The impact of energy taxes on the affordability of domestic energy

Energy affordability can be defined as a household’s ability to pay for necessary levels of energy use within normal spending patterns. This paper uses three indicators to measure energy affordability risk in 20 OECD countries. Energy affordability risk differs widely between countries. The countries with the highest GDP per capita tend to have the lowest levels of energy affordability risk. The paper then analyses how indicators of energy affordability change in response to a hypothetical tax reform that increases taxes on natural gas, heating oil and electricity in most countries analysed. Results show that, if combined with an income-tested cash transfer using one third of the change in revenue resulting from the tax reform, the reform generally improves energy affordability. If combined with a lump-sum transfer instead, results show that energy affordability increases only according to the most selective of the three indicators.