing instruments to meet its GHG mitigation objectives, including those outlined in its NDC. The proposed AF would support Chile to take advantage of the momentum and awareness raised to broaden the scope and increase the impact of the carbon tax, so more of the country’s GHG emissions are regulated under a carbon pricing instrument. It would sustain the implementation of a MRV Platform (MRV 3.0) for the energy sector that goes beyond the boilers and turbines currently affected by the carbon tax and would set the basis for the GHG accounting system in the energy sector as a whole that is in line with the Paris Agreement requirements and the country’s NDC commitments. The enhancement of the current carbon tax scheme by assessing other complementary carbon pricing instruments is also part of the proposed AF activities. The activities to be implemented under the proposed AF would provide additional funds to existing Components 3 and 4, and include two new Components: Components 5, Enhancement and complementation of the existing carbon tax scope and reporting system, and Component 6, Assessment of alternative carbon pricing schemes for the energy sector. The activities proposed under the new components respond to the institutional framework and accountability of the different sectoral entities. On one hand, the MMA is the agency responsible for the carbon tax MRV and registry system, and would therefore be responsible for co-leading the evaluation the carbon tax’s implementation, and thus the establishment of a mandatory MRV 3.0 platform for gross emissions that is expected to feed Chile’s National GHG Inventory (INGEI for its acronym in Spanish, which is under the MMA). As for the activities under Component 6 (Assessment of Alternative Carbon Pricing schemes for the Energy Sector), they are specific for the energy sector, and the ME would be leading this work, which is expected to be the foundation of future energy sector mitigation and adaptation actions.

21. Component 3: Stakeholder engagement and communications strategy, and capacity building (totaling US$200,000 for the proposed AF activities; PMR TF resources). This component would continue the development and execution of the stakeholder engagement and communication strategy to support the dissemination of the new proposed activities. It would also include activities, such as participation in training, workshops, in-country visits, and study tours, with the objective of enhancing global and regional cooperation on carbon pricing. The Component would also include periodic updates and improvements to the Project website, as well as capacity building services for the private and public sectors. Specific capacity building activities for climate policy modelling would be envisaged.

22. Component 4: PMR Implementation Coordination (totaling US$265,000 for the proposed AF activities; PMR TF resources). The component would include support for overall management of the Project, including the PIU, which would include staff for: (i) strategic coordination and project management activities; and (ii) fiduciary aspects within AGCI to support project implementation. 23. Component 5: Enhancement and complementation of the existing carbon tax scope and reporting system (totaling US$690,000 of which US$610,000 are PMR TF resources and US$80,000 ME). This component would aim to deepen the analysis and understand how to improve the impact of the carbon tax given its design limitations. In line with the objective



of complementing the existing tax scheme, this component would also implement a comprehensive MRV Platform (MRV 3.0) for the entire energy sector that would include areas and sub-sectors currently not covered under the carbon tax, such as mining, iron or steel industries.8 The establishment of the MRV 3.0 platform would build from the MMA’s INGEI, and will therefore be co-lead by the MMA. By expanding the scope of the current carbon tax MRV system, this activity would include a mandatory reporting scheme to identify not only net emissions reductions but also gross emissions generated by the energy sector. The proposed GHG accounting system for the energy sector is aligned with the EP2050, and an important outcome for the support of the energy sector in the achievement of the NDCs. The component would be led by the MMA with strong coordination with the ME, SMA and the Internal Revenue Service (SII).

