Policymakers have options to reduce price impacts and save lives.
I left the place where bad weather was invented – Northern Bavaria – in my youth to migrate West. I have settled in a place where I found the amenities I care about – reasonable climate, skiing, artisan ice cream, street tacos – and of course my dream job. I never have to worry about weather posing a direct risk to my health. This is obviously not true in many places such as Chicago, where I nearly died of exposure trying to go for a run in January. I am fortunate in that salaries in the economics profession are high and even if I lived in Chicago, I could afford to pay for the necessary heating and air conditioning to keep me comfortable. A point my fellow blogging friend Matt Kahn made is that the higher your income, the smaller the expenditure share on necessary goods like food. I always thought that this might be true for energy expenditure on average, but the relationship is a bit more complex. Richer people often live in bigger houses and keep their home at the perfect temperature for comfort. However, if you are poor, or a retiree living on a fixed income, you might not turn on the heat in your small place since, at the margin, a dollar spent on food or health care might be more important to you than a dollar spent on gas or electricity. Also, energy expenditures in many places are highly seasonal. We should be worried that if folks with lower incomes don’t turn on the heat or AC, they may disproportionately put their health at risk.
New Evidence of How High Energy Prices Kill
This is where my new favorite paper of 2019 comes in – a new working paper by Chirakijja, Jayachandran, and Ong. I will spare you the wonky economic setup, which involves two of my favorite super heroes – Eugen Slutsky and Sir John Hicks. What they basically point out is that when a consumer faces a higher price for a good, not only does it make them buy less of that good, but to the extent that they keep buying it, it also leaves them less money to buy other things. The paper makes this point eloquently in the context of heating energy. If the price of your heating fuel goes up, you either shift consumption towards other goods away from warmth or you cut consumption of other goods. The magnitude of the overall shift depends on your preferences and the magnitude of the price change. In reality, you likely get a mix of both. You shift away from heating and cut expenditures on other things – which includes spending on health services. So is this a big deal? The answer is yes.
We have known for a long time that mortality peaks in the winter. This is not news and is undisputed. What we have not understood well so far are the channels through which this works. The paper shows convincingly that high heating prices in the winter cause (yes I mean to say cause! Swole stats!) detectable and significant increases in mortality in the US. How do they get to this conclusion? Their research design uses variation across the US in the energy type used for home heating – either natural gas or electricity. You would be surprised by the relative importance of each fuel in heating, even across neighboring counties. They use changes in the ratio of gas prices to electricity prices across time. The shale gas boom, which happened during the period they looked at, has led to a drastic decrease in heating prices for places that heat more with natural gas. A statistical comparison of winter time deaths in areas that experienced larger decreases in heating costs due to natural gas being more important shows that the shale gas driven price decline led to 11,000 (!!!!) fewer winter time deaths per year. They convincingly show that this is not just due to decreases in short run mortality (something public health folks call “harvesting”, which is a word I dislike more and more as I get older.) This is not small potatoes! They sell the paper as lower prices save lives. But as my blog title suggests, the opposite is also true.
Evaluating Policy Responses
Well what are we going do about it? There are a couple of avenues here, some of which are more promising than others. I have graded each of the proposed ideas in square brackets.
- We could use public money to weatherize homes of low income folks in order to lower their heating and cooling costs. The only causal evidence on this I can find is that these programs are expensive, people do not take them up at high rates and they deliver only some of the savings engineers promise us. [Partial FAIL]
- We could make energy cheaper for everyone. Generally we think energy is not priced correctly since not all external costs are priced in everywhere. So the price signal should go in the opposite direction to combat the negative consequences of air pollution and climate change. [For completeness, Severin and Jim have a paper suggesting that retail electricity prices might be higher than social costs in some areas – for now]. [FAIL]
- We could make energy cheaper for the most sensitive populations. We do this in California, where through the CARE program low-income households get a 20% discount on their electricity and natural gas bills. At the federal level there is a program called LIHEAP, which in many cold areas is not sufficient and supplemented by local utility programs. [PARTIAL APPROVE].
- We could think carefully about seasonality in pricing natural gas. We currently add so called volumetric charges to each unit of gas consumed, which make you pay for the fixed costs of operating the natural gas system. These are charged throughout the year. My super smart former student Ed Rubin and I have a paper suggesting that shifting these charges to the summer time is both progressive (meaning helps low-income people) and efficient (makes the pie bigger). This is wonky, but clever. [APPROVE]
Finally, I wonder whether rate cases in front of Public Utility Commissions pay closer attention to the seasonal mortality and morbidity consequences of pricing energy. This fabulous new paper gives us an answer of the overall magnitude of the effect. Yet I would like us to push a bit further. As my superstar colleague Lucas Davis suggested to me, we should work on understanding whether this mortality is driven largely by intensive margin effects (e.g. people not turning on their existing heaters) or by extensive margin effects (e.g. people not investing in the right size heater and level of efficiency for their home). This is a highly policy relevant strand of research and we should do more of it!
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.