Efficiency and Equity Impacts of Energy Subsidies

Robert W. Hahn and Robert Metcalfe ()

No 28371, NBER Working Papers from National Bureau of Economic Research, Inc

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% to offset the costs of the program.

JEL-codes: D04 D1 D60 Q4 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-ene and nep-reg
Note: EEE
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Citations: View citations in EconPapers (21)

Published as Robert W. Hahn & Robert D. Metcalfe, 2021. "Efficiency and Equity Impacts of Energy Subsidies," American Economic Review, American Economic Association, vol. 111(5), pages 1658-1688, May.

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Journal Article: Efficiency and Equity Impacts of Energy Subsidies (2021)
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