Portugal: Selected Issues
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International Monetary Fund. European Dept.
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Publication Date:
30 Jun 2022
eISBN:
9798400215070
ISBN:
9798400215070
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English
Keywords:
EU-ETS allowance; energy mix; EU ETS; GHG change; economic recovery plan
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1. Portugal is increasingly vulnerable to natural disasters. Over the last two decades, the frequency of natural disasters in Portugal has increased, with wildfires, droughts, storms, floods, and extreme temperatures becoming the main natural disasters (Figure 1). Between 1980 and 2021, natural disasters affected 166 mil people and incurred damages of USD10 billion.3 On average, a natural disaster is estimated to have caused damages of about 0.4 percent of GDP and affected 60 per 100,000 inhabitants every year (Table 1). Based on a sample of all natural disasters in Europe between 1980 and 2021, Portugal has a large probability of being hit by a severe natural disaster in the region (Figure 1).4 5 Severe natural disasters have a significant negative impact on growth, inequality, fiscal, and trade balances. Climate change also likely had long-term effects on Portugal’s tourism and agriculture sectors, including by diverting long-term investment and further constraining fiscal space.6

Abstract

1. Portugal is increasingly vulnerable to natural disasters. Over the last two decades, the frequency of natural disasters in Portugal has increased, with wildfires, droughts, storms, floods, and extreme temperatures becoming the main natural disasters (Figure 1). Between 1980 and 2021, natural disasters affected 166 mil people and incurred damages of USD10 billion.3 On average, a natural disaster is estimated to have caused damages of about 0.4 percent of GDP and affected 60 per 100,000 inhabitants every year (Table 1). Based on a sample of all natural disasters in Europe between 1980 and 2021, Portugal has a large probability of being hit by a severe natural disaster in the region (Figure 1).4 5 Severe natural disasters have a significant negative impact on growth, inequality, fiscal, and trade balances. Climate change also likely had long-term effects on Portugal’s tourism and agriculture sectors, including by diverting long-term investment and further constraining fiscal space.6

Reducing Greenhouse Gas Emission in Portugal: The Road Ahead1,2

A. Portugal and Climate Change

1. Portugal is increasingly vulnerable to natural disasters. Over the last two decades, the frequency of natural disasters in Portugal has increased, with wildfires, droughts, storms, floods, and extreme temperatures becoming the main natural disasters (Figure 1). Between 1980 and 2021, natural disasters affected 166 mil people and incurred damages of USD10 billion.3 On average, a natural disaster is estimated to have caused damages of about 0.4 percent of GDP and affected 60 per 100,000 inhabitants every year (Table 1). Based on a sample of all natural disasters in Europe between 1980 and 2021, Portugal has a large probability of being hit by a severe natural disaster in the region (Figure 1).4 5 Severe natural disasters have a significant negative impact on growth, inequality, fiscal, and trade balances. Climate change also likely had long-term effects on Portugal’s tourism and agriculture sectors, including by diverting long-term investment and further constraining fiscal space.6

Figure 1.
Figure 1.

Impact of Climate Change on Portugal

Citation: IMF Staff Country Reports 2022, 204; 10.5089/9798400215070.002.A003

Table 1.

Portugal: Natural Disasters in Portugal and Selected Countries

article image
Source: The EM-DAT database and IMF staff calculations

2. Despite its mild weather, energy poverty in Portugal has gradually emerged as an important policy issue and the authorities have recognized addressing energy poverty as one of its key objectives. Natural disasters tend to disproportionately impact the most vulnerable through the loss of economic assets such as roads, housing, schools, or equipment. While the situation has significantly improved over the last two decades, some 20 percent of Portugal’s households are still unable to properly heat or cool their homes (Figure 1). Other indicators of energy poverty also indicate that Portugal scores below its EU peers. Inadequate insulation of old houses and high electricity prices remain a long-standing issue, although the trend has been reversing recently.7 Pollution has also become a concern to an increasing share of Portuguese population.8

