Redistribution Through Public Utility Pricing in the Presence of Nonlinear Income Taxation and Energy Efficiency Considerations

Many OECD countries such as the USA, the UK or Switzerland are concerned with the affordability of utility services and the distributional consequences inherent in the pricing of basic goods and services, such as electricity. In spite of that, residential energy prices include a combination of taxes, levies, and infrastructure charges. These mark-ups exacerbate potential affordability issues, as expenditures on energy consumption make up a considerable proportion of low income households' total expenditures. In this paper we structurally estimate a model that combines public utility pricing and income taxation to explain the deviation from marginal cost pricing commonly observed in residential electricity markets. We employ a large panel data set on about 105,000 households in the Swiss Canton of Bern from 2008 to 2013, including detailed energy consumption and household income and tax payment characteristics. The calibrated model shows that if, conditional on income, households' taste for electricity consumption differs, and the social planner is solely interested in income redistribution, the electricity price should be subsidized. However, once energy efficiency concerns also prevail, optimal mark-ups increase. The positive mark-up of 49% in our data implies that, in practice, the government equally values energy efficiency and equity.