How will a carbon tax affect household energy source combination?

Abstract

Households consider the relative price among various energy sources while selecting the ideal energy source for use in their daily lives. Carbon tax influences the energy choices of households through changes in the relative price among various energy sources. As the rate of carbon tax increases, the cost advantage of inexpensive energy source toward expensive energy source will diminish. Therefore, we expect that households will move from inexpensive to expensive energy. We explore the effect of carbon taxes on household energy source combinations by conducting a microdata analysis of Japanese households. Our results show that increased carbon tax leads to an increased percentage of households using gas, and reduced percentage of households selecting full electrification or kerosene.