Working Paper: NBER ID: w28371
Authors: Robert W. Hahn; Robert D. Metcalfe
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.
Keywords: energy subsidies; price elasticity; welfare impacts; natural gas; California
JEL Codes: D04; D1; D60; Q4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in natural gas demand (Q47) | reduction in economic welfare (D69) |
| consumer surplus gain (D11) | reduction in economic welfare (D69) |
| optimal subsidy level for California (H21) | enhance total welfare (D69) |
| CARE program (I11) | increase in natural gas demand (Q47) |
| 20% price subsidy (H23) | increase in natural gas demand (Q47) |