On the environmental, economic and budgetary impacts of fossil fuel prices: A dynamic general equilibrium analysis of the Portuguese case

Alfredo Pereira and Rui Pereira

Energy Economics, 2014, vol. 42, issue C, 248-261

Abstract: This paper examines the influence of fossil fuel prices on carbon dioxide emissions, economic activity, and the public sector account in Portugal. It uses a dynamic general equilibrium model which highlights the mechanisms of endogenous growth and includes a detailed modeling of the public sector. Fuel price scenarios are based on forecasts by the US Department of Energy (DOE-US), the International Energy Agency (IEA-OECD) and IHS Global Insight Inc. The differences in relative fuel prices among the three scenarios lead to substantially different environmental impacts. Higher fuel prices in the DOE-US scenario lead to a 10.2% reduction in the policy effort required to meet the EU 2020 emission targets, while relative price changes in the IEA-OECD scenario result in a 19.2% increase in the required policy effort and decreasing fuel prices increase the emissions deficit by 95.9% under the IHS scenario. In terms of the long term economic impacts, our results suggest a 2.2% reduction in GDP in the DOE-US scenario and 1.9% in the IEA-OECD scenario and an increase of 1.4% in the IHS scenario. As to the budgetary impact, higher fuel prices lead to lower tax revenues, which, coupled with a reduction in public spending translates to lower public deficits. From a methodological perspective, our results highlight the importance of the mechanisms of endogenous growth. A scenario of higher fuel prices would, under exogenous economic growth assumptions, result in larger baseline emissions growth, substantially smaller economic effects, and rather different budgetary effects. From a policy perspective, our results highlight the importance of fossil fuel prices in defining the level of policy intervention required for compliance with international and domestic climate change legislation.

Keywords: Fuel prices; Endogenous growth; Budgetary consolidation; Climate policy; Dynamic general equilibrium; Portugal (search for similar items in EconPapers)
JEL-codes: C68 D58 H50 H68 Q43 Q54 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: On the environmental, economic and budgetary impacts of fossil fuel prices: A dynamic general equilibrium analysis of the Portuguese case (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:42:y:2014:i:c:p:248-261

DOI: 10.1016/j.eneco.2014.01.006

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