Measuring the influence of energy prices within the price formation mechanism

Abstract

Environmental economics has proposed the taxation on energy as an effective way to mitigate the pollution caused by the production and use of energy based on fossil fuels. From a practical point of view, however, taxes on energy are thought to have a detrimental impact on the economy that reduce competitiveness and diminish economic welfare, especially if the tax burden is (completely or partially) translated to final prices. This paper provides a method to analyse by how much energy prices influence the price formation mechanism of an economy. The model used, which captures the general equilibrium channels existing among energy activities, the rest of the production system and households, is based on the accounting identities reflected in a Social Accounting Matrix (SAM). The SAM price model allows to identify the role of energy prices into the cost transmission and the price definition process. The empirical application, which is for the Catalan economy, shows a considerable influence of energy prices on both production and final prices. The results also show that the different forms of energy exert asymmetric impacts on the costs of sectors and consumers. Keywords: energy prices, cost linkages, price transmission, social accounting matrix. JEL Classification: C69. D58. Q41.