Fossil fuel prices and the economic and budgetary challenges of a small energy-importing economy: the case of Portugal

Journal of Economic Policy Reform

2017

Using an applied dynamic general-equilibrium model, we simulate the environmental, economic, and budgetary effects in Portugal of a new carbon tax indexed to the carbon price in the EU-ETS market. Through careful recycling of the carbon-tax revenues to finance lower personal income taxes, lower Social Security contributions, and higher investment tax credits-in particular when these changes are directed at promoting energy efficiency-we show that a carbon tax reform can yield three dividends of a long-lasting nature: a reduction in emissions, better economic performance, and a stronger budgetary position. Thus, we show that it is possible to design a politically-feasible carbon tax reform that not only boosts economic growth and strengthens fiscal consolidation, but also accommodates the legitimate needs of different stakeholders: interest groups that target environmental goals, households focused distributional issues, and businesses concerned with international competitiveness. These views were fully incorporated in a draft bill presented to the Portuguese Government in September 2014 by the Commission for Environmental Tax Reform [CRFV (2014)]. Based on these recommendations, a new indexed carbon tax was then approved by Parliament, and enacted on January 1 st , 2015.

Section: On the Choice Of A Carbon Tax Indexed To The Eu-ets Carbon Pmentioning

confidence: 99%

“…Previous versions of this model have been used to evaluate the impact of tax policy [see Rodrigues (2002, 2004)], public pension reform [see Pereira and Rodrigues (2007)], as well as energy and climate policy [see Pereira and Pereira (2013, 2014c].…”

Section: Introductionmentioning

confidence: 99%

Achieving the triple dividend in Portugal: a dynamic general-equilibrium evaluation of a carbon tax indexed to emissions trading

Journal of Economic Policy Reform

2017

“…The levels and scope of taxation vary widely from a low of about 1.5€ per ton of CO2 in Japan and about 7€ per ton in Iceland -covering 50% and 70% of domestic emissions respectively, to near 115€ in the United Kingdom and 125€ in Sweden, although these cover only about 25% of total emissions in these countries. In about two-thirds of the countries, taxes range from 10€ to 35€ Anderson et al (2013)] and is also indicative of the efforts required to meet domestic targets [see Pereira and Pereira (2013)]. We further consider a lower tax level of 5€ per ton and a higher level of 35€ per ton.…”

Section: On the Level Of Carbon Taxationmentioning

confidence: 99%

“…The model further captures the small, open, energyimporting, nature of the Portuguese economy, and is calibrated to replicate its stylized facts over the last two decades. Previous versions of this model were used to evaluate the impact of tax policy [see Rodrigues (2002, 2004)], public pension reform [see Pereira and Rodrigues (2007)], and, more recently, other energy and climate policies [see Pereira and Pereira (2013].…”

Section: Introductionmentioning

confidence: 99%

Reducing carbon emissions in Portugal: the relative roles of fossil fuel prices, energy efficiency, and carbon taxation

Journal of Environmental Planning and Management

2016

We assess the relative role of fossil-fuel prices, energy efficiency and carbon taxation in achieving climate policy goals using a dynamic general-equilibrium model of the Portuguese economy featuring endogenous growth and a detailed modeling of public-sector activities. Given the expected evolution of international fossil fuel prices, we show that to reach ambitious domestic reductions in emissions, it is fundamental to promote energy efficiency and to levy a significant carbon tax. Improving energy efficiency and implementing a new carbon tax have significantly different economic and budgetary effects. More energy efficiency reduces emissions and boosts economic performance, but increases public and foreign debt. In turn, the new carbon tax reduces emissions at the risk of jeopardizing economic performance, while the effects on public and foreign debt are more favorable. Thus, the relevance of pursuing both strategies in tandem is clear. We estimate that under the reference-price scenario, a steady energy efficiency gain of 2-2.5% and a carbon tax of at least 35 € per tCO2 are required to achieve the stated goal of reducing carbon dioxide emission by 2030 by an amount equivalent to 40% of the emissions in 1990. These views were fully integrated in a proposal presented by the Commission for Environmental Tax Reform [CRFV (2014)] to the

“…Previous versions of this model were used to evaluate the impact of alternative tax policies (see Pereira and Rodrigues, 2002;, public pension reform (see Pereira and Rodrigues, 2015), and other energy and climate policies (see Pereira and Pereira, 2013;. Even more crucial from this note's perspective, this model served as the basis for the Commission's recommendations, and all results presented here are, although naturally in a different context, includedin its official report (see CRFV, 2014).Accordingly, the key contribution of this article is to provide answers to a well-defined policy question in a well-defined public policy situation, answers which were instrumental in the actual framing of the proposals by the CRFV Commission and the carbon tax, as it was eventually adopted.…”

Section: Introductionmentioning

confidence: 99%

A new carbon tax in Portugal: A missed opportunity to achieve the triple dividend?

Rodrigues

2016

Energy Policy

In 2014, the Portuguese government appointed a Commission for Environmental Tax Reform that formulated a carbon-tax proposal designed to achieve three dividends: to help Portugal meet the European Union's target for emissions reductions by 2030, to boost long-term employment and GDP above their pre-carbon-tax levels, and to strengthen public finances by lowering public indebtedness. A key feature of this proposal was a judicious set of mixed strategies to recycle all carbon-tax revenues back into the economy. In this note, we show how the carbon tax that the Portuguese Parliament eventually approved deviated from such guidelines, and ultimately failed to achieve the triple dividend. We argue that authorities need to quickly amend the existing legislation to avoid this misguided attempt turning into a missedopportunityto improve environmental, macroeconomic, and fiscal outcomes.