The fiscal and intergenerational burdens of brakes and subsidies for energy prices

Huber, Johannes; Scharrer, Christian Article — Published Version The fiscal and intergenerational burdens of brakes and subsidies for energy prices International Tax and Public Finance Provided in Cooperation with: Springer Nature Suggested Citation: Huber, Johannes; Scharrer, Christian (2023) : The fiscal and intergenerational burdens of brakes and subsidies for energy prices, International Tax and Public Finance, ISSN 1573-6970, Springer US, New York, NY, Vol. 31, Iss. 5, pp. 1249-1273, https://doi.org/10.1007/s10797-023-09807-8 This Version is available at: https://hdl.handle.net/10419/309472 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Vol.:(0123456789) International Tax and Public Finance (2024) 31:1249–1273 https://doi.org/10.1007/s10797-023-09807-8 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies forenergy prices JohannesHuber1· ChristianScharrer2 Accepted: 9 October 2023 / Published online: 30 October 2023 © The Author(s) 2023 Abstract We study the effects of different financing rules for untargeted energy price brakes and subsidies on intergenerational welfare in a large-scale overlapping generations model. The results indicate that, in comparison with a laissez-faire solution without any government interventions, debt-financed implementations of such measures are very detrimental for young and future generations. However, the taxation of windfall profits can significantly contribute to reduce the economic burdens of these generations; whereas, the positive effects on older generations are much less pronounced. Keyword Fiscal policy, Price brakes, Price subsidies, Energy crisis, Welfare JEL Classification E62· E30· H20· H30 1 Introduction After the Russian invasion of Ukraine on February 24, 2022, energy prices for gas and electricity skyrocketed so that, in particular, many European countries had to put emergency plans in place. For example, the lines in Fig.1 show that the harmonized indices of consumer prices for energy increased by roughly 50% in France, Germany, and Spain; while, Italy even faced increases of about 100% in 2022.1 As * Johannes Huber [email protected] * Christian Scharrer christian.schar[email protected] 1 Department ofEconomics, University ofRegensburg, Universitätsstraße 31, 93040Regensburg, Germany 2 Department ofEconomics, University ofAugsburg, Universitätsstraße 16, 86159Augsburg, Germany 1 Source: https:// ec. europa. eu/ euros tat/ datab rowser/ view/ PRC_ HICP_ MIDX__ custom_ 54112 78/ defau lt/ table (accessed 18 March 2023). 1250 J.Huber, C.Scharrer 1 3 a consequence, many European governments implemented measures to protect businesses and households from rising energy costs. This paper studies the intergenerational welfare effects of fiscal measures shielding households and firms from rising energy price costs and their corresponding financing rules in a large-scale overlapping generations model. With regard to European countries, Arregui et al. (2022) and Sgaravatti et al. (2022) provide an overview about the adopted fiscal measures that can be distinguished by two dimensions, the distortion of relative energy prices and the targeted relief of vulnerable groups. On the one hand, according to Arregui etal. (2022), almost all countries implemented at least one untargeted price-distorting measure like reduced energy taxes, fees, charges, or carbon taxes. On the other hand, many countries also enacted non-distortionary measures such as lump-sum income tax credits, lump-sum transfers, or energy vouchers, which were often also untargeted. In particular, the German government introduced so-called energy price brakes for gas and electricity. This instrument transfers the (positive) difference between the current market price and a guaranteed price times a quota, which depends on the specific energy consumption of the previous year, from the government via energy suppliers to households and firms. Therefore, such measures usually provide more pronounced incentives to reduce the consumption of energy in comparison with price-distorting measures like price subsidies. Interestingly, these untargeted interventions amounted to about 70% of total fiscal outlays although they only accounted for slightly more than 50% of all relief measures. Figure2 displays the associated earmarked and allocated funding (in % of GDP) of different countries. The bars show that, in particular the largest countries in the European Union, Germany, France, Italy, Spain, and Poland were willing to spend relatively high amounts of their GDP to mitigate the negative effects of the energy crisis. Both price brakes and price subsidies for energy result in a direct relief of consumers. However, regardless of which measure is implemented to