Beat butter and shortening in a large mixing bowl with an electric mixer on medium to high speed for 30 seconds. Add powdered sugar, 2 tablespoons granulated sugar, ground chili, vanilla, salt, cinnamon, and baking powder; beat until combined. Stir in flour and walnuts.
Shape the dough into 1-inch balls. Place 2 tablespoons granulated sugar in a small bowl. Roll balls in sugar and place on an ungreased cookie sheet. Flatten balls until 1/4-inch thick using the bottom of the glass.
Bake in a 325 degree F oven about 15 minutes or until edges are light brown. Transfer cookies to wire racks to cool. Makes about 36 cookies.