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How should governments respond to energy price crises? A horse-race between fiscal policies

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  • Duparc-Portier, Geoffroy
  • Figus, Gioele
Abstract
This paper compares the welfare and distributional implications of fiscal policies aimed at reducing a sudden and significant increase in the price of energy. A dynamic computable general equilibrium model with households disaggregated by income groups is used to compare the effectiveness of five energy price-reducing fiscal policies. The policies are assessed under two financing options, pure government debt and a mix of debt and windfall taxation on energy companies. Results from simulations demonstrate that targeted demand-side policies are more effective at reducing overall energy-driven inflation and increasing welfare. Supply-side policies and mixed demand and supply policies achieve a smaller reduction in the consumer price index but are more expansionary. Financing the policies partly through windfall taxation does not impact the ranking of policies but it delivers better distributional outcomes and higher welfare. The results motivate the use of windfall taxation if governments face high interest rates on debt financing and/ or if households care sufficiently about the provision of public goods. The optimal policy is likely a mix of supply-side measures such as production tax reductions or general price subsidies and either targeted energy price subsidies or targeted income subsidies financed where possible through windfall taxation.

Suggested Citation

  • Duparc-Portier, Geoffroy & Figus, Gioele, 2024. "How should governments respond to energy price crises? A horse-race between fiscal policies," Energy Economics, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:eneeco:v:130:y:2024:i:c:s014098832300782x
    DOI: 10.1016/j.eneco.2023.107284
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    More about this item

    Keywords

    Energy crisis; Fiscal policy; Income distribution; Computable general equilibrium; Welfare; Windfall tax;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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