“Welfare Gains from Usage-Based Pricing: Evidence from Energy Reform in China”
Koichiro Ito (University of Chicago) and Shuang Zhang (University of Colorado)
Inefficient energy pricing and the lack of incentives to conserve energy are common problems in developing countries. We evaluate a recent major energy reform in the residential heating system in China that replaced a non-metered fixed payment system with usage-based pricing. We develop an event-study research design that exploits quasi-experimental variation in the staggered rollouts of the reform over ten years. Using household-level daily heating usage data before and after the reform, we find that the reform induced substantial reduction in heating usage, by 31 percent reduction in four years. We also find evidence of learning—households reduced heating usage gradually over time, with larger reduction in warmer days (i.e. days when the value of heating was relatively low) in later years. We then use plant-level emission data to examine environmental benefits of the reform. The reduced heating usage was associated with substantial reductions in SO2 emission concentration, NOx concentration, and PM concentration. Using these results, we calculate the social welfare gains and consumer surplus from the policy. Our estimates suggest that the policy’s social welfare gain was 74 USD/year per household. Our findings provide important implications for energy policy because many developing countries are considering the implementation of individual meters and usage-based pricing in lieu of pre-existing inefficient fixed prices.