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


  • Alfredo Marvão Pereira

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

  • Rui M. Pereira

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


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.

Suggested Citation

  • Alfredo Marvão Pereira & Rui M. Pereira, 2011. "On the environmental, economic and budgetary impacts of fossil fuel prices: A dynamic general equilibrium analysis of the Portuguese case," Working Papers 110, Department of Economics, College of William and Mary.
  • Handle: RePEc:cwm:wpaper:110

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    References listed on IDEAS

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    Cited by:

    1. Alfredo Marvão Pereira & Rui M. Pereira, 2015. "Reducing Carbon Emissions in Portugal: The Relative Roles of Fossil-Fuel Prices, Energy Efficiency, and Carbon Taxation," Working Papers 154, Department of Economics, College of William and Mary.
    2. Pereira, Alfredo & Pereira, Rui, 2017. "On the Effect of an Increase in the VAT on Electricity in Portugal," MPRA Paper 77594, University Library of Munich, Germany.
    3. Pereira, Alfredo & Pereira, Rui, 2016. "On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions," MPRA Paper 77630, University Library of Munich, Germany.
    4. 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.
    5. Gerhard Glomm & Juergen Jung, 2015. "A Macroeconomic Analysis Of Energy Subsidies In A Small Open Economy," Economic Inquiry, Western Economic Association International, vol. 53(4), pages 1783-1806, October.
    6. Pereira, Alfredo M. & Pereira, Rui M. & Rodrigues, Pedro G., 2016. "A new carbon tax in Portugal: A missed opportunity to achieve the triple dividend?," Energy Policy, Elsevier, vol. 93(C), pages 110-118.
    7. repec:kap:enreec:v:67:y:2017:i:2:d:10.1007_s10640-015-9984-z is not listed on IDEAS
    8. KARGI, Bilal, 2014. "The Effects of Oil Prices On Inflation and Growth: Time Series Analysis In Turkish Economy For 1988:01-2013:04 Period," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 29-36.
    9. Tahseen, Samiha & Karney, Bryan W., 2017. "Reviewing and critiquing published approaches to the sustainability assessment of hydropower," Renewable and Sustainable Energy Reviews, Elsevier, vol. 67(C), pages 225-234.
    10. 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.
    11. Alfredo Marvão Pereira & Rui M. Pereira, 2015. "Achieving the Triple Dividend in Portugal: A Dynamic General-Equilibrium Evaluation of a Carbon Tax Indexed to Emissions Trading," Working Papers 155, Department of Economics, College of William and Mary.

    More about this item


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

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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