3. Under status quo, the intensity, frequency, and economic costs of extreme weather events are expected to increase (Figure 1). According to the Climate Risk Index, Portugal is among the European countries with the highest potential vulnerability to the impact from the climate change―at 21st place out of 180 countries.9 Similarly, the United Nations Framework Convention on Climate Change (UNFCCC (2021)) refers to a number of vulnerabilities in case of Portugal, such as increasing frequency and intensity of droughts, floods, flash floods, heat waves, rural fires, erosion, reduced annual precipitation combined with higher frequency of heavy precipitation events, and rising sea level. In line with developments in other Southern European countries, additional increase in temperature by one degree Celsius could reduce the value of Portugal’s land by about 10 percent, one of the largest in Europe (Van Passel et al., 2017). Under the most pessimistic climate scenario, Portugal could lose more than 60 percent of its land value by 2100 (EEA, 2021).10

B. Portugal’s GHG Emission

4. With per capita GHG emissions below EU average, Portugal’s contribution to global emissions remains limited. At its peak in 200511, Portugal produced 69 mil tCO2e (Figure 2), equivalent to 1.8 percent of EU’s total GHG and 0.13 percent of world’s GHG emissions, ranking 59 out of the top 218 polluting countries. In 2019, Portugal’s per capita GHG emissions reached 6.7 tCO2e (EU average 8.4 tCO2e) and continued declining. Nonetheless, the carbon intensity of the Portuguese economy―while also on a declining path―remains above the EU average.12 The transport sector has been the largest contributor to total emissions, representing almost 30 percent. Agriculture emissions are among the lowest in the EU. One fifth of Portugal’s emissions originate from electricity generation. With last coal-based power plant closed in 2021, emissions from electricity generation are expected to decrease significantly in the coming years in part due to the higher reliance on renewable sources of energy and gas. Portugal’s energy mix, despite having one of the highest shares of renewables in the EU13, continues to be dominated by imported fossil fuels.

Figure 2.
Figure 2.

Portugal’s GHG Emissions

Citation: IMF Staff Country Reports 2022, 204; 10.5089/9798400215070.002.A003

5. After peaking in 2005, total emissions have decreased close to its 1990 level thanks to energy efficiency improvements and production of renewable energy.14 GHG emissions rose steadily in the 1990s in line with increasing―partially coal-based―electricity generation and a higher use of cars. Since 2005 however, with greater reliance on natural gas and renewables in electricity generation, and a higher number of more efficient car engines, Portugal’s GHG emissions declined significantly, which have been in compliance with the Kyoto Protocol.15 Improvements in energy efficiency (emissions per unit of GDP) played an important role in reducing emissions.16 Thanks to these changes, GHG emissions have been on a declining path since 2005―though less over the recent years―while the economy has been growing.

C. Portugal’s Climate Goals and Policies

6. Portugal’s vision for low GHG emissions was formulated in the Roadmap for Carbon Neutrality 2050 (RCN) and set out in the National Energy and Climate Plan (NECP).17 In 2016, Portugal was among the first in the EU to announce its goal of becoming carbon neutral by 2050―five years before EU’s requirement. The government announced ambitious national and sectoral targets of reducing GHG by 45–55 percent compared to 2005 in 2030 (Table 2 and 3), reduce Portugal’s primary energy consumption by 35 percent and increase the share of energy from renewable sources to 47 percent by 2030 (more than the 32 percent minimum required by the EU). Portugal also committed to ensure that the land use sector, land use change and forestry (LULUCF) would compensate the amounts of CO2 emitted by the different sectors, as set in the Paris agreement and the EU directives.18 In addition, the authorities committed to increase support for public and private research and innovation on climate change by 3 percent of GDP by 2030 and address the impact of energy transition on vulnerable citizens and energy poverty.

Table 2.

Portuguese Strategic Objective for the 2030 Horizon

article image
Table 3.

