Sebastian Renner / Jann Lay / Michael Schleicher

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

GIGA Working Paper, No. 302, May 2017

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.

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Dr. Sebastian Renner

Research Fellow
Speaker Research Team

Sebastian Renner is a postdoctoral researcher at the University of Göttingen and a research fellow at the GIGA German Institute of Global and Area Studies. His research interests are at the intersection of environmental and development issues, dealing with questions of poverty, the distributional impacts of climate policy, and the ecological-economic trade-offs that result from human development.

Apl. Prof. Dr. Jann Lay is head of GIGA Research Programme 3 “Growth and Development.” He is also an adjunct professor of development economics at the University of Göttingen. His research interests encompass various aspects of economic development in the Global South and Africa in particular, including (informal) employment and labour markets, the effects of so-called “land grabs”, and energy- and climate-related topics.

Recent Publications by the Authors

Daniel Neff / Cornelis W. Haasnoot / Kunal Sen / Sebastian Renner

The Social and Economic Situation of the Scheduled Tribes in India

in: Christopher Fleming / Matthew Manning (eds.), Routledge Handbook of Indigenous Wellbeing, London: Routledge, forthcoming

Sebastian Renner / Jann Lay / Michael Schleicher

The effects of energy price changes: heterogeneous welfare impacts and energy poverty in Indonesia

Environment and Development Economics, 24, 2019, 2, 180-200

Insa Flachsbarth / Simone Schotte / Jann Lay / Alberto Garrido

Rural structural change, poverty and income distribution: evidence from Peru

The Journal of Economic Inequality, 16, 2018, 4, 631-653

Sebastian Renner / Jann Lay / Hannes Greve

Household welfare and CO2 emission impacts of energy and carbon taxes in Mexico

Energy Economics, 72, 2018, 222-235