The Welfare Loss of Subsidies in Global Electricity Markets

31 Pages Posted: 12 Oct 2020 Last revised: 11 Sep 2021

See all articles by Pierre-Olivier Pineau

Pierre-Olivier Pineau

HEC Montreal - Department of Decision Sciences

Nima Rafizadeh

HEC Montreal

Date Written: August 20, 2020

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

Suggested Citation

Pineau, Pierre-Olivier and Rafizadeh, Nima, The Welfare Loss of Subsidies in Global Electricity Markets (August 20, 2020). Available at SSRN: https://ssrn.com/abstract=3679848 or http://dx.doi.org/10.2139/ssrn.3679848

Pierre-Olivier Pineau

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Nima Rafizadeh (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

HOME PAGE: http://www.nimarafizadeh.com/

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