protect households Fig. 1 Harmonized indices of consumer prices: Energy, Source: Eurostat 1251 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… and firms from rising energy cost, the energy price shock does not disappear since the financial burdens are only redistributed from consumers to current or future taxpayers. The corresponding fiscal rules that control the responses of taxes and government debt play a decisive role in this regard. If, for example, relief packages are mainly financed by increases in government debt, then the economic burdens are transferred to present young and future generations. In contrast, pure tax-financed increases shift the financial burdens into the present and, thus, on current living generations. From a welfare perspective and with respect to the political decision making process, these two different and possibly opposing effects must therefore be taken into account simultaneously. In this paper, we study the effects of financing rules for untargeted energy price subsidies and energy price brakes on the intergenerational welfare in a large-scale overlapping generations model. For merely illustrative purposes, we calibrate the model for the German economy and get the following results in comparison with a laissez-faire solution without any government interventions: Both price subsidies and energy price brakes are very detrimental for young and future generations if they are mainly financed by increases in government debt and/or labor income taxes; while, they strongly benefit retirees and people close to retirement. In particular, debt financing leads to very pronounced welfare losses among the youngest and future generations, if the additional government revenue opportunities from taxing windfall profits are not utilized. Overall, the taxation of windfall profits is especially relevant for the economic relief of young and future generations; whereas, it plays a minor role for older generations. In contrast, financing rules that mainly tax asset incomes make young and future generations better off. However, they only slightly mitigate the negative effects of energy price shocks among the oldest individuals and slightly decrease the welfare of older workers and young retirees. Furthermore, our results indicate that the welfare differentials between energy price brakes and energy price subsidies are relatively small since the welfare gains and losses are both qualitatively and quantitatively very similar across all age groups. Fig. 2 Governments earmarked and allocated funding to shield households and firms from the energy crisis (% of GDP, Sep 2021 - Jan 2023), Source: Sgaravatti etal. (2022) 1252 J.Huber, C.Scharrer 1 3 The most closely related papers to ours are De Miguel and Manzano (2006), Dhawan and Jeske (2008), Heer and Scharrer (2018), Bachmann etal. (2022), Lan etal. (2022), Ciola etal. (2023), and Turco etal. (2023). De Miguel and Manzano (2006) examine the optimal taxation of oil and show that an extension of their dynamic stochastic general equilibrium (DSGE) model with oil consumption of households implies different optimal tax rates for both firms and households. In this case, their zero taxation result still holds for oil used in the firm sector but governments should levy taxes on household consumption of oil and adjust them as response to economic shocks. Among many others,2 Dhawan and Jeske (2008) study the contributions of energy price shocks to output fluctuations in a DSGE model with exogenously given energy prices. They find that energy price shocks are associated with more pronounced effects on durables than on fixed capital, which mitigate the impacts on future production. Therefore, TFP shocks primarily account for the majority of output fluctuations in their model. Moreover, Heer and Scharrer (2018) investigate the redistributive effects of government spending shocks financed by either debt or taxes. They find that higher government spending increases both income and wealth inequality; while, debt financing may be particularly harmful to retirees with high accumulated private savings. However, they follow the macroeconomic literature and assume that government spending shocks do not affect the private utility of individuals or overall productivity since they are modeled as pure waste.3 In contrast, this paper studies deliberate government policies that shield households and firms from rising energy prices. Bachmann etal. (2022) and Lan etal. (2022) examine the effects of a potential cut-off from Russian energy imports on the German economy and predict losses of around 0.2% − 2.2% and 1.5% of GDP, respectively. Both studies highlight the importance of policy measures that provide and increase incentives to save and substitute fossil energies. Furthermore, Ciola etal. (2023) use a