45 In July 2014, a law replaced SIPCO with MEPCO (Mecanismo De Estabilización De Precios De Los Combustibles, Fuel Price Stabilization Mechanism). MEPCO works on the same principle of adjusting the variable component while not touching the fixed component, but with some modifications. The band around the reference price is reduced to 5 percent. The variable component of the specific fuel tax is initially set to limit changes in retail prices to about 5.2 Chilean pesos (US$0.008) per liter a week, a limit that is adjusted for inflation (see discussion on the monthly tax unit below). If the import‐parity price differs from the reference price by more than 5 percent, however, this requirement is over‐ridden and the variable component is adjusted to keep the ex‐refinery price within 5 percent of the reference price. The cumulative deficit from the variable component of the fuel tax is limited to the peso equivalent of US$500 million. If this threshold is reached, the variable component is made to reach zero over a maximum of 12 weeks using a formula. If, despite the application of the formula, another deficit of US$100 million accumulates at any time during the 12‐week period, the variable component is immediately set equal to zero. The calculation rules were debated extensively prior to finalizing them. The history of different options considered and how the adopted methodology was selected has been written up and available on the website of the Chilean National Congress of Library (BCNC 2014).

An important aspect in setting specific fuel taxes in Chile is the UTM (Unidad Tributaria Mensual, monthly tax unit), a currency unit expressed in Chilean pesos and adjusted monthly in line with the consumer price index. The fixed component of the specific tax is expressed in UTM, so that it automatically adjusts with inflation. This avoids the type of problem encountered in the United States where, due to a political gridlock, the federal excise tax has been frozen at US$0.183 per gallon (US$0.048 per liter) for gasoline and US$0.244 per gallon (US$0.064 per liter) for diesel since 1993. Because the excise taxes are not indexed to inflation, their real values have been steadily declining over the last two decades, depriving the Federal Highway Trust Fund of the necessary funds to maintain federal highways.

The fixed components for gasoline, diesel, automotive LPG, and automotive CNG are 0.006 UTM (US$0.41) per liter, 0.0015 UTM (US$0.10) per liter, 0.0014 UTM (US$0.10) per liter, and 1.93 UTM (US$0.13) per cubic meter, respectively. The history of the specific tax for diesel since MEPCO came into effect is illustrated in Figure 11.

The extent of smoothing achieved by the specific tax is shown for gasoline in Figure 12. The new formula that came into effect in August 2015 smooths prices more effectively than the previous regime. A review of MEPCO conducted by the Latin American Center for Economic and Social Policy (Clapes‐UC 2015) found that between MEPCO’s inception on August 7, 2014 and December 10, 2015, the variable tax component for gasoline (93 and 97 RON) translated to a net subsidy of US$2 million, while that for diesel produced a net income of US$25 million, or a total net variable tax for the two fuels of US$23 million. The highest and lowest variable tax components were 82.60 pesos (US$0.14) per liter in October 2014 and ‐73.08 pesos (‐US$0.11) in July 2015, respectively, for gasoline, and 38.26 pesos (US$0.06) in January 2015 and ‐34.99 pesos (‐US$0.06) in March 2015, respectively, for diesel.