An integrated economic and distributional analysis of energy policies

Most public policies, particularly those in the energy sphere, have not only efficiency but also distributional effects. However, there is a trade-off between modelling approaches suitable for calculating those impacts on the economy. For the former most of the studies have been conducted with general equilibrium models, whereas partial equilibrium models represent the main approach for distributional analysis. This paper proposes a methodology to simultaneously carry out an analysis of the distributional and efficiency consequences of changes in energy taxation. In order to do so, we have integrated a microeconomic household demand model and a computable general equilibrium model for the Spanish economy. We illustrate the advantages of this approach by simulating a revenue-neutral reform in Spanish indirect taxation, with a large increase of energy taxes that serve an environmental purpose. The results show that the reforms bring about significant efficiency and distributional effects, in some cases counterintuitive, and demonstrate the academic and social utility of this approximation. (C) 2009 Elsevier Ltd. All rights reserved.