Household welfare loss from energy price crisis: Evidence from China

Abstract

The war in Ukraine and associated 2022 energy crisis had far-reaching effects. The energy price crisis causes varying degrees of households' welfare losses by directly increasing energy prices and indirectly increasing product costs along the supply chain. This impact is particular significant for developing countries and emerging economies with a large concentration of middle and low-income groups. In this study, we utilize a multiregional input-output (MRIO) model and micro-household consumption spending figures to simulate the effects of rising fuel costs, both directly and indirectly, on 24 expenditure segments in China. According to the energy prices schema, we find increased energy burdens deteriorate household welfare. In a dire scenario of a 50% increase in energy prices, 11.35% of households will fall into energy poverty because of a disproportionately high share of visible energy consumption, raising China's energy poverty rate from 11.61% to 22.96%. Residual impacts are passed on to households by raising the cost of producing goods, resulting in higher indirect energy consumption, and ultimately leading to a significant increase in the inequality of households' real incomes excluding energy consumption. Further analysis shows that it is more cost-effective to provide subsidies to relatively poor households for the consumption of various commodities, with subsidies for food, healthcare and medical services, and housing expenses being the most effective, than direct subsidization of energy prices by the government to reduce household welfare losses. The major findings of this study emphasize the impact of energy security challenges in household sector, that helps to assess the negative impact of the Russian-Ukrainian conflict on energy securities of emerging economies.