Reforms in the Natural Gas Sector and Economic Development

Abstract

This paper investigates the short- and long-term effects of increased competition in the provision of natural gas. We build a dynamic general equilibrium model with monopolistic distribution of natural gas and calibrate it to 12 major Brazilian local distribution companies. We find that reductions in the price of natural gas can lead to sustained and significant increases of natural gas in the energy mix. A 5% reduction in the price of natural gas leads to a median increase in the consumption of natural gas of 5.5%, with moderate GDP gains between 0.03% and 0.16%. Our model not only highlights the mechanisms for energy transitions but also shows that moderate declines in natural gas prices can lead to sustained long-term increases in the share of natural gas consumption.