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Efficient and Equitable Policy Design: Taxing Energy Use or Promoting Energy Savings?

Florian Landis, Sebastian Rausch, Mirjam Kosch, and Christoph Böhringer

Year: 2019
Volume: Volume 40
Number: Number 1
DOI: 10.5547/01956574.40.1.flan
View Abstract

Should energy use be lowered by using broad-based taxes or through promoting and mandating energy savings through command-and-control measures and targeted subsidies? We integrate a micro-simulation analysis, based on a representative sample of 9,734 households of the Swiss population, into a numerical general equilibrium model to examine the efficiency and equity implications of these alternative regulatory approaches. We find that at the economy-wide level taxing energy is five times more cost-effective than promoting energy savings. About 36% of households gain under tax-based regulation while virtually all households are worse off under a promotion-based policy. Tax-based regulation, however, yields a substantial dispersion in household-level impacts whereas heterogeneous household types are similarly affected under a promotion-based approach. Our analysis points to important trade-offs between efficiency and equity in environmental policy design.

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