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

a r t i c l e i n f o JEL classification: Q43 Q54 C68 D58 H50 H68 Keywords: Fuel prices Endogenous growth Budgetary consolidation Climate policy Dynamic general equilibrium Portugal 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. This paper addresses the impact of fossil fuel prices on energy consumption, carbon dioxide (CO 2) emissions, economic activity, and the public sector account using a dynamic general equilibrium model of the Portuguese economy, an economy dependent on foreign energy sources. It has two main purposes: to assess the role of fuel prices as drivers of CO 2 emissions and to explore the dynamic relationship between fuel prices, economic activity, and the public sector account. These allow us to determine the impact of fuel prices on climate policy efforts. Fuel prices are important in …