Consumer responses to energy-consumption taxes

• In Event: From Gas Tanks to the Grid: Impact of Taxation on Energy Consumption

Abstract

The Jamaican government added electricity consumption to the VAT base in 2015 as a means of generating tax revenue. For equity reasons, the marginal rate was set at 16.5% with a threshold of 350 kWh/month. The introduction of the tax resulted in a change in both the average and marginal price of electricity. Using proprietary monthly customer meter-level data from Janaury 2014 to 2018 and a bunching framework, I identify the effect of changes in the marginal price of electricity on electricity consumption. I find no evidence of bunching around the tax policy-induced kink. This suggests that consumers do not respond to the marginal price of electricity, a finding consistent with Ito (2014), who uses a similar strategy to study responsiveness to electricity prices in California. Next, I turn to a DID methodology to estimate the effect of the policy change and find that the effect varies across space and time. First, I cannot reject the null that the policy had no effect in the first two months after enactment. Second, the effect after the second month varies across geographic space. Consumption increased in Kingston (the capital), while it remained stable or decreased in other municipalities. Finally, I implement a difference model that compares consumption in the pre-2015 period with consumption in the same months of 2016. This approach is beneficial for two reasons. First, it allows me to control for the seasonality of energy consumption. Second, it captures a medium to longer-term effect. I find that the tax reduced consumption by about 2.8%. This result is stable over time.

Author

• Denvil Duncan, O'Neill School of Public and Environmental Affairs