Distributional Consequences of Climate Change Impacts on Energy Demand across Italian Households

The paper evaluates the distributional implications of climate-induced temperature changes on energy demand and energy poverty in Italy. We use two different simulation approaches that make it possible to analyze to what extent general equilibrium substitution and income effects moderate or amplify the first-order changes induced by climate change. Climate change impacts are regressive. While rich households reduce expenditure on heating fuels more than the poor, less affluent households increase electricity expenditure relatively more. For a given income level, whether households increase or decrease energy expenditure depends on the size of the shock, the existing climate conditions, and the energy sources used. The increase in electricity poor households highlights a new emerging risk related to those households who will be exposed to higher temperatures and will not being able to purchase the cooling services needed to protect themselves because of credit, institutional, infrastructural constraints. We shed new light on the importance of accounting for the distributional consequences of climate change impacts when designing climate policies.

Concerns about the inequitable consequences of climate change policies have motivated scholars and researchers to evaluate the distributional implications of carbon pricing (Baranzini et al. , 2017) and of mitigation policies (Fullerton, 2017). Not only can an appropriate design of mitigation policy avoid regressive impacts, but several studies highlight how the revenue from carbon pricing schemes can be used to achieve other sustainable development goals (Jacob et al. , 2016) and reduce poverty (Fujimori et al. , 2020). When considering the distributive impacts of climate policy, policy scenarios should be compared to baseline scenarios that account for the impacts of climate change and the associated adaptation efforts. The knowledge regarding the distributional implications of climate change impacts and the related adaptation responses is still very limited. There is consensus that climate change will place a heavier burden on poor households (IPCC, 2014), though outcomes depend on how damage functions vary across geography and with population characteristics (e.g. income, access to technology) (Hsiang et al. , 2019), and more generally with the ability to adapt.

Adjusting final energy use is an ubiquitous form of autonomous adaptation that households adopt to maintain conditions of thermal comfort at home when exposed to warmer or colder temperature levels. Along with income and prices, climate conditions are among the well-established drivers of households energy demand. While heating and cooling are the most directly affected end-use services, other usages can also change as people spend more time at home (Zivin & Neidell, 2014) and even the efficiency of other appliances, such as refrigerators (Meier, 1995), is sensitive to out-door climate conditions. Energy demand is therefore an important example where mitigation, adaptation, and residual impacts interact and provide diffferent signals inducing behavioural adjustments.

While the reduced frequency of cold days lowers fuel expenditures for heating, increased exposure to hot days has the opposite effect on electricity expenditures (van Ruijven et al. , 2019). The response of different income groups depends on their willingness and, especially, their ability to adapt. Affluent households are more likely to increase energy demand for cooling compared to the low-income people who might be credit-constrained (Burgess et al. , 2014). At the household level, changes in energy expenditure can induce substitution effects that modify the overall pattern and composition of households’ expenditure, for example by reducing food (Bhattacharya et al. , 2003) or education (Maccini & Yang, 2009) expenditure, with lasting effects on households’ welfare and fuel poverty (Phoumin & Kimura, 2019). At the macroeconomic level, changes in households’ expenditure patterns affect the aggregate demand of energy as well as of other goods, and therefore can bring about price adjustments that influence production and consumption choices across all sectors of the economy. In Europe, fuel poverty affects 10% to 15% of the population, depending on the Member State (Europe, 2014). Earlier studies on energy poverty have been conducted in relatively cold countries, such as in the United Kingdom, focusing on heating fuel poverty. The ongoing trends of global average temperature could bring about a new type of energy poor related to those households who need to divert a share of their income to satisfy the demand for cooling away from other types of expenditures, such as food and education.

This paper analyzes the distributional implications of climate change impacts on energy demand around 2050. We compare the response of households over the full income distribution across the Italian regions characterized by different climate conditions. We also derive the implications on selected expenditure-based indicators of energy poverty. We evaluate to what extent macroeconomic adjustments mitigate the direct impacts of climate change. The analysis focuses on Italian households. Italy offers an interesting case study because it combines a highly diverse geography with heterogeneous socioeconomic conditions. We combine a macroeconomic model with a sequential, arithmetic micro-simulation approach to develop a modular set-up to analyze how climate-induced changes in energy expenditures are distributed across regions and income groups.

To our knowledge, this paper is the first assessment that evaluates the distributional implications of autonomous adaptation to climate change through the use of energy. We contribute to the literature in three ways. First, we evaluate how the impacts of climate change on the use of oil products, natural gas, and electricity varies across households belonging to different income groups and regions, and examine whether they are regressive or progressive. Second, we evaluate the implications on selected indicators of energy poverty count and intensity. Third, we investigate to what extent general equilibrium adjustments through changes in income and prices, and budget considerations mitigate the initial, direct, climate-induced shocks.

Our results show that the direct impacts of temperature shocks are a good approximation of the final, general equilibrium effects at the country level as well as across income groups. The macroeconomic adjustments vary significantly across Italian regions and fuels, and they mostly affect electricity. Changes in energy expenditures lead to a reduction in the number of energy poor and in the intensity of energy poverty, whereas electricity poor increase in hotter and more populated regions both without and with higher-order, macroeconomic adjustments. Our results suggest that mitigation policies, by limiting the future increase in global average temperature, can bring about economic benefits in terms of reduced electricity poverty. We also show that price adjustments and budget constraints limit the extent of house-hold adaptation compared to the first-order direct climate shocks, pointing at the persistence of residual damages and at interactions with other forms of expenditure (e.g. health).

The remainder of the paper is articulated as follows. Section 2 briefly reviews the relevant literature. Section 3 describes the methods and the framework of the analysis. Section 4 presents the results. Section 5 concludes.

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