Portuguese Energy and Climate Targets for 2030

article image

7. Portugal is subject to EU-wide climate directives. Emissions from large companies in the energy, industry, and aviation sectors are covered by the cap-and-trade EU-wide Emission Trading System (ETS). At the EU level, the system specifies the total amount of GHG emissions while allows participants to trade permits. The cap is reduced annually so that EU’s emissions is set to reach 43 percent of its 2005 level by 2030. For sectors not covered by the ETS, such as transport and housing, a separate emissions trading system is under discussion and expected from 2026.

uA003fig01

Target Emission Reduction by 2030

(Percent)

Citation: IMF Staff Country Reports 2022, 204; 10.5089/9798400215070.002.A003

Sources: Eurostat/UNFCCC, and IMF staff calculations.

8. Portugal’s Recovery and Resilience Plan (RRP) presents measures that will support decarbonization and energy objectives outlined in the NECP and RNC. Almost a fifth of Portugal’s RRP funds (€3.06 bn, 2 percent of 2020 GDP under 16 components of the RRP) have been allocated to Climate Transition pillar although the measures supporting climate change objectives account for 38 percent of the Portugal’s plan total allocation. The main projects include investments in (i) sustainable mobility― expansion of the Lisbon and Porto metro systems and the decarbonization of public transportation―(€0.97 billion), (ii) decarbonisation of industry and businesses (€0.75 billion), (iii) promotion of green hydrogen and renewable technologies (€ 0.37billion) and (iii) energy efficiency of residential, public administration, ane commercial buildings (€0.61 billion). The RRP envisages green transition as an opportunity to leverage the Portuguese economy towards sustainability, by promoting technological advancement, job creation, combating energy poverty and preservation of natural resources.

D. Simulating the Impact of a Carbon Pricing Reform

9. A well-designed carbon price is an essential, although not the only, part of any efficient strategy to reduce GHG emissions. Carbon pricing is deemed to be the most powerful and effective way to reduce GHG emissions (IMF, 2020b). It stimulates improvements in energy efficiency, reduces the demand for energy-intensive products, and promotes green investment and innovation. Furthermore, carbon pricing brings much welcome fiscal revenue, which could finance the greening of the economy and compensate the most vulnerable users for higher energy costs. Carbon pricing can be implemented, for instance, through an explicit carbon tax or through a cap-and-trade system, i.e., EU-ETS.19

10. Several measures have already been implemented to appropriately price carbon. The EU’s Energy Taxation Directive20, recommends the reinforcement of carbon taxation and to use the attendant revenue to finance measure to reduce its GHG emissions and to protect the most vulnerable households. About ¾ of Portugal’s total GHG emissions are already subject to some form of carbon pricing (Box 1). Almost half of Portuguese companies in the energy and industry sectors participate in the EU-ETS, and an explicit carbon tax for non-ETS sectors was introduced in 2015. Nonetheless, the effective carbon tax remains low relative to estimates of carbon emission damage (Table 4). In addition, revenue from environmental taxes has been on a declining trend―both as a share of GDP and public revenue since 1995―although it increased after the carbon tax was increased in 2015 (Figure 3).

Table 4.

Portugal: Carbon Pricing Schemes in Selected European Countries, 2019

article image

Environmentally Related Taxes in Portugal

There are several environmentally related taxes in Portugal, such as: (i) taxes on energy products, (ii) motor vehicles and transport, (iii) waste management, (iv) ozone-depleting substances and others.

  • Tax on petroleum and energy products (ISP), introduced in 1986, is applied on (i) oil, (ii) energy products, and (iii) hydrocarbons―consumed as a fuel―and (iv) electricity covered by Code NC 2716.

  • Add-on to CO2 emissions―carbon tax―was introduced in 2015 to promote a low-carbon economy, help fight climate change and reduce Portugal’s external energy dependency. The tax was designed as an add-on to ISP and applies to sectors not covered by EU ETS. The carbon tax is applied to (i) Petrol; (ii) Oil and colored and marked oil; (iii) Diesel; (iv) LPG (methane and petroleum gases); (v) Natural gas used as a fuel or propellant (vi) Fuel Oil; (vii) Petroleum coke; and (viii) Coal and coke. Carbon tax rate is calculated as the arithmetic mean of the previous year’s price from GHG emissions license auctions held under EU ETS. Products exempted from ISP are not subject to the carbon tax.