multiagent model to investigate the economic and distributional effects of energy shocks both at the aggregate and sectoral level in the US. They find that energy shocks, for example exogenous increases of energy prices, have similar effects at the aggregate level; whereas, the distribution of gains and losses across sectors and agents especially depends on the type of shock. Turco etal. (2023) use a similar multi-agent model for the Euro Area to examine the effects of macro-stabilization policies, i.e., energy price reductions, tax cuts, household and firm subsidies, and taxes on windfall profits. They find that government-funded energy price reductions supplemented with taxes on windfall profits of energy firms are the most effective policy to mitigate GDP losses. The remainder of this paper is organized as follows. In Sects.2 and 3, we outline and calibrate our model, respectively, before Sect.4 presents the steady state. Section5 shows our results with respect to the effects of financing rules for untargeted energy price subsidies and energy price brakes on intergenerational welfare. The following sensitivity analysis is provided in Sect.6. In Sect.7, we summarize and discuss the main findings of this paper. 2 See, for example, Kim and Loungani (1992), Rotemberg and Woodford (1996), or Huynh (2016). 3 See, for example, Galí etal. (2007) or Uhlig (2010). 1253 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… 2 The model In this section, we present a general equilibrium life-cycle model with overlapping generations of households, a representative firm, and a government sector. The households optimize their expected lifetime utility and the representative firm maximizes its profits; while, the government collects tax revenues for government consumption and runs a pay-as-you-go (PAYG) social security system that transfers resources across generations from workers to retirees. Moreover, we assume that each household comprises one individual, so the terms “household” and “individual” are interchangeable in this model. 2.1 Households Each period, a new cohort of households of constant size at model age s=1 , which corresponds to a real life age of 26 years, enters the economy. These households work during the first Tw years, live up to a maximum possible lifespan of T years, and additionally face the survival probabilities 𝜙s from age s to age s+1 with 𝜙0 ≡ 1 . Hence, the mass of households 𝜓s+1 at age s+1 evolves according to 𝜓s+1=𝜙s𝜓s . As it is standard in the literature, we normalize the total mass of households to one. In period t, a household maximizes the following discounted expected lifetime utility Ut at age s=1 with respect to normal consumption cn,s t , energy consumption ce,s t , labor supply ns t (with ns t ≡ 0 for s>Tw ), and savings in the form of financial assets as+1 t+1 : Following Trabandt and Uhlig (2011), the specification of the first instantaneous utility function u (cn ,ce ,n) is given by with the CES aggregator function These preferences feature a constant intertemporal elasticity of substitution 1∕𝜂 and a constant Frisch elasticity of labor supply 𝛾1 . The age-specific parameter 𝛾s 0 controls the labor supply at age s in the steady state. Moreover, 𝜎 denotes the elasticity of substitution between normal consumption goods cn,s t and energy consumption ce,s t , whereas 𝜈 represents a standard utility weight. Furthermore, similar to DeNardi and (1) U t=Et T ∑ s=1 𝛽s−1 (s ∏ j=1 𝜙j−1 )[ u ( cn,s t+s−1,ce,s t+s−1ns t+s−1 ) + ( 1−𝜙s ) b ( as+1 t+s )]. (2) u ( cn,s t,ce,s t,ns t ) =1 1−𝜂 [( cs t ) 1−𝜂 ( 1− 𝛾s 0 (1−𝜂) 1+1∕𝛾 1( ns t ) 1+1∕𝛾1 ) −1 ] (3) c s t= [ 𝜈 ( cn,s t ) 𝜎−1 𝜎+(1−𝜈) ( ce,s t ) 𝜎−1 𝜎 ] 𝜎 𝜎−1 . 1254 J.Huber, C.Scharrer 1 3 Yang (2014) and Kaplan etal. (2020), the second instantaneous utility function b (a) introduces a warm-glow bequest motive at ages s>Tw : where 𝜃 controls the strength of the bequest motive. The corresponding budget constraints at age s in period t are given by The variable 𝜏c t denotes the statutory value-added tax rate levied both on normal consumption goods cn,s t and energy ce,s t that is imported at the (household) price p h t . For simplicity, as in Heathcote (2005), we assume that public debt pays the economy-wide pre-tax real return rt so that government bonds bs t and capital ks t are perfect substitutes. Therefore, the stock of financial assets of a household at age s in period t is represented by where we assume that households enter the economy without any holdings of financial assets so that bs t ≡ 0 and ks t ≡ 0 at age s=1 . Hence, only older generations receive asset incomes that are taxed at the asset income tax rate 𝜏k t . The net labor income of workers depends on the real wage wt , the age-specific productivity es , the income tax rate 𝜏w t , and the contribution rate 