Prices versus policy: an analysis of the drivers of the primary fossil fuel mix

Tarek Atalla, Jorge Blazquez, Lester C. Hunt*, Baltasar Manzano

*Corresponding author for this work

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Abstract

Energy policymakers often attempt to shape their countries' energy mix, rather than leave it purely to market forces. By calibrating and simulating a Dynamic Stochastic General Equilibrium (DSGE) model, this paper analyzes the primary fossil fuel mix in the USA and compares it to Germany and the UK, given the different evolution of the mixes and the different roles played by relative prices and policy in North America and Europe. It is found that the model explains well the evolution of the primary fossil fuel mix in the USA for the period 1980–2014, suggesting that relative fossil fuel prices generally dominated in determining the mix during this time. However, this is not the case for Germany and the UK. For both countries, the model performs well only for the period after the market-oriented reforms in the 1990s. Additionally, the volatility of private consumption and output for the pre- and post-reform periods is evaluated for Germany and the UK and it is found that the liberalized energy markets brought about a transition from coal to natural gas, but with increased macroeconomic volatility.

Original languageEnglish
Pages (from-to)536-546
Number of pages11
JournalEnergy Policy
Volume106
Early online date14 Apr 2017
DOIs
Publication statusPublished - 1 Jul 2017

Keywords

  • DSGE modeling
  • Energy transition
  • Fossil fuel mix
  • Prices vs policy
  • Relative prices

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