Efficiency and Equity Impacts of Energy Subsidies
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Robert W. Hahn
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Robert D. Metcalfe
- American Economic Review (Forthcoming)
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.
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