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Estimating welfare aspects of changes in energy prices from preference heterogeneity

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  • Pashardes, Panos
  • Pashourtidou, Nicoletta
  • Zachariadis, Theodoros

Abstract

The European Union's energy and climate policy package is expected to cause an increase in end-user prices of electricity and fuels. This paper assesses the distributional effects of these price increases in Cyprus by specifying and estimating a consumer demand system with price heterogeneity between households. This novel method allows obtaining robust parameter estimates even when household expenditure surveys are limited, as is the case in many European countries. The empirical analysis is conducted both conditional on energy-related household characteristics and unconditionally. We then use the estimated demand system to conduct welfare analysis. We find that the rise in energy prices results in welfare losses of EUR 101 per household (in 2009 prices) in year 2020, or a nationwide welfare loss of more than EUR'2009 33 million. Price increases will be regressive and will affect small and urban households more strongly than the rest of the population. Furthermore, we find that the largest proportion of welfare loss is due to loss of household's income purchasing power caused by higher energy prices, while the changes in relative prices induce deadweight loss which is a small part of welfare loss because of the limited substitutability of energy with other goods.

Suggested Citation

  • Pashardes, Panos & Pashourtidou, Nicoletta & Zachariadis, Theodoros, 2014. "Estimating welfare aspects of changes in energy prices from preference heterogeneity," Energy Economics, Elsevier, vol. 42(C), pages 58-66.
  • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:58-66
    DOI: 10.1016/j.eneco.2013.12.002
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    Cited by:

    1. Theodoros Zachariadis, 2015. "How Can Cyprus Meet Its Energy and Climate Policy Commitments? The Importance of a Carbon Tax," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 9(2), pages 3-20, December.
    2. Pothen, Frank & Tovar Reanos, Miguel Angel, 2018. "The Distribution of Material Footprints in Germany," Hannover Economic Papers (HEP) dp-627, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. Heindl, Peter & Löschel, Andreas, 2015. "Social implications of green growth policies from the perspective of energy sector reform and its impact on households," ZEW Discussion Papers 15-012, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Gorkemli Kazar & Arthur Kazar, 2014. "The Renewable Energy Production-Economic Development Nexus," International Journal of Energy Economics and Policy, Econjournals, vol. 4(2), pages 312-319.
    5. Schulte, Isabella & Heindl, Peter, 2017. "Price and income elasticities of residential energy demand in Germany," Energy Policy, Elsevier, vol. 102(C), pages 512-528.
    6. Wang, Qian & Hubacek, Klaus & Feng, Kuishuang & Wei, Yi-Ming & Liang, Qiao-Mei, 2016. "Distributional effects of carbon taxation," Applied Energy, Elsevier, vol. 184(C), pages 1123-1131.

    More about this item

    Keywords

    Climate policy; Deadweight loss; Demand system; Distributional effect;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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