Energy price shocks in Europe and its impacts on vulnerable households: A demand system approach

Highlights

• Analyse the 2022–2023 EU energy price crisis on welfare and energy poverty
   
• Rising energy costs are regressive, disproportionately impacting low-income households
   
• Higher energy costs lead low-income households to cut spending on other essentials
   
• Government price-based measures eased losses but a had limited impact on energy poverty
   
• CO emissions rebounded post relief; high-income households remain top emitters
   

Abstract

This paper examines how European households, particularly low-income groups, adjusted to the surge in energy prices during the  energy crisis and the extent to which policy interventions mitigated the associated welfare losses. We estimate a household demand system using EU microdata and energy prices adjusted for government subsidies.

Our results show that low-income households have significantly lower capacity to adjust energy consumption in response to price increases, amplifying their exposure to higher energy costs. This limited substitutability strengthens the regressive impact of energy price shocks and leads to spillovers onto essential non-energy expenditures. Cross-price elasticities indicate that vulnerable households partially offset higher energy costs by reducing consumption of necessities such as food.

We further document substantial distributional and environmental effects. CO2 emissions declined temporarily during the initial price surge but partially rebounded in the second year, driven mainly by higher-income households’ consumption patterns, highlighting the need for differentiated climate policies. Energy poverty increased markedly, particularly among women, single-person and single-parent households, the unemployed, and residents of sparsely populated areas, with limited evidence that policy measures fully offset these impacts.

Overall, the findings highlight the importance of combining targeted income support with structural investments in energy efficiency to strengthen resilience to energy price shocks. Countries most affected at the beginning of the crisis — particularly Belgium, Ireland, and Luxembourg — highlight the need for a policy mix balancing affordability, equity, and decarbonisation objectives.