24. Component 6: Assessment of alternative carbon pricing schemes for the energy sector (totaling US$1,125,000 of which US$905,000 are PMR TF resources and US$120,000 ME). In February 2017 Chile ratified the Paris Agreement, which entered into force for the country on March 12, 2017. In the context of the Paris Agreement, there is a need to further understand the role the carbon tax would play in the realization of Chile’s NDC commitments and how it could be enhanced with complementary carbon pricing mechanisms. This component would support: (i) the design and implementation a climate policy simulation tool for the energy sector in Chile; and (ii) the development of an MRV scheme to account emission reductions from energy-related mitigation actions. The simulation tool, to be built on the work carried out under the PMR Policy Analysis Work Program, would reproduce different scenarios of carbon tax and its interaction with other complimentary carbon pricing alternatives, such as an emissions trading system (ETS). Through this simulation, the tool would assess the impacts in emissions of implementing a combination of different carbon pricing instruments, such as a carbon tax, an ETS and/or offset mechanisms, in the context of NDC implementation.9 The final objective is to identify potential emission reductions trajectories in the overall energy sector for achieving Chile´s NDC, and corresponding measures for their implementation by 2030. The rationale for assessing complimentary carbon pricing instruments, such as an ETS, responds to Article 6 of the Paris Agreement, and the results from studies developed by the PMR Chile Project that highlighted the opportunity to expand the reach of carbon pricing instruments by exchanging carbon units with the establishment of an ETS.10 This climate policy modelling work would require building institutional capacity to ensure value and continuity of the modelling activities. Specific building capacity activities on climate policy modelling would be envisaged under Component 3. As for the establishment of a robust accounting framework for the energy sector mitigation actions, the component would identify and account emission reductions from energy-related mitigation actions (such as, distributed generation). Implementation of this component would be led by the ME, in coordination with the MMA and SMA.

8 Design of the core elements of the MRV 3.0 Platform is being conducted under the original activities of the PMR Chile Project.9 The proposed climate policy modelling tool is expected to fill the following gaps: (i) consider various economic development scenarios; (ii) incorporate a rising carbon price, which is important for assessing different carbon price scenarios; (iii) cover a range of sectors to incorporate other sectors that might also be captured by a potential expanded carbon pricing policy; (iv) provide a user-friendly interface, so it can be used by stakeholders with not technical knowledge in modelling tools; and (v) be specifically designed to incorporate climate change policies and facilitate climate decision-making process.10 This rationale has recently been reinforced by the increasing interest in a potential regional carbon market through the Green Growth Platform of the Pacific Alliance.



Table 1: PMR Chile Project - Additional Financing Proposed Activities

Component Deliverables OutcomesBudget

Allocation PMR

Budget Allocation ME

Component 3: Stakeholder engagement and communications strategy, and capacity building (existing)

Communication, Consultation and Engagement Strategy. Training – including potential regional cooperation on carbon pricing, workshops, study tours, and in-country visits. Capacity building, including modelling. Project Website.

- Policy makers, private sector and other stakeholders are consulted and informed on the latest developments of the carbon pricing initiatives in Chile

US$200,000 -

Component 4: PMR Implementation Coordination (existing)

Technical execution of activities through the Ministry of Energy, including coordination and technical and policy advice. Administrative execution through AGCI to support disbursement.

- Institutions and team members involved are aware of their responsibilities within the Project, understand the deliverables and their timelines, and reach out to the Project manager and strategic coordinator when required.

US$265,000 -

Component 5: Enhancement and complementation of the existing carbon tax scope and reporting system (new)

Evaluation of first year of carbon tax implementation aiming at addressing impacts stemming from its operation, such as costs/arrangement challenges from regulated entities, revenue raising, MRV challenges, etc. and expand the scope of the existing tax scheme. Establishment of a comprehensive MRV Platform for the energy sector to also account for gross energy-related emissions currently not covered by the carbon tax.

- GoC has a clear understanding of the limitation of the carbon tax and is aware of potential measures to overcome those shortcomings and increase the carbon tax impacts.- ME has identified the gross emissions associated to the energy sector and understands the emissions reduction potential of the whole sector, including those emissions currently not covered by the tax.

US$ 610,000 US$ 80,000



Component 6: Assessment of alternative carbon pricing schemes for the energy sector (new)

Implementation of a climate policy modelling tool for the energy sector. Assessment of complimentary carbon pricing initiatives as facilitative instruments for the NDC, including the identification of potential emission reductions trajectories and corresponding measures of the energy sector to 2030. Establishment of a MRV scheme for the energy sector to account for emission reductions from energy-related mitigation actions, in line with Paris Agreement guidance for robust accounting.

- ME understands the implications and the role of complimentary carbon pricing initiatives in the realization of the NDC. - ME is aware of the emission reductions from different energy-related mitigation actions, such as distributed energy or energy efficiency improvements in small and medium enterprises.

