Targeting energy savings? Better on primary than final energy and less on intensity metrics

Abstract

Energy efficiency is a critical issue in public policies, as it is the key to decoupling economic growth and energy use. These objectives are becoming even more relevant to addressing the energy crisis and the new geopolitical scenarios delivered by the Ukraine war. Although several papers have analyzed energy efficiency goals, this paper focuses on energy savings targets, which represent the main efficiency metric for the European Union. This paper fills a gap in literature by analyzing the economic and environmental impacts of attaining energy efficiency targets through an energy fiscal policy, simulated by a hybrid computable general equilibrium model with technological detail. Six scenarios are defined for energy savings in primary/final energy consumption of fossil-fueled/all energy products, using Portugal as a case study. Relevant insights for policy makers from the simulated scenarios include: (i) achieving energy saving targets by alternative means, i.e., directed at primary or final energy consumption, provide heterogeneous impacts on the efficiency of the energy system and GDP, and some unexpected and undesirable outcomes concerning environmental impacts; (ii) a relatively lower taxation of all energy products deliver larger and more distorting impacts on electricity generation than higher taxes on fossil fuels only (a counterintuitive result), (iii) policies aiming to reduce primary energy instead of final energy provide the best outcomes (further increases in the efficiency of the energy system with smoother economic impacts), thereby pointing against the European Energy Taxation directive principle that taxation should be levied on final products, regardless of inputs used in their production and (iv) and targets should not be set up based on energy intensity indicators. Hence, it is shown that the size of the trade-off between economic and environmental concerns depends on where (primary or final energy consumption) and what (fossil or all energy products) energy savings are targeted.