The Price of Natural Gas Dependency: Price Shocks, Inequality, and Public Policy

Abstract

The 2022 natural gas price spikes across Europe raised concerns regarding their distributional consequences. This paper investigates the distributional effect of price increases between and, in particular, within different income groups in Germany, accounting for different determinants of gas expenditures. The study finds that low-income households are affected the most by the gas price increase. Low-income households pay, at the median, 11.70 percent of their equivalent income for natural gas, while high-income households pay, at the median, 2.41 percent. Moreover, natural gas expenditures are higher for tenants in detached houses and in houses without double glazing or thermal insulation. Our policy analysis shows that a well-targeted subsidy scheme can be more effective at reducing inequality and less costly than a subsidy for all households. Additionally, the introduction of a minimum energy efficiency standard for buildings can help reduce inequality in the medium term.