Final Energy Demand in Portugal: How Persistent it is and Why it Matters for Environmental Policy

Abstract

The objective of this paper is to examine the degree of persistence in final energy demand in Portugal. Our results suggest that when structural breaks are accounted for aggregate energy demand and all of its components are stationary. Accordingly, the response to shocks is not permanent. We find, however, strong levels of persistence. Demand for electricity is the most persistent component of aggregate demand while the levels of persistence for petroleum and gas are similar and close to the aggregate level. In turn, demand for coal and biomass are also similar and the least persistent. These results have important implications for the design of macroeconomic policies. Indeed, high persistent levels mean that temporary energy shocks translate into persistent changes in energy demand and thereby in less transient shocks to the overall economy. These results are also important for the design of environmental policies. The fact that energy demand is highly persistent means that the effects of environmental policies will tend to be long lasting. Also, the relatively high persistence of electricity, gas and petroleum and the fact that their levels of persistence are similar suggests that fuel switching policies involving these fuels will be relatively easy to implement.