The Welfare Effects of Raising Household Energy Prices in Poland

Abstract

We examine the welfare effects from increasing household energy prices in Poland. Subsidizing household energy prices, common in the transition economies, is shown to be highly regressive. The wealthy spend a larger portion of their income on energy and consume more energy in absolute terms. We therefore rule out the oft-used social welfare argument for delaying household energy price increases. Raising prices, while targeting relief to the poor through a social assistance program is the first-best response. However, if governments want to ease the adjustment, several options are open, including: in-kind transfers to the poor, vouchers, in-cash transfers, and lifeline pricing for electricity. Our simulations show that if raising prices to efficient levels is not politically feasible at present and social assistance targeting is sufficiently weak, it may be socially better to use lifeline pricing and a large price increase than an overall, but smaller, price increase.