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The incidence of VAT reforms in electricity markets: Evidence from Belgium

Author

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  • HINDRIKS Jean,

    (Université catholique de Louvain, CORE, Belgium)

  • SERSE Valerio,

    (Université catholique de Louvain, CORE, Belgium)

Abstract

In April 2014, the Belgian government reduced the VAT rate on the electricity price from 21% to 6%. In September 2015, however, this tax cut was repealed, and the VAT rate was reinstated to 21%. This paper investigates the impact of such temporary exogenous VAT reform on the Belgian electricity market. We study both the pass-through of the VAT reform to electricity prices and the effect of this (exogenous) price change on electricity consumption. We estimate the VAT pass-through by a difference-in-differences approach using business electricity prices (not subject to VAT) as a control group. To estimate the impact of the VAT change on demand, we perform an event study on the electricity flowed monthly over the grid at the network operator level. Our findings reveal that both the tax cut and the tax hike were entirely shifted to the electricity price (i.e., 100%). Exploiting different sources of price variation, our results reveal a price elasticity of residential demand for electricity between -0.09 and -0.17. Interestingly, we also find that consumption reacted quickly and symmetrically to the VAT cut and the subsequent VAT hike.

Suggested Citation

  • HINDRIKS Jean, & SERSE Valerio,, 2020. "The incidence of VAT reforms in electricity markets: Evidence from Belgium," LIDAM Discussion Papers CORE 2020012, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2020012
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    Cited by:

    1. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2020. "The Pass-Through of Temporary VAT Rate Cuts in German Supermarket Retail," ifo Working Paper Series 341, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Clemens Fuest & Florian Neumeier & Daniel Stöhlker, 2025. "The pass-through of temporary VAT rate cuts: evidence from German supermarket retail," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(1), pages 51-97, February.
    3. Gechert, Sebastian & Mey, Bianka & Prante, Franz & Schäfer, Teresa, 2025. "The Price Elasticity of Heating and Cooling Energy Demand," OSF Preprints 4sjy5_v2, Center for Open Science.
    4. De Groote, Olivier & Gautier, Axel & Verboven, Frank, 2024. "The political economy of financing climate policy — Evidence from the solar PV subsidy programs," Resource and Energy Economics, Elsevier, vol. 77(C).
    5. Bart Capéau & Duygu Güner & Nabil Sheikh Hassan & Jonas Vanderkelen & Toon Vanheukelom & Stijn Van Houtven & André Decoster, 2022. "We Are All Facing The Same Storm, But Not All Are In The Same Boat. A Distributional Picture Of The Purchasing Power Effects Of The 2021‐22 Energy Price Shock And Compensating Measures," Working Papers ECARES 2022-05, ULB -- Universite Libre de Bruxelles.
    6. Alisa Frey & Justus Haucap, 2024. "VAT pass-through: the case of a large and permanent reduction in the market for menstrual hygiene products," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 160-202, February.
    7. Jiaming Li & Yibo Li & Yulin Liu, 2023. "China’s value-added tax policy and intertemporal optimal assets allocation of enterprises——Based on the dual perspectives of VAT input refund and VAT rate," PLOS ONE, Public Library of Science, vol. 18(8), pages 1-36, August.
    8. Brusco, Giacomo & Velayudhan, Tejaswi, 2025. "VAT incidence in real VAT systems," Journal of Public Economics, Elsevier, vol. 249(C).

    More about this item

    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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