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Is Fuel-Switching a No-Regrets Environmental Policy? VAR Evidence on Carbon Dioxide Emissions, Energy Consumption and Economic Performance in Portugal

  • Alfredo Marvão Pereira

    ()

    (Department of Economics, College of William and Mary)

  • Rui Manuel Marvão Pereira

    ()

    (College of William and Mary)

The objective of this paper is to estimate the impact of carbon dioxide emissions from fossil fuel combustion activities on economic activity in Portugal in order to evaluate the economic costs of policies designed to reduce carbon dioxide emissions. We find that energy consumption has a significant impact on macroeconomic activity. In fact, a one ton of oil equivalent permanent reduction in aggregate energy consumption reduces output by ?6,340 over the long term, an aggregate impact which hides a wide diversity of effects for different fuel types. More importantly, and since carbon dioxide emissions are linearly related to the amounts of fuel consumed, our results allow us to estimate the costs of reductions in carbon dioxide emissions from different energy sources. We estimate that marginal abatement costs for carbon dioxide are ?45.62 per ton of carbon dioxide per year for coal, ?66.52 for oil, ?91.07 for gas, ?191.13 for electricity and ?254.23 for biomass. An important policy implication is that, once the overall economic costs of reducing carbon dioxide emissions are considered, fuel switching is a no-regrets environmental policy capable of reducing carbon dioxide emissions without jeopardizing economic activity and indeed with the potential for generating favorable economic outcomes.

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File URL: http://hdl.handle.net/10174/8458
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Paper provided by University of Évora, Department of Economics (Portugal) in its series Economics Working Papers with number 05_2008.

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Length: 47 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:evo:wpecon:05_2008
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