Using Energy Prices to Redistribute Income

A new paper helps us measure how “unequal” electricity rates are.

If you go to a kid’s birthday party, it’s usually not the size of the birthday cake that matters to the kids. All that matters is how big of a slice Noah gets relative to Will, Sam and Kyle. In economics we generally have focused on making the biggest possible cake out of the resources available (we call that efficiency) and underemphasized how we slice it up (we call that equity).That has changed recently, especially in the realm of energy and the environment as the discipline – much too late – is putting much more emphasis on how the impacts of environmental and energy regulation are shared.

On this blog, Severin has recently discussed the fact that once you account for the full cost of generating and shipping electricity to Californians’ homes, electricity is still more expensive than it should be. This is inefficient. That is of course economically correct (Severin’s rarely wrong, and when he is, it’s usually not related to energy economics). But underneath that finding, there is a subtle layer of questions, that is worth digging into. Namely, what are the distributional consequences of the way we price electricity and how do we measure them – inside and outside California? I have been thinking about this for a bit and on sunny Monday morning a new paper written by another tall bald energy economist Arik Levinson  (and his coauthor Emilson Silva) with a jealousy inducing title called “The Electric Gini: Income Redistribution through Energy Prices” landed in my inbox. And it is a beauty, so let me discuss what they do in this paper.

Continue reading on Energy Institute at Haas.

By MIT Sloan CDO