𝜏p t for the PAYG system. Lumpsum transfers and pension payments from the government to households are denoted by trs t and penss t , respectively. Furthermore, to limit the computational cost of our global solution method, we follow a very similar approach as in Heer etal. (2020) and assume that households do not internalize future pension benefits in their labor supply decisions. Therefore, pension benefits only depend on the average past labor earnings of each cohort and the replacement ratio 𝜁t : (4) b (a)= 1 s>Tw 𝜃 1−𝜂( a1−𝜂−1 ), (5) ( 1+𝜏 c t )( c n,s t+p h tc e,s t ) +a s+1 t+1= ( 1−𝜏 w t−𝜏 p t ) wte s n s t+tr s t + ( 1+rt ( 1−𝜏k t )) as t, for ages∈ { 1, ..., T w} , (6) ( 1+𝜏 c t )( c n,s t+p h tc e,s t ) +a s+1 t+1= ( 1+rt ( 1−𝜏 k t )) a s t+pens s t+tr s t , for ages∈ { T w +1, ..., T } . (7) as t= b s t+ k s t, (8) penss t= ⎧ ⎪ ⎨ ⎪ ⎩ 𝜁t Tw Tw−1 � i=0 wt−i−1eTw−inTw−i t−i−1, for s=Tw+ 1, pensTw+1 t−s+Tw+1 , for s>Tw+ 1. 1255 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… 2.2 Firms Following Dhawan and Jeske (2008), a representative firm produces an energy-cap- ital bundle Xt as intermediate good. The corresponding CES production function in its calibrated share form4 is given by The parameter 𝜒 represents the elasticity of substitution between the input factors capital Kt and energy imports Et , while 𝜇 affects the capital income share. Then, this firm uses a Cobb-Douglas production technology to produce the final output Yt by combining the intermediate good Xt and labor Nt , where 1−𝛼 controls the income share of labor.5 Its resulting profits Πt consist of the sum of revenues and (potential) transfers Trf t from the government less labor, capital, and energy cost, The parameters 𝛿 and pf,e t denote the depreciation rate of capital and the price of energy input Et , respectively. 2.3 Energy Prices As in Kim and Loungani (1992) and Dhawan and Jeske (2008), we assume that all energy inputs need to be imported. The corresponding world price of energy is given by with (9) X t=X [ 𝜇 ( Kt K ) 𝜒−1 𝜒 +(1−𝜇) ( Et E ) 𝜒−1 𝜒 ] 𝜒 𝜒−1 . (10) Yt =X 𝛼 t N 1−𝛼 t, (11) Πt =Y t +Tr f t −w t N t − ( r t +𝛿 ) K t −p f t E t. (12) p t − p p =zt+𝜑 Qe t −Qe Q e (13) Qe t=Ce t+Et, (14) C e t = T ∑ s=1 𝜓sce t . 4 See Cantore and Levine (2012) and Temple (2012). 5 Alternatively, we could also specify a CES production function with a (KN)E nesting structure as estimated by van der Werf (2008). In Appendix A.1, we show that our results remain qualitatively unaffected if we use this specification instead. 1256 J.Huber, C.Scharrer 1 3 The variable Qe t denotes the total aggregate demand for energy, which depends on the aggregate demands Ce t and Et from the household and the firm sector, respectively. Without loss of generality, we set p ≡ 1 and assume that the shock zt follows an AR(1) process, with |𝜌|<1 and the disturbance 𝜖t . However, in contrast to Dhawan and Jeske (2008), we additionally introduced the term 𝜑 Qe t −Qe Q e on the right side of Eq.(12) to take into account that a lower aggregate demand for energy Qe t has the potential to dampen the upward pressure on the world price pt after a positive price shock zt if 𝜑>0 . Furthermore, in accordance with German data, we assume that firms receive a discount 𝜋 on their energy demand. Hence, the final energy prices for households and firms are given by 2.4 Social Security The budget constraint of the PAYG system is given by The variable Gp t represents potential transfers from the government to the social security authority to keep both the contribution rate and the replacement ratio constant over time. Hence, 𝜏p t =𝜏 p and 𝜉t=𝜉 , where variables without a time index denote the corresponding steady state values. 2.5 Government As in Heer et al. (2017), we assume that the government collects all accidental bequests Beqt . Moreover, for ease of interpretation, we distinguish between two different types of government spending, namely normal government spending Gg t and government expenditure Ge t for energy subsidies.6 These expenditure are financed by different tax revenues and government debt Bt+1 so that the government budget is always balanced: (15) zt=𝜌zt−1+𝜖t (16) ph t =p t, (17) pf t=(1−𝜋)pt. (18) T ∑ s=1 𝜓spenss t=Ntwt𝜏p t+Gp t . 6 Note that we follow Galí etal. (2007), Uhlig (2010), and Heer and Scharrer (2018) since we model Gg t as pure waste or, put differently, as residual in our model. Nevertheless, we could alternatively assume that that government spending enters the utility function in an additive separable way and always yields the constant utility level 𝜈 (G) for |Gt −G| ≤ 𝜖 with 𝜖>0 around the steady state of our model. 