US$ 905,000 US$ 120,000



D. Institutional and implementation arrangement25. The proposed AF activities would rely on the existing operational and financial mechanisms under the ongoing PMR Chile Project. Within GoC, the ME would continue to be the lead implementation agency regarding technical matters, overall Project oversight, and day-to-day supervision, while the recipient of the funds and the bearer of fiduciary responsibilities would be AGCI within the Ministry of Foreign Relations. Under the PMR Chile Project, AGCI and the ME have already signed a subsidiary agreement outlining their respective obligations and arrangements for the Project. This subsidiary agreement would be amended as per the proposed AF.

26. In addition, the ME would be responsible for continuing the collaboration with other relevant stakeholders, such as: (i) Petit Committee: which assists the ME in its overall day-to-day supervision function, and comprises of the Ministries of Finance and Environment; (ii) Steering Committee (SC): established in March 2012 and headed by the ME with the participation of the Ministries of Agriculture; Economy; Environment; Finance; Foreign Affairs; Mining; and Transportation & Telecommunications. It constitutes the primary engagement, collaboration and consultation body in which key ministries would continue to provide the necessary policy and technical guidance during the implementation of the proposed AF activities; (iii) Council of Ministers for Sustainability: created in 2010, is a multi-sectoral body headed by MMA that provides high-level policy guidance to PMR Chile Project; and (iv) Consultative Group of Experts (CGE): comprises representatives of industrial associations, research organizations and non-governmental organizations with the role of carbon pricing in promoting low carbon development.

27. The World Bank Group, through the Energy and Extractives Global Practice (GP) and the PMR Secretariat under the Climate Change Cross Cutting Solutions Area (CCSA), would continue to provide technical advice during the implementation of AF’s activities. The active participation of two World Bank teams, the Energy and Extractives GP and Climate Change CCSA, would ensure the right cross-sectoral support is provided in a timely manner to the two main technical counterparts, the ME and MMA. Furthermore, the PMR Secretariat, through its periodic international workshops, technical trainings and webinars, would continue supporting the Chilean counterparts on other carbon pricing instruments being implemented worldwide, and would share lessons learned from experiences of the 19-PMR participating countries.

E. Overall Risk Rating and Explanation of Key Risks28. No significant additional risks are expected to affect the proposed AF. The overall risk rating for this Project remains low. The proposed activities rely on existing institutional and financial mechanisms. During the Project preparation of the initial phase of the PMR Chile Project, the World Bank Group assessed and found adequate the procurement, financial management, and safeguards-related capacities of the implementation arrangement.

29. Financial management and procurement risks. Financial management and procurement implementation arrangements are expected to be the same as in the existing Project.

30. Environmental and social risks. Under the proposed AF’s activities there continue to be no safeguards impacts since it focusses on technical studies, training and MRV model related to carbon emissions in the energy sector. Nonetheless, studies related to carbon taxes will consider the impact of overall prices for consumer and producers, and indirect effect of promoting biofuels production and viability of renewable energies. As a result, the environmental and social risk remain low.

31. Political risks. Implications on the continuation of the PMR Chile Project due to a potential change of government in the upcoming presidential elections in November 2017 are considered low. The Chilean carbon tax was designed as part of a larger tax reform package, which would need various discussions and approvals within the Congress to be modified. As it is part of the larger tax reform law, the risk of eliminating the carbon tax is low. In addition, Chile has already ratified the Paris Agreement and committed to reduce its GHG emissions intensity by 30 percent by 2030. A well-designed and



restructured carbon tax would be an instrumental tool to help the country meet its NDC commitment.

F. Appraisal Summary32. Economic and Financial Analysis. Besides the benefits of helping Chile in its efforts toward achieving a sustainable growth path, the proposed AF is expected to have positive impacts on economic activity and employment through the outreach, training, consultant reports etc. Despite the cost to the obligated companies, the implementation of the MRV system overall will have a positive impact through creation of jobs and business opportunities, notably in the areas of emissions monitoring and verification services. Carbon tax impact on consumers’ bills is expected to be low in the short term, since 73 percent of the existing energy contracts are old contracts with already established energy prices up to 2020 and later. This would also allow for a gradual and affordable increase of the consumer’s electricity bills. The proposed integrated MRV Platform would also provide valuable data and protocols that the Government can use to monitor NDC compliance. Similarly, the various analytical activities planned would help the GoC to conduct economic and cost-benefit analyses on the proposed scenarios for the enhancement of the carbon tax.

