The Impact of Fossil Energy Prices on Carbon Emissions: The Dual Mediation of Energy Efficiency and Renewable Energy

Abstract

This paper empirically examines the nexus between fossil energy prices and carbon emissions using a balanced panel of 119 economies spanning the period from 1990 to 2023. The baseline regression results indicate that a 1% rise in fossil energy prices results in a 0.009% reduction in CO2 emissions, equivalent to approximately 3.1 million tons of CO2. Further analysis reveals two key mechanisms. First, energy efficiency partially mediates the price–emission relationship: higher prices significantly improve efficiency, which in turn reduces CO2 emissions, although a rebound effect of 13.6% offsets part of the expected savings. Second, renewable energy penetration serves as an additional pathway, with higher prices accelerating renewable adoption and thereby contributing to carbon mitigation. Overall, the findings confirm the direct and indirect impacts of fossil energy prices on emissions, underscoring their role as an effective lever for achieving global sustainability targets. Policy implications include the need to align fossil energy prices with true economic and environmental costs, while complementing price mechanisms with efficiency standards and renewable incentives to counterbalance hirebound effects.