The welfare effects of price shocks and household relief packages: Evidence from the European Energy Crisis

How should governments respond to rapid increases in the cost of living driven by shocks to the prices of staple goods? We examine this question in the context of the 2022–2023 European Energy Crisis, studying the design of policies aimed at supporting households. We show that households reduced their energy consumption in response to price rises, with an average elasticity of 0.31 and stronger responses among heavy energy users. Households were nonetheless exposed to large, heterogeneous welfare losses that only weakly correlate with income. The UK policy response – a combination of an energy price subsidy and a universal transfer – reduced the average welfare loss from the crisis from 6% to 1% of income. It also compressed the distribution of losses, preventing 2.3m households falling into energy poverty. However, households’ consumption responses to the policies generated substantial efficiency costs, equal to £3.7bn over six months. We develop a framework to evaluate alternative policies and show that basing transfers on income and past energy use, in combination with a subsidy, closes 60% of the gap in the social value of losses between implemented policy and the first-best personalised transfer policy.