Estimating short- and long-run price and income elasticities of final energy demand as a function of household income

This study investigates the short- and long-run price and income elasticities of private households’ energy demand, focusing on electricity, heating energy carriers (proxied by natural gas), and car fuels, and examining their variations as a function of household income. Employing longitudinal data from two large private household surveys, we apply method of moments and OLS estimators to fixed and random effects models to capture the dynamic response of energy demand to changes in price and income. Our findings reveal significant heterogeneity in elasticities across different income groups. For electricity, short-run price elasticities range from −0.27 for low-income households to −0.44 for high-income households, with long-run elasticities varying from −0.22 to −0.64. Gas price elasticities show an inverse relationship with income, spanning from −0.64 for low-income to −0.11 for high-income households in the short run, and from −0.58 to −0.15 in the long run. Car fuel price elasticities, which we were not able to differentiate over time, range from −0.47 for low-income to −0.14 for high-income households. Income elasticities also exhibit notable variability. For electricity, short-run income elasticities decrease from 0.048 for low-income households to insignificance for high-income households. Short-run income elasticities of gas demand follow a similar pattern, starting from 0.079 and decreasing with rising income. Contrastingly, income elasticities of car fuel demand increase with income from 0.060 for low-income households to 0.443 for high-income households. Our results underscore the necessity of incorporating socioeconomic factors into energy policy design to enhance effectiveness and equity in promoting energy conservation and investments in energy efficiency and electricity generation. • Price elasticities of energy demand vary significantly across German income groups. • Low-income households show higher gas price elasticity but lower electricity elasticity. • Car fuel price responsiveness decreases significantly with rising household income. • Bias-corrected dynamic models provide robust short and long-run elasticity estimates. • Energy policies require income-differentiated design to avoid regressive effects.