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

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Author Info

  • Alfredo Marvão Pereira

    ()
    (Department of Economics, The College of William and Mary)

  • Rui M. Pereira

    ()
    (Department of Economics, University of the Algarve)

Abstract

This paper examines the environmental, economic and budgetary impacts of fuel prices using a dynamic general equilibrium model of the Portuguese economy which highlights the mechanisms of endogenous growth and includes a detailed modeling of the public sector. The fuel price scenarios are based on forecasts by the DOE-US, the IEA-OECD and IHS Global Insight Inc., and represent a wide range of projections for absolute and relative fossil fuel prices. The dramatic differences in relative prices lead to substantially different environmental impacts. Our results suggest that higher fuel prices in the DOE-US scenario would lead to a reduction in emissions that account for 10.2% of the implicit emissions deficit for EU 2020 emissions targets, while relative price changes, led by lower prices for coal, result in a 19.2% increase for the IEA-OECD scenario. Under the IHS scenario, declining fuel prices would increase the emissions deficit by 95.9%. In terms of the long term economic impact, our results suggest a 2.2% drop in GDP in the DOE-US scenario and of 1.9% in the IEA-OECD scenario and an increase of 1.4% in the IHS scenario, which reflect the absolute change in energy costs. 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. In addition, and from a methodological perspective, our results highlight the importance of endogenous growth mechanisms. A scenario of higher fuel prices would, under exogenous economic growth assumptions, result in larger baseline emissions growth scenarios, substantially smaller economic effects, and rather different budgetary effects. Finally, and from a policy perspective, our results highlight the impact of fossil fuel prices in defining the level of policy intervention required for compliance with international and domestic climate change legislation. As a corollary, we argue that it is critical for both international comparisons and international policy negotiations to define baseline emission targets in function of steady state economic projections under stable price assumptions.

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Bibliographic Info

Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 110.

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Length: 48 pages
Date of creation: 23 Jan 2011
Date of revision:
Handle: RePEc:cwm:wpaper:110

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Keywords: Fuel Prices; Endogenous Growth; Budgetary Consolidation; Climate Policy; Dynamic;

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References

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  1. van Ruijven, Bas & van Vuuren, Detlef P., 2009. "Oil and natural gas prices and greenhouse gas emission mitigation," Energy Policy, Elsevier, vol. 37(11), pages 4797-4808, November.
  2. Carlo Carraro & Enrica De Cian & Massimo Tavoni, 2009. "Human Capital Formation and Global Warming Mitigation: Evidence from an Integrated Assessment Model," CESifo Working Paper Series 2874, CESifo Group Munich.
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Cited by:
  1. Alfredo Marvão Pereira & Rui M. Pereira, 2012. "DGEP - A Dynamic General Equilibrium Model of the Portuguese Economy: Model Documentation," Working Papers 127, Department of Economics, College of William and Mary.
  2. Gerhard Glomm & Juergen Jung, 2012. "A Macroeconomic Analysis of Energy Subsidies in a Small Open Economy: The Case of Egypt," Caepr Working Papers 2012-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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