The effects of higher gas prices on the EU economy: a computable general equilibrium modelling perspective

Russia’s invasion of Ukraine has led to strong economic repercussions globally. In particular, turbulences on international energy markets and reduced flows of natural gas from Russia to the EU led to a sharp increase of natural gas prices. In this paper, we investigate the effect of higher gas prices on the European economy using the computable general equilibrium model JRC-GEM-E3. Numerical simulations quantify direct and indirect (via spillovers to electricity prices) implications for macro-economic outcomes, sectoral trade and employment, and distributional impacts across household income deciles. Results indicate that the (indirect) macro-economic impacts from electricity price changes induced by higher gas prices are larger than the (direct) impact of the gas price increase. Spatial heterogeneity in gas price impacts across regions globally leads to trade and competitiveness impacts, but has little influence on aggregate GDP impacts. The energy price shock is regressive, and results indicate strong employment impacts in particular sectors. Finally, the scenarios indicate that the macro-economic impact of the same energy price shock would be reduced by more than two thirds, if it were to occur in an economy that has decarbonised to achieve the EU’s 2030 climate targets. This illustrates that decarbonising the economy enhances the resilience to fossil fuel price increases.