Figure 3.
Figure 3.

Portugal: Carbon Pricing, Energy Taxation, and Subsidies

Citation: IMF Staff Country Reports 2022, 204; 10.5089/9798400215070.002.A003

11. The NECP outlines the authorities’ plans to further strengthen existing measures. In the energy sector a gradual elimination of fossil fuel subsidies, initiated in 2018, combined with an ongoing revision of tax benefits, is expected to lower incentives to use fossil fuels.21 The share of companies covered by the ETS is expected to be gradually increased. Revisions of vehicle and road taxes―together with adjustments in other direct and indirect taxes―and subsidies should provide incentives to decarbonize the transport sector and incentivize electric mobility. Tax incentives promoting: (i) energy efficiency of buildings; (ii) production of energy from renewable sources in residential and services sectors are foreseen in the 2022 State Budget; and (iii) low-carbon products and services are expected to be introduced by 2025.

12. A well-designed carbon pricing reform would help accelerate transition towards carbon neutrality. To reach carbon neutrality by 2050, Portugal GHG emission should reach between 47mts and 39mts in 2030. Applying the IMF/World Bank’s Carbon Price Assessment Tool (CPAT), staff simulates the impact of existing, planned, and potential measures to reform carbon pricing on GHG emissions, the economy and income distribution (Table 5).22, 23 Main conclusions:24

  • Preserving current status quo (baseline), e.g., keeping the current carbon price at US$28/tCO2 as well as the coverage of the carbon tax and the existing level of energy subsidies would not prevent GHG emissions from growing over time. Under the baseline, specifically assuming that all else remaining the same, staff assesses GHG emissions to increase from an estimated 55 million tons (mts) in 2022 to 58 mts (+4.7 percent) in 2030.

  • A higher carbon price would reduce emissions but still fall short of putting Portugal on a trajectory towards carbon neutrality in 2050 under current policies. Assuming linearly increasing carbon price from the baseline level of US$28/tCO2 to US$75 (100) /tCO2 in 2030, GHG emissions are projected to drop by 1.3 (5.3) percent compared to the 2022 estimated level, reaching 55 and 53 mts by 2030.25 This is partly because the tax would apply to a relatively narrow tax base (see next scenario).

  • Increasing only the coverage of the carbon tax and removing fuel subsidies and exemptions would increase the effective tax rate which would stabilize GHG emissions at the 2022 level, even if the carbon price remains unchanged at the baseline level. In a scenario where all the sectors not participating in the ETS would be covered by the carbon tax and all the fuel subsidies and exemptions would be removed, GHG emissions are projected to reach 56 mts in 2030 (0.9 percent higher than the 2022 estimate).

  • To approach its intermediary objective to reach carbon neutrality by 2050, Portugal will need to implement a gradual reform combining a higher carbon price with a higher carbon tax coverage and elimination of fuel subsidies. Combining a gradual elimination of fossil fuel subsidies and carbon tax exemptions with linearly increasing carbon price to US$ 100/tCO2 would significantly increase the effective price of carbon and thus eliminate incentives to pollute environment. In such a scenario, GHG emissions are projected to drop to 48 mts by 2030, close to the Portugal’s intermediary objective of reaching carbon neutrality by 2050.26

Table 5.

Portugal: Assumptions and GHG Change Under Baseline and Alternative Scenarios

article image

13. A gradual carbon price reform―as described under scenario “d”27―seems the most effective in achieving carbon neutrality by 2050, although with large distributional consequences for lower income households. Specifically:

  • Higher carbon price and broader carbon tax coverage would bring about significant benefits as well as create efficiency costs. If monetized, estimated co-benefits of the reform would reach an annual average at 0.2 percent of GDP. About 81 percent of the benefits would be due to domestic environmental co-benefits, such as less traffic congestion and lower number of accident-related externalities. Remaining 19 percent would come from better air quality and lower number of deaths. The global climate benefit is estimated to bring additional 0.1 percent of GDP, increasing the total welfare benefit to 0.3 percent of GDP.28 Nonetheless, as the cost of adopting cleaner technology is expensive, a carbon price of about US$100/tCO2 would entail some costs.29 For example, higher non-road oil and kerosene prices would impact the shipping transportation and aviation, possibly hurting competitiveness of Portugal’s tourism sector.

