Assessing energy subsidy policies in a structural macroeconomic model

Abstract

We assess the welfare consequences of energy price subsidies for an energy-importing country using a structural macroeconomic model that includes energy and durable goods consumption. To consume durable goods, energy consumption is required. In production, the use of energy and capital are complements. We calibrate the model to fit the economy of Taiwan. The results indicate that the optimal policy is achieved when subsidies are allocated to firms. This is primarily because in this economy energy is mostly consumed by industries rather than by households. The welfare gain is, however, very limited. Further sensitivity analysis suggests that having no subsidy would be the optimal policy in a less energy-dependent economy.