Natural Gas Price Elasticities and Optimal Cost Recovery Under Consumer Heterogeneity: Evidence from 300 million natural gas bills

Maximilian Auffhammer, Edward Rubin

NBER Working Paper No. 24295
Issued in February 2018
NBER Program(s):Environment and Energy Economics

Half of American households heat their homes with natural gas furnaces and 43% use it to heat their water. Hence, understanding residential natural gas consumption behavior has become a first-order problem. In this paper, we provide the first ever causally identified, microdata-based estimates of residential natural gas demand elasticities using a panel of approximately 300 million bills in California. To overcome multiple sources of endogeneity, we employ a two-pronged empirical strategy: (1) we exploit a discontinuity along the border between two major natural-gas utilities in conjunction with (2) an instrumental variables strategy based upon the differences in the utilities’ rules/behaviors for internalizing changes in the upstream natural gas spot market. We estimate that the elasticity of demand for residential natural gas is between -0.23 and -0.17. We also provide evidence of significant seasonal and income-based heterogeneity in this elasticity. This heterogeneity suggests unexplored policy avenues that may be simultaneously efficiency-enhancing–in the absence of first best pricing—and pro-poor.

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Document Object Identifier (DOI): 10.3386/w24295

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