  • Higher carbon price would have a large impact on energy prices and weight on most vulnerable households, which would need to be addressed with offsetting measures. Energy prices would respond sharply in scenario “d”. Specifically, gas prices are projected to increase by more than 40 percent, diesel by more than 30 percent, gasoline by about 25 percent and electricity by 10 percent. As the share of energy in households’ consumption remains high, e.g., direct energy consumption represents almost 20 percent of total consumption of lower income groups, the projected price increase would heavily impact on most vulnerable households.

  • The overall economic impact critically depends on how the newly generated revenue from the carbon tax is distributed back to the economy. A gradual increase of both the coverage and the carbon price could raise public revenues by about 2½ percent of GDP (USD$7.4 billion) by the end of the projection horizon in 2030 (Figure 4). Newly generated revenue from carbon taxation could be used to: (i) address critical public investment gaps; (ii) offset the regressive effect of the carbon tax on the most vulnerable households; and (iii) reduce labor and/or corporate tax to avoid economic inefficiencies linked to double taxation.

Figure 4.
Figure 4.

Impact of Carbon Pricing Reform

Citation: IMF Staff Country Reports 2022, 204; 10.5089/9798400215070.002.A003

E. Policy Conclusions

14. Portugal was among the first countries in the EU to set ambitious objectives and targets, develop plans, and introduce measures to address increasing climate-related challenges. Portugal’s energy-intensive sectors participate in the EU-ETS. Portugal met its 2020 targets on non-ETS emissions, with the share of renewables in heating and cooling reaching 41 percent, and the share of renewable energy in overall energy consumption increasing by 11 percentage points between 2005 and 2019, reaching about 30 percent of gross final energy demand in 2019. The government aims to further increase the share of renewables to 47 percent by 2030―among the highest in the EU―and to improve its energy efficiency.30 Sector-specific emission and energy efficiency measures outlined in the NECP, such as for transport, industry, and electricity, will contribute to lower GHG emission. Policies increasing production of green hydrogen and other renewable gases (biomethane) and electricity generation from solar and offshore wind platforms combined with renovation of buildings―one of authorities’ priorities―will help reduce energy consumption and attain energy efficiency targets. Since 2015, a carbon tax has been charged on most energy products, generating additional revenue, which together with the EU-ETS allowances contribute to Portugal’s environmental Fund.

15. Portugal’s economic recovery plan places a strong emphasis on accelerating energy transition. The measures and funding (almost 40 percent of Portugal’s allocation) as set out in Portugal’s RRP― supporting sustainable mobility, energy efficiency, higher share of renewables, decarbonization and the bio-economy―are expected to support the decarbonization and objectives set out in the NECP and RNC. The plan sees green transition as an opportunity to leverage the Portuguese economy towards sustainability by promoting technological advancement, job creation and preservation of natural resources.

16. Nonetheless, to achieve carbon neutrality in 2050, more effort would be required. The economy remains heavily reliant on imported fossil fuels, which accounted for 74 percent of primary energy supply in 2019 (44 percent oil, 25 percent natural gas and 6 percent coal). Additional policies and measures will be required in order to increase the share of renewables to 47 percent. Similarly, the targets aiming at reducing energy import dependency below 65 (19) percent by 2030 (2050) as set by NECP (RNC) seem ambitious and achieving these goals will require strong and sustained measures to reduce fossil fuel demand across sectors. Special focus will be required to reduce oil demand in the transport sector as 94 percent of transport energy demand was covered by oil, and transport GHG emissions increased by 10 percent from 2014 to 2019. Faster reduction of carbon tax exemptions would increase the effective price of carbon, contributing to elimination of fossil fuels subsidies―estimated at 0.6 percent of GDP in 2021― and contributing to decarbonization of the economy. With a large share (two thirds) of buildings not meeting energy performance requirements, the renovation of both public and private buildings would also need to be advanced.

