The effects of energy price changes: heterogeneous welfare impacts and energy poverty in Indonesia

Sebastian Renner,Jann Lay,Michael Schleicher

doi:10.1017/s1355770x18000402

Abstract

AbstractWe study the welfare and energy poverty implications of energy price change scenarios in Indonesia. Our analysis extends previous analyses of energy price impacts at the household level in three ways. First, by employing a household energy demand system (QUAIDS), we are able to distinguish between first- and second-order welfare effects over the income distribution. Second, our results point to the ownership of energy-processing durables as another source of impact heterogeneity. Third, we extend the welfare analysis beyond the money-metric utility effects and look at energy poverty, which is understood as the absence of or imperfect access to reliable and clean modern energy services. The analysis indicates that energy prices may serve as an effective instrument to reduce energy use but also have important adverse welfare effects. The latter can, however, be mitigated by appropriate compensation policies.

Highlights

Fuel and energy prices are subject to government intervention in many low- and middleincome countries, where governments often set domestic energy prices below market levels or impose taxes on transport fuels
Our findings confirm prior studies, which are based on observed demand and the assumption of zero substitution between goods, on the progressive direction of this effect for electricity and gasoline
We find neutral effects for kerosene and liquefied petroleum gas (LPG) and smaller welfare losses for electricity and gasoline by employing second-order welfare estimates

Summary

Introduction

Fuel and energy prices are subject to government intervention in many low- and middleincome countries, where governments often set domestic energy prices below market levels or impose taxes on transport fuels. Increasing energy accessibility for the poor is one main motivation for subsidising it, while fuel taxation is a popular measure to internalise externalities at relatively low levels of distortion. Climate change mitigation has emerged as an additional reason to regulate energy prices. Such regulation typically affects substantial shares of governments’ budgets, and the abolition of fuel subsidies in developing countries has frequently been advocated as a win-win policy which reduces market distortions and internalises negative climate externalities. Fuel subsidies remain popular and attempts to cut them usually meet with fierce public resistance.

Methods

Results

Conclusion