A low-carbon strategy for Portugal – a hybrid CGE modelling approach

The EU 2020 Climate and Energy Package, in force since June 2009, commits the European Union to reduce its overall greenhouse gas (GHG) emissions to at least 20% below their 1990 levels by 2020, pursuing the ambition to make Europe a low-carbon and energy-efficient economy over the next decade. Under the actual EU emission market segmentation, this overall emissions reduction target is split down into a 21% reduction in emissions from the sectors covered by the EU Emissions Trading Scheme (EU ETS) and a 10% reduction in emissions from the non-ETS sectors, taking 2005 as the base year. Portugal, as an EU Member State, is subject to the EU climate-energy policy regulation and therefore is required to comply with country-specific emissions targets by 2020. In particular, Portugal may increase GHG emissions from the non-ETS sectors by 1% compared to 2005 levels by 2020, which must be reached with domestic policy measures. There is no national cap on emissions from the ETS sectors, although a 21% reduction must be achieved jointly across the 27 EU Member States by 2020. Thus, it is assumed that the EU ETS target applies to Portugal, i.e. Portugal should reduce emissions from the ETS sectors to 21% below 2005 levels by 2020. In this paper we intend to assess the impacts on the Portuguese economy when complying with this ambitious low-carbon strategy up to 2020. In our numerical simulations we employ a hybrid top-down/bottom-up modelling approach, which represents a reliable framework to analyse the economy-energy-environment interactions underlying carbon abatement policies. In particular, we make use of the Hybrid Bottom-up General Equilibrium Model (HybGEM) for Portugal – a multi-sector, CGE model integrating a bottom-up representation of the power sector, which has been designed for energy and climate mitigation policy assessment in a small open economy like Portugal. The HybGEM model is applied to simulate the economic, environmental and technological effects to achieve Portugal’s emissions targets for 2020, considering as policy instruments (1) the EU ETS with an economy-wide cap-and-trade system for emissions from energy-intensive sectors and (2) a domestic carbon tax for emissions from sectors outside the carbon trading (non-ETS sectors). The HyBGEM is numerically implemented as a system of simultaneous non-linear inequalities using the Mathematical Programming System for General Equilibrium analysis as a subsystem within the General Algebraic Modelling System – MPSGE/GAMS, and solved by using the PATH solver. Due to the preliminary nature of the results so far available, this abstract only presents the main simulated trends instead of quantitative outcomes which will be reported in the full paper. Preliminary results suggest that achieving the decarbonisation of the Portuguese economy considered in the simulated policy scenario leads to a contraction in output of energy (fossil-fuel) intensive sectors, reflecting the higher production costs associated with a non-zero carbon price. In the national power generation sector, there is an increased share of electricity produced from renewable energy sources as well as a diversification of the technology supply mix with carbon-free renewable power generation technologies (such as wind, biomass, and geothermal) replacing partly high-carbon fossil-fuels technologies (namely coal). The increased costs of electricity supply leads to a raise in electricity prices. In the new equilibrium, consumption is lower indicating the welfare cost of the transition towards a low-carbon economy. The real wage rate and the rental rate of capital fall below baseline levels.