17. Increasing price of carbon could help achieve carbon neutrality if combined with other reforms, including on energy subsidy and larger coverage of the carbon tax. Under current policies, staff estimates that increasing carbon price from current US$28 t/CO2e to US$75(100) t/CO2e would reduce GHG emissions by 11(15) percent and thus not put the country on the path of carbon neutrality by 2050. The limited impact of higher carbon price would be a results of existing tax exemptions and reduced rates. Combining higher carbon price with energy subsidy reform and larger coverage of the carbon tax, would reduce GHG emissions to 48 t/CO2e by 2030 and place Portugal on a trajectory towards carbon neutrality, justifying a need to minimize the existing tax exemptions and reduced tax rates. Increasing the price of pollution would generate additional public resources, that can finance reduction of other (more distortionary) taxes, transfers to vulnerable households, investment in infrastructure, clean technologies, and innovations.

18. Measures to support carbon pricing reform are also critically important. Measures outlined in NECP and RNC, such as: (i) investment in public transportation infrastructure and urban planning; (ii) renewable-based power generation; (iii) introducing or raising efficiency standards, (iv) water, land and forest management; and (v) investment in R&D initiatives will also help accelerate transition towards carbon neutrality.

19. To avoid further impact from climate change, additional specific policies and measures will be required. As floods, coastal erosion, droughts, heat waves and rural fires are expected to become more frequent and extreme in Portugal, investments in risk prevention and preparedness, and climate change adaptation, including improvement in water management, rural fire prevention, circular economy, and waste management, may also be needed. Additional considerations include exploring offshore wind and ocean energy and increasing solar energy generation. Improving energy efficiency of buildings through well-designed building renovation programs remains a longstanding priority as well as addressing high energy intensity in the transport sector.

20. The authorities are developing plans to shield the most vulnerable from the side effects of the green transition. To address energy poverty, the authorities are developing a National Long-Term Strategy analyzing causes of energy poverty, setting out objectives for reducing energy poverty, and proposing specific measures to achieve the objectives. Special attention is paid to measures contributing to: (i) improving energy efficiency of homes, (ii) better access to energy services, (iii) improving energy literacy, and (iv) reducing the burden of energy consumption. Furthermore, the NECP and RRP foresee additional measures to combat energy poverty and further develop instruments to protect the most vulnerable.

References

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1

Prepared by Kamil Dybczak, Magali Pinat, and Boyang Sun (all EUR). The analysis benefited from extensive discussions with Karlygash Zhunussova, and comments and suggestions from Simon Black, Koralai Kirabaeva, Alex Pienkowski, and Ruifeng Zhang and colleagues from Banco de Portugal and the Portuguese Ministry of Environment and Climate Action.

2

While several 2020 climate indicators became available at the time of producing this note, the analysis mostly uses 2019 data, as some of the 2020 indicators, such as energy consumption or energy imports, were impacted by the pandemic and overall economic slowdown.

3

Since 1980, Portugal has been hit by 43 disasters, implying the probability of a disaster each year at about 130 percent. Data on frequency of natural disasters, number of affected, and size of damage are from the Emergency Events Database (EM-DAT).

4

Dongyeol et al. (2018) find that only severe natural disasters have significant economic impact. They define a natural disaster as “severe” if the total damage and the size of population affected is above 90th percentile.

5

These figures do not consider forward-looking probabilities based on evolution of global and domestic climate change policies.

6

It is important to recognize however, the challenges in quantifying long-run effects which are sensitive to model specifications and assumptions about prospective policy changes.

7

Adão et al. (2022) quantify measures of heating and cooling needs, pointing at regional differences within Portugal.

8

Eurobarometer (2021).

9

According to Ciscar et al. (2014) the geographical distribution of the climate damages is very asymmetric with a clear bias towards the southern European regions, where the welfare losses reach to 3 percent of GDP, i.e., about fifteen times more than in Northern Europe.

