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Estimating welfare aspects of changes in energy prices from preference heterogeneity

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  • Panos Pashardes
  • Nicoletta Pashourtidou
  • Theodoros Zachariadis

Abstract

The European Union's energy and climate policy package will 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 household energy demand system with price heterogeneity between households. This novel method allows obtaining robust parameter estimates even when household expenditure surveys are limited. 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 (in 2009 prices) of EUR 31 and EUR 101 per household for 2013 and 2020 respectively, or a nationwide welfare loss of more than EUR’2009 33 million in 2020. 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

  • Panos Pashardes & Nicoletta Pashourtidou & Theodoros Zachariadis, 2013. "Estimating welfare aspects of changes in energy prices from preference heterogeneity," University of Cyprus Working Papers in Economics 07-2013, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:07-2013
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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 Reaños, Miguel Angel, 2018. "The Distribution of Material Footprints in Germany," Ecological Economics, Elsevier, vol. 153(C), pages 237-251.
    3. Tovar Reaños, Miguel & Lynch, Muireann Á., 2019. "Distributional impacts of carbon taxation and revenue recycling: a behavioural microsimulation," Papers WP626, Economic and Social Research Institute (ESRI).
    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. Wang, Qian & Hubacek, Klaus & Feng, Kuishuang & Guo, Lin & Zhang, Kun & Xue, Jinjun & Liang, Qiao-Mei, 2019. "Distributional impact of carbon pricing in Chinese provinces," Energy Economics, Elsevier, vol. 81(C), pages 327-340.
    6. Tovar Reaños, Miguel A. & Lynch, Muireann Á., 2022. "Measuring carbon tax incidence using a fully flexible demand system. Vertical and horizontal effects using Irish data," Energy Policy, Elsevier, vol. 160(C).
    7. 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.
    8. Heindl, Peter & Löschel, Andreas, 2015. "Social implications of green growth policies from the perspective of energy sector reform and its impact on households," CAWM Discussion Papers 81, University of Münster, Münster Center for Economic Policy (MEP).
    9. Böhringer, Christoph & García-Muros, Xaquín & González-Eguino, Mikel, 2022. "Who bears the burden of greening electricity?," Energy Economics, Elsevier, vol. 105(C).
    10. Chen, Zhan-Ming & Chen, Pei-Lin & Ma, Zeming & Xu, Shiyun & Hayat, Tasawar & Alsaedi, Ahmed, 2019. "Inflationary and distributional effects of fossil energy price fluctuation on the Chinese economy," Energy, Elsevier, vol. 187(C).
    11. Theodoros Zachariadis & Constantinos Taliotis & Nestor Fylaktos & Marios Karmellos & Elias Giannakis & Sofia Andreou, 2020. "Environmental and Economic Impacts of the National Energy and Climate Plan of Cyprus," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 14(1), pages 1-15, June.
    12. Tovar Reaños, Miguel A. & Wölfing, Nikolas M., 2018. "Household energy prices and inequality: Evidence from German microdata based on the EASI demand system," Energy Economics, Elsevier, vol. 70(C), pages 84-97.
    13. Tovar Reanos, Miguel, 2020. "Car ownership and the distributional and environmental policies to reduce driving behavior," Papers WP673, Economic and Social Research Institute (ESRI).
    14. Schulte, Isabella & Heindl, Peter, 2017. "Price and income elasticities of residential energy demand in Germany," Energy Policy, Elsevier, vol. 102(C), pages 512-528.
    15. Eisner, Anna & Kulmer, Veronika & Kortschak, Dominik, 2021. "Distributional effects of carbon pricing when considering household heterogeneity: An EASI application for Austria," Energy Policy, Elsevier, vol. 156(C).
    16. Tovar Reaños, Miguel & Lynch, Muireann Á., 2019. "Carbon taxation in Ireland: distributional effects of revenue recycling policies," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    17. Maria Guadalupe Garcia-Garza & Jeyle Ortiz-Rodriguez & Esteban Picazzo-Palencia & Nora Munguia & Luis Velazquez, 2023. "The 2013 Mexican Energy Reform in the Context of Sustainable Development Goal 7," Energies, MDPI, vol. 16(19), pages 1-24, October.
    18. Tovar Reaños, Miguel A., 2021. "Floods, flood policies and changes in welfare and inequality: Evidence from Germany," Ecological Economics, Elsevier, vol. 180(C).

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    More about this item

    Keywords

    deadweight loss; demand system; distributional effect;
    All these keywords.

    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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