33. Technical. The ME would continue to lead the technical implementation of the AF activities, in close collaboration with the MMA and other institutions involved. Given its mandate, organizational structure, and previous experience with the implementation of the PMR Chile Project, it is well positioned to support the technical execution of the proposed AF. The Petit Committee –which comprises the Ministry of Finance and MMA, and provides overall day-to-day supervision of the Project- and Steering Committee –which includes representatives from 7 ministries and constitutes the primary engagement, collaboration and consultation body of the PMR Chile Project - will continue supporting the ME during the implementation of the proposed AF by providing technical information and political guidance. Technical support and international expertise from the PMR Secretariat and the World Bank Energy team will further strengthen the proposed activities.

34. Financial Management (FM). Under the proposed AF, financial management tasks would remain to be AGCI’s responsibility. Based on the information available, the FM risk remains as moderate, and the proposed arrangement is acceptable to the Bank, subject to: (i) use the same format of the financial statements as previously used by the PMR Chile Project; (ii) provided an updated operational manual; and (iii) appointment of a new or continuation of the existing financial management specialist.

35. Procurement. Under the proposed AF, AGCI continues to be the lead agency to manage the procurement and financial disbursement of the PMR Activities. Thus, the overall procurement risk remains as Moderate. Procurement activities for this Project, will be conducted according to the World Bank Procurement Regulations for IPF Borrowers, for Goods, Works, Non-Consulting and Consulting Services (“Procurement Regulations”), issued in July 2016, and the provisions stipulated in the Grant Agreement.

36. As part of the preparation of the Project, AGCI has prepared: (i) a PPSD (Project Procurement Strategy Development); (ii) a detailed procurement plan. Both documents are acceptable to the Bank

37. National Procurement Arrangements: In accordance with paragraph 5.3 of the Procurement Regulations, when approaching the national market (as specified in the Procurement Plan), the country’s own procurement procedures (Chile Compra) may be used, in accordance with clauses 5.3 to 5.6 of the Regulations for Borrowers. The Bank’s Standard Procurement Documents (SPD) shall be used for all contracts subject to international competitive procurement and those contracts as specified in the Procurement Plan.

38. Individual Consultants: The process for hiring individual consultants, will be carried out according paragraphs 7.34 – 7.39 of the Procurement Regulations.



39. Procurement Plan: The Borrower, during the preparation of the Project has prepared a detailed and comprehensive procurement plan that includes all contracts for which bid invitations and invitations for proposals are to be issued during the implementation of the Project. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, cost estimate, prior review requirements, and time frame will be agreed between the Borrower and the Bank in the Procurement Plan. It will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

40. In accordance with paragraph 5.9 of the Procurement Regulations, the Bank’s Systematic Tracking and Exchanges in Procurement (STEP) system will be used to prepare, clear and update Procurement Plans and conduct all procurement transactions for the Project.

41. Social Safeguards. The proposed AF does not raise social (including safeguards) issues. The Project does not include any gender-specific actions and is not expected to have impacts differentiated by gender. Therefore, no gender sensitive analysis or monitoring and evaluation will be conducted.

42. Environmental Safeguards. The environmental category of the proposed AF remains as C, as it is likely to have minimal or no adverse environmental impact, as it does not finance any physical activity on the ground, but rather consists of technical assistance activities, such as training, background analyses and reports, etc.

G. Projected Disbursements

FY Current Proposed

2015 300,000.00 300,000.00

2016 240,932.78 240,932.78

2017 1,863,084.22 1,659,067.22

2018 595,983.00 1,200,000.00

2019 - 1,030,000.00

2020 - 550,000.00

Please note that the above projected disbursement table has been added, as the system does not allow to include existing and proposed new disbursements under “Disbursement Estimate” section.

Note to Task Teams: The following sections are system generated and can only be edited online in the Portal.



