Efficiency and Equity Impacts of Energy Subsidies
- (pp. 1658-88)
Abstract
Economic theory suggests that energy subsidies can lead to excessive consumption and environmental degradation. However, the precise impact of energy subsidies is not well understood. We analyze a large energy subsidy: the California Alternate Rates for Energy (CARE). CARE provides a price reduction for low-income consumers of natural gas and electricity. Using a natural field experiment, we estimate the price elasticity of demand for natural gas to be about −0.35 for CARE customers. An economic model of this subsidy yields three results. First, the natural gas subsidy appears to reduce welfare. Second, the economic impact of various policies, such as cap-and-trade, depends on whether prices for various customers move closer to the marginal social cost. Third, benefits to CARE customers need to increase by 6 percent to offset the costs of the program.Citation
Hahn, Robert W., and Robert D. Metcalfe. 2021. "Efficiency and Equity Impacts of Energy Subsidies." American Economic Review, 111 (5): 1658-88. DOI: 10.1257/aer.20180441Additional Materials
JEL Classification
- C93 Field Experiments
- D61 Allocative Efficiency; Cost-Benefit Analysis
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- L94 Electric Utilities
- L95 Gas Utilities; Pipelines; Water Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy
- Q48 Energy: Government Policy