Combining a Demand System with the Household Production Approach. Modelling Energy Demand in Selected European Countries

This paper sets up a model of private consumption for selected EU countries with special emphasis on the impact of energy efficiency on energy demand. The analysis starts out from the idea that consumers' demand is a combination of a demand for "services" with a technological component. Demand for services is derived from utility maximisation or cost minimisation, and actual energy (commodity) demand stems from a household production process. The model indirectly takes into account the impact of capital stocks and technology on energy demand and all the different links between services and goods demand. That allows for describing more channels of impacts on consumption expenditure for energy and non-energy than in traditional consumption models. Exogenous key variables that can be modified in order to calculate different scenarios are prices of energy and non-energy goods, and the exogenous capital stock (infrastructure) or user costs of capital. Simulations of revenue-neutral energy taxation with changes in capital stocks for heating and transport are carried out.