The effects of carbon taxes on the welfare of households using multiple energy sources

Abstract

Households use a variety of energy services by combining several sources of energy, such as electricity, gas, and kerosene. However, the effects of carbon taxes on the welfare of households using multiple energy sources have not yet been fully investigated. In this study, we propose a residential energy consumption model where the elasticity of substitution between energy sources is influenced by weather conditions and the relative evaluation of energy sources differs between households with different socioeconomic characteristics. We then conduct a household-level data analysis to estimate the elasticity of substitution, and the relative evaluation of electricity, city gas, LP gas, and kerosene. The empirical results show that the elasticity of substitution between energy sources increases as outside temperature drops, and households with different socioeconomic characteristics evaluate energy sources differently. Specifically, using the estimation results, we assess the impact of carbon taxation on household welfare. Assuming that total energy expenditure remains unchanged after carbon taxation, we compare the welfare impact of carbon taxation among households using different energy source combinations. The simulation results predict that households using electricity and kerosene in rural areas are most severely affected by carbon taxation.