Why "Energy Price Brakes" Encourage Moral Hazard, Raise Energy Prices, and Reinforce Energy Savings

31 Pages Posted: 28 Dec 2022

See all articles by Markus Dertwinkel-Kalt

Markus Dertwinkel-Kalt

University of Münster; Max Planck Institute for Research on Collective Goods

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE)

Date Written: December 5, 2022

Abstract

To help households and firms with exploding energy costs in the aftermath of the Ukraine war, a new policy called the "energy price brake" was implemented. A unique feature of this relief measure is that it provides a transfer that increases in the consumer's contractual per-unit price of energy. In a formal model, we show that this policy creates incentives for moral hazard of energy providers to raise per-unit prices. While this moral hazard problem increases the policy's fiscal costs, it also reinforces energy savings. Whether the policy's main beneficiaries are consumers or firms depends on the market structure.

Keywords: Energy Price Policies; Energy Crisis; Energy Saving; Energy Price Brake.

JEL Classification: D04, L12, Q48, K33.

Suggested Citation

Dertwinkel-Kalt, Markus and Wey, Christian, Why "Energy Price Brakes" Encourage Moral Hazard, Raise Energy Prices, and Reinforce Energy Savings (December 5, 2022). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.4294767

Markus Dertwinkel-Kalt (Contact Author)

University of Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany
+49-211-81-15009 (Phone)
+49-211-81-15499 (Fax)

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