Equity Effects in Energy Regulation

Some choices in energy regulation, particularly those that price emissions, raise household energy prices more than others. Those choices can lead to a large variation in burden both across and within income groups because of wide variation in household energy use. The within–income group variation in burden can be particularly hard to remedy. In this paper, we review alternative welfare perspectives that give rise to equity concerns within income groups (“horizontal equity”) and consider how they might influence the evaluation of environmental policies. In particular, we look for sufficient statistics that policymakers could use to make these evaluations. We use Consumer Expenditure Survey data to generate such statistics for a hypothetical carbon price versus a tradable carbon performance standard applied to the electric power sector. We show how horizontal equity concerns could overwhelm efficiency concerns in this context.