Prices that Clear the Air: Energy Use and Pollution in Chile and Indonesia zyxwvutsrqponmlk Gunnar S. Eskeland, Emmanuel Jimenez and Lili Liu* Emission reductions could be provided by cleaner technologies as well as substitution towards less polluting inputs and goods. W e develop a model to assess the scope for emission reductions by input substitution. W e then apply the model to manufacturing in Chile and Indonesia-two developing countries considering airpollution control strategies. W e 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 (SOA and suspended particulates (TSP), emission elasticities with respect to the price of heary fuels range from -0.4 to -1.2. A price increase of 20percent would reduce emissions of SO, and TSP by 8 to 24’ percent. W hile these results indicate how emissions can be reduced @ 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. INTRODUCTION The best way to “clear the air” is to make polluters face the marginal social costs of their actions. A policy which could implement such a principle is a pollution tax equal to the marginal social damages of emissions. Such The Energy Journal, Vol. 19, No. 3. Copyright o 1998 by the IAEE. All rights reserved. * All three authors are at the World Bank, Development Research Group, 1818 H Street, N.W., Washington, DC 20433, USA. Email: geskelandQworldbank.org. Support from World Bank research grant RPO 676-48. and a grant from the Swedish International. Development Agency (SIDA) to the research project on Poverty, Environment and Growth are gratefully acknowledged. We also thank Chingying Kong for excellent research assistance and. Christopher S. Weaver for analysis of emission coefficients. The findings, interpretations, and: conclusions expressed in this paper are entirely those of the authors, and do not necessarily represent: the views of the Government of Sweden, the World Bank, its Executive Directors, or the countries they represent. 85