The Cost of Tax-Induced Energy Conservation

This paper considers the cost to society of long-run reductions of aggregate energy input from its equilibrium level. It demonstrates that similar economic results to those obtained from complex simulation models can be derived from a heuristic partial equilibrium model. It furthermore shows that the partial equilibrium approach provides a previously unrecognized upper bound on the social cost of tax induced conservation in an otherwise undistorted economy. The net social cost attributable to such conservation measures is likely to be much less than the cost of the energy saved. Claims of significantly greater cost consequences must be based on the argument that tax-induced price increases aggravate other existing distortions in the economy.