The Welfare Loss of Subsidies in Global Electricity Markets

Abstract

Subsidies induce a market inefficiency by creating a deadweight loss since supply and demand are out of equilibrium. In 2016, electricity subsidies were the largest component of the total global energy subsides, with an estimated 128 billion USD out of 287 billion USD. Electricity generation is also directly responsible for a quarter of global greenhouse gas emissions. Under baseline assumptions about supply and demand elasticities and employing the latest available data, we first estimate the welfare loss of global electricity subsidies and then estimate the global environmental costs imposed by electricity consumption. We find that the total annual deadweight loss worldwide in 2016 was 12.4 billion USD. Incorporating external costs stemming from excessive consumption, which is a result of prices that are less than the private marginal cost, leads to a total annual welfare loss of 43.2 billion USD. This number accounts for 4.5% of the total electricity market value in electricity-subsidizing countries. Furthermore, we estimate that the worldwide electricity consumption imposes environmental costs of at least 652.8 billion USD annually; thus, the total annual costs in the global electricity markets are nearly 700 billion USD.

Keywords: Electricity Subsidy, Deadweight Loss, Welfare Loss, Environmental Costs, Worldwide Analysis

JEL Classification: D60, H23, Q41, Q48