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

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.

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GIGA Authors

Sebastian Renner is a postdoctoral researcher at the University of Göttingen and a research fellow at the German Institute for Global and Area Studies (GIGA). 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 lead research fellow at the GIGA Institute for African Affairs and heads the GIGA Research Programme 3 “Growth and Development.” He is also an adjunct professor of Development Economics at the University of Göttingen. His work focuses on various facets of economic development, including firm dynamics and labour markets, poverty, and the distributional impact of economic reforms; the impacts of commercial agricultural expansion; and issues related to energy, climate, and development.

Recent Publications by the Authors

Tabea Lakemann / Jann Lay

Digital Platforms in Africa: the "Uberisation" of Informal Work

GIGA Focus Africa, 07/2019

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

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

The social and economic situation of Scheduled Tribes in India

in: Christopher Fleming / Matthew Manning (eds.), Routledge Handbook of Indigenous Wellbeing, London: Routledge, 2019, 194-208

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Land-use change in oil palm dominated tropical landscapes: an agent-based model to explore ecological and socio-economic trade-offs

PLOS ONE, 2018