I. SUMMARY OF CHANGES

Changed Not Changed

Change in Results Framework ✔

Change in Components and Cost ✔

Change in Loan Closing Date(s) ✔

Additional Financing Proposed ✔

Change in Disbursement Estimates ✔

Change in Implementation Schedule ✔

Change in Implementing Agency ✔

Change in Project's Development Objectives ✔

Cancellations Proposed ✔

Reallocation between Disbursement Categories ✔

Change in Disbursements Arrangements ✔

Change in Overall Risk Rating ✔

Change in Safeguard Policies Triggered ✔

Change of EA category ✔

Change in Legal Covenants ✔

Change in Institutional Arrangements ✔

Change in Financial Management ✔

Change in Procurement ✔

Other Change(s) ✔

IV. DETAILED CHANGE(S)

OPS_DETAILEDCHANGES_RESULTS_TABLE

RESULTS FRAMEWORK

Project Development Objective Indicators PDO_IND_TABLE

One or more carbon pricing instruments and associated infrastructure recommended to the Government and concrete activities to develop specific elements proposedUnit of Measure: Yes/NoIndicator Type: Custom



Baseline Actual (Current) End Target Action

Value No Yes Yes Revised

Date 04-Sep-2014 19-May-2017 31-Aug-2019

MRV framework and registry established within the energy sectorUnit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 31-Aug-2019

Knowledge, awareness, and capacity developed in the public and private sector in relation to the design and implementation of carbon pricing instruments.Unit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 31-Aug-2019

Intermediate IndicatorsIO_IND_TABLE

Regulatory Analyses for carbon pricing mechanisms in ChileUnit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 31-Aug-2019

Economic Analysis for carbon pricing mechanisms in ChileUnit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 31-Aug-2019



Institutional Analysis for carbon pricing mechanisms in ChileUnit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 31-Aug-2019

Design and Implementation of MRV systemUnit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 04-Sep-2017

Design and implementation of a bottom up registryUnit of Measure: Yes/NoIndicator Type: Custom



Date 04-Sep-2014 19-May-2017 04-Sep-2017

Number of workshops, training events and in-country visitsUnit of Measure: NumberIndicator Type: Custom


Value 0.00 12.00 20.00 Revised

Date 04-Sep-2014 19-May-2017 31-Aug-2019

Participation of public and private stakeholders in trainings and country visitsUnit of Measure: Yes/NoIndicator Type: Custom


Value No Yes Yes Marked for Deletion

Date 04-Sep-2014 26-May-2017 04-Sep-2017

Design and establishment of an integrated MRV Platform (MRV 3.0) specifically for the energy sector that goes beyond the carbon tax



Unit of Measure: Yes/NoIndicator Type: Custom


Value No No Yes New

Date 25-May-2017 19-May-2017 31-Aug-2019

Design of a climate policy simulator tool for the energy sectorUnit of Measure: Yes/NoIndicator Type: Custom


Value No No Yes New

Date 19-May-2017 19-May-2017 31-Aug-2019

Development and execution of a stakeholder and communication strategyUnit of Measure: Yes/NoIndicator Type: Custom


Value No Yes Yes New

Date 19-May-2017 19-May-2017 31-Aug-2019

OPS_DETAILEDCHANGES_COMPONENTS_TABLE

COMPONENTS

Current Component Name

Current Cost

(US$M)Action Proposed

Component NameProposed

Cost (US$M)

0.00 NewComponent 3 (existing) - Communications strategy and stakeholder engagement

200000.00

0.00 NewComponent 4 (existing) - Administration of the PMR Chile Project

265000.00

0.00 New

Component 5 (new) - Enhanment and complementation of the existing carbon tax scope and reporting system

610000.00

0.00 New Component 6 (new) - 905000.00



Assessment of alternative carbon pricing schemes for the energy sector

TOTAL 0.00 1,980,000.00

OPS_DETAILEDCHANGES_LOANCLOSING_TABLE

LOAN CLOSING DATE(S)

TF StatusOriginal Closing

Revised Closing(s)

