The Effects of Energy Price Changes: Heterogeneous Welfare Impacts, Energy Poverty, and CO2 Emissions in Indonesia

GIGA Working Papers, No. 302, May 2017

37 Pages Posted: 1 Jun 2017

See all articles by Sebastian Renner

Sebastian Renner

GIGA German Institute of Global and Area Studies

Jann Lay

GIGA German Institute of Global and Area Studies; University of Goettingen

Michael Schleicher

South Asia Institute

Date Written: May 29, 2017

Abstract

We study the welfare, energy poverty, and CO2 emission implications of energy price change scenarios in Indonesia. Our analysis extends previous analyses of energy price impacts at the household level in several 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. Our analysis shows considerable heterogeneity of welfare impacts. For gasoline and electricity, first-order calculations overestimate welfare effects by 10 to 20 per cent for price changes between 20 and 50 per cent. Second, our results point to the ownership of energy-processing durables as another source of impact heterogeneity. Poor households that own these goods may be hit particularly strongly by energy price increases. 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. Drawing on the estimated demand function, we find that price increases have substantial effects on energy poverty. Fourth, our analysis explicitly considers the emissions effects of energy price scenarios. We find that reduced household energy demand implies a substantial reduction in emissions. The analysis thus indicates that energy prices may serve as an effective mitigation instrument but also have important adverse welfare effects. The latter can, however, be mitigated by appropriate compensation policies.

Keywords: energy subsidies, climate policy, poverty, distributional effects, energy poverty

Suggested Citation

Renner, Sebastian and Lay, Jann and Schleicher, Michael, The Effects of Energy Price Changes: Heterogeneous Welfare Impacts, Energy Poverty, and CO2 Emissions in Indonesia (May 29, 2017). GIGA Working Papers, No. 302, May 2017. Available at SSRN: https://ssrn.com/abstract=2977820 or http://dx.doi.org/10.2139/ssrn.2977820

Sebastian Renner (Contact Author)

GIGA German Institute of Global and Area Studies ( email )

Jungfernstieg 21
Hamburg, 20354
Germany

Jann Lay

GIGA German Institute of Global and Area Studies ( email )

Neuer Jungfernstieg 21
Hamburg, DE D-20354
Germany

University of Goettingen

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Michael Schleicher

South Asia Institute ( email )

Im Neuenheimer Feld 330
Heidelberg, 69120
Germany

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