10

Climate ADAPT provides further information, projections, scenarios and assessment of the impact of climate change, along with an overview of existing pressures and implications for key sectors of Portugal’s economy.

11

GHG emissions peaked in most of European countries around 1990.

12

Carbon intensity is calculated as a ratio of GHG emissions (gCO2e) per unit of GDP.

13

Renewable energy production represented 34 percent of total electricity generation in 2020.

14

While total GHG emissions in 2020 dropped below 2019 level―driven by lower emissions from the transportation during the Covid-19 pandemic― a rebound in GHG emissions is expected in 2021 in line with the economic recovery.

15

The steep jump in GHG emissions of 2017 was due to a combination of factors, as low rainfall resulted in a switch from hydro power generation to fossil fuels and contributed to extreme wildfires resulting in a notable increase in GHG emissions.

16

The decline in Portugal’s per capita GDP growth during and after the global financial crisis also contributed to containing emissions.

17

The NECPs specifies policies necessary to contribute to EU climate goals and the RCN defines a long-term development strategy to achieve carbon neutrality by 2050.

18

Some land uses, notably pastures, forests and scrubland, absorb CO2 from the atmosphere. A so-called “carbon sink” is anything that absorbs more carbon from the atmosphere than it releases and thereby lowers the concentration of CO2 in the atmosphere. Examples of natural carbon sinks include vegetation and the ocean. Artificial sequestration includes carbon capture and storage or geological sequestration. Excluding wildfires in 2017, the average carbon sink by forests in Portugal has been about 10 Mt CO2 a year.

19

Carbon pricing can be complemented by incentive schemes that may indirectly affect carbon price such as modifying prices of green financial instruments, incentivizing low-carbon programs and projects, and reducing fossil fuel subsidies.

21

Energy subsidies are projected to decline from 1.2 percent of GDP in 2019 to 0.67 percent in 2025 (IMF Climate Change Indicators Dashboard.

22

The Carbon Pricing Assessment Tool (CPAT) was developed by IMF Fiscal Affairs department and the World Bank. The tool allows for simulation of the impact of carbon taxation as well as other complementary measures. For more details see Parry et al. (2014).

23

Adão et al. (2022) estimate that, under current policies, carbon neutrality will be achieved by 2120. Assuming optimal policies in the renewable and fossil fuel sectors are adopted, they estimate it would be achieved by 2070.

24

The results are surrounded by large uncertainty, for example, as the CPAT is not a general equilibrium model, it does not fully reflect behavioral responses of households and economic sectors and their interactions in response to higher carbon prices.

25

The assumption of US$75/tCO2 and US$100/tCO2 is based on Stiglitz, Stern et al. (2017), who suggest that the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030.

26

Note that if prices are raised to US$ 75/tCO2 on the broader tax base, the GHG emissions drop only to 50 mts by 2030.

27

A gradual reform combining a higher carbon price with elimination of fuel subsidies and higher carbon tax coverage.

28

Climate benefits include global climate benefits―common to all countries―and benefit to future generation.

29

These costs correspond to the value of foregone consumption to fossil fuel consumers, less savings in supply costs. Effectively, efficiency costs reflect the annualized costs of adopting cleaner, but more expensive, technologies, net of any savings in lifetime energy costs. In scenario “d”, the efficiency cost is estimated to reach 0.38 percent of GDP in 2030.

30

The final assessment of the Portugal NECP by the EC (EC (2020)) assumes the energy efficiency targets to be achieved through measures under Article 7 of the EU Energy Efficiency Directive.

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Cover IMF Staff Country Reports
Portugal: Selected Issues
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2022: Issue 204
Publisher:
International Monetary Fund
ISBN:
9798400215070
ISSN:
1934-7685
Pages:
44
DOI:
https://doi.org/10.5089/9798400215070.002
Figure 1.

Impact of Climate Change on Portugal
Figure 2.

Portugal’s GHG Emissions

Target Emission Reduction by 2030

(Percent)
Figure 3.

Portugal: Carbon Pricing, Energy Taxation, and Subsidies
Figure 4.

Impact of Carbon Pricing Reform