Proposed Closing

Proposed Deadline for Withdrawal

Applications

TF-17731 Effective 04-Sep-2017 31-Aug-2019 31-Dec-2019

OPS_DETAILEDCHANGES_ADDITIONAL_FINANCING_TABLEADDITIONAL FINANCINGSource Currency Amount USD EquivalentPartnership for Market Readiness(PMR) USD 1,980,000.00 1,980,000.00

Existing Net Commitment USD Amount 3,000,000.00

Total 4,980,000.00

OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE

DISBURSEMENT ESTIMATES

Change in Disbursement EstimatesYes

Year Current Proposed

2015 300,000.00 300,000.00

2016 240,932.78 240,932.78

2017 1,863,084.22 1,659,067.22

2018 595,983.00 800,000.00

Note to Task Teams: End of system generated content, document is editable from here.



ANNEX I – PROJECT CHRONOGRAM

# Component Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1Regulatory, economic and institutional analyses to assess the viability of one or more carbon pricing instruments for the energy sector

2 Design and implementation of an MRV framework andregistry

3Stakeholder engagement and communications strategy, and capacity building

4 PMR Implementation Coordination

5Enhancing and complementing the existing carbon tax scope and reporting system

6Assessing alternative carbon pricing schemes for the energy sector and its link with the Paris Agreement

FY19 FY20FY15 FY16 FY17 FY18



ANNEX II - SUMMARY OF MAIN ACTIVITIES AND DELIVERABLES OF THE INITIAL PHASE OF THE PMR CHILE PROJECT

Component Activity Deliverables Status1.1. International Developments on Carbon Pricing and their implications on Chile’s public policies

Policy analysis Delivered

1.2 Evaluation of Chile’s participation in the CDM

Lessons learned from previous climate finance experiences

Delivered

1.3 Alternatives of design and additional measures to decide on a more comprehensive carbon pricing instrument

Proposal of potential carbon pricing instruments and its combination for Chile

July 2017

1.4 Design of an MRV 3.0 system GHG mandatory reporting guidelines

August 2017

1.5 Design of an MRV Platform and mitigation recognition program

Protocol and guidelines August 2017

Component 1. Regulatory,

Economic and Institutional

Analyses

1.6 Design an ETS simulator Protocol and guidelines August 2017

2.1 IT Security and computer procedures study

IT system improved Delivered

2.2 Design an MRV system to implement the carbon tax, scalable to other emissions, sectors (such as mining, iron and steel industry) and instruments

Protocol and guidelines July 2017Component 2. Design and

Implementation of an MRV

Framework and Registry System

2.3 Implementation of the carbon tax MRV system

MRV system in place July 2017

3.1 Communication, Consultation and Engagement Strategy

Workshops, conferences, training and other dissemination events

June 2017Component 3.

Communication Strategy and Stakeholder Engagement 3.2 Design and Implementation of

the Project’s Web PlatformProject website Delivered

Component 4. Administration

of the PMR Chile Project.

4.1 Technical execution of activities through the ME, including coordination and technical and policy advice4.2 Administrative execution through AGCI to support disbursement.

Payments, publication of ToRs,

August 2017



In addition to the Project implementation funding, Chile also receives support through the PMR’s Policy Analysis Work Program (PAWP), which is a Bank-executed activity to support upstream policy analysis that helps countries to build an evidence base to inform their decisions on if and how to use carbon pricing instruments. Chile has received funding and technical assistance from the PAWP for several activities, all meant to inform and complement the work being carried out as part of the Project. Completed policy work includes:

Policy Note Outputs ImpactsMitigation Action Plan for the Energy Sector

List of mitigation actions for the energy sector, including their mitigation potential and costs

Need to increase/strengthen the mitigation actions identified under the EP2050 to ensure NDC goals are meet (i.e. MRV for mitigation actions)

Analysis of the potential impacts from the implementation of the carbon tax in Chilean thermal generation plants

List of potential impacts for the thermal generation plants

Need to enhance the carbon tax scheme to increase its impact on GHG emission reductions

Analysis of the interaction and consistency between the carbon tax and other national energy policies and regulations

Policy analysis Lack of alignment between the Energy Policy 2050 and the NDC commitments

Characterization of plants and their facilities affected by the carbon tax

List of plants and facilities eligible under the carbon tax

Expand the initial scope of the carbon tax