1263 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… reasons, we expect revenues to be significantly lower than the initial estimates of the European Commission and present our main results for 𝜏wp ∈{0, 0.25, 0.5} . To examine the impacts of energy price brakes and energy price subsidies on welfare and economic growth with respect to different forms of financing, we consider five cases: (1) a laissez-faire scenario without any fiscal measures, and the cases with implemented energy price subsidies or energy price brakes that are either financed by (2) debt, (3) labor income taxes, (4) consumption taxes, or (5) asset income taxes. Fig. 4 Consumption equivalent changes (CECs) - benchmark calibration (EPB = energy price brake, EPS = energy price subsidy) 1264 J.Huber, C.Scharrer 1 3 Table1 summarizes the parameter values of 𝜔e , 𝜔b , 𝜔w , 𝜔c , 𝜔k , and 𝜏wp for each case.12 Figure 4 displays the consumption equivalent changes (CECs) of both present and future age groups after an energy price shock in period 1. This welfare measure describes the percentage variation of steady state consumption cs that is equivalent to a given absolute change in lifetime utility.13 The x-axis denotes the model age in period 1. For example, the positive model age s=1 (10) denotes individuals at a real life age (RLA) of 26 (36) years in period 1, whereas the negative model age s=−1 (-2) represents individuals, that will enter the economy in period 2 (3) at real life age 26. The panels in the left column show the welfare results for implemented energy price brakes; whereas, the panels in the right column display the corresponding results for energy price subsidies. Note that, per definition, the laissez-faire solutions, which are displayed by solid light blue lines, are identical across all cases. The upper left panel of Fig.4 shows the EPB results for 𝜏wp =0 . Irrespective of the financing form, the youngest individuals, who are alive in period 1, face the most pronounced declines of lifetime utilities. These cohorts are exposed to the negative effects of the energy price shock for the longest period of time and have to deal with the strongest increase in energy prices in period 1. Comparing the CECs across all age groups and all financing forms with respect to the laissez-faire solution shows that, in particular, labor income taxes and debt financing strongly redistribute the economic burdens between old and young/future generations, as depicted by the red and orange lines, respectively.14 Young generations are worse off in these two cases, whereas older generations, in particular young retirees, benefit from the introduction of the energy price brake since it dampens their welfare losses. For example, the CEC of individuals at model age s=1 (RLA 26) is equal to − 0.20 and − 0.27% in the laissez-faire and in the debt financing scenario, respectively. In contrast, the corresponding CECs of old individuals at age s=40 (RLA 65) amount to − 0.05 and − 0.02%, while the values at age s=55 (RLA 80) equal − 0.03 and − 0.02%. Also note that the welfare improvements of the elderly are especially detrimental for future generations if the introduced energy price brakes are financed with debt. This results 14 Note that the age-specific inflation for the consumption bundle cs t , see equation (3), depends both on the price for energy consumption ce,s t and the price for normal consumption goods cn,s t . Hence, our model features increases in inflation that are solely driven by increases in energy prices since normal goods (and capital) serve as numeraire in our model. The missing inflationary pressure from the normal goods market is, however, implicitly offset by adjustments of relative prices in our simulations, as, for example, declines in real wages reduce the purchasing power of households. 13 We could also use the absolute deviations of lifetime utilities as welfare measure. However, it is always possible to add a constant to instantaneous utility functions, so relative deviations of lifetime utilities cannot be meaningfully interpreted. Therefore, the CEC is often used in models with overlapping generations since it allows to draw more meaningful comparisons across generations. Nevertheless, both welfare measures are equivalent to each other. 12 In Case 2, we set 𝜔b=0.90 to approximate the form of debt financing since this value still ensures local stability around the steady state in all of our simulations. Moreover, a parameter 𝜔b<1 implies that we have to introduce additional adjustments of other tax rates to keep the government budget balanced. For calibrations with high parameter values for 𝜔b , our results remain, however, essentially unchanged with respect to different allocations of the remaining spending share (1−𝜔b) to different tax rates. Therefore, we set 𝜔w= 𝜔 c= 𝜔 k=( 1 − 𝜔 b)∕3 only for illustrative purposes. 1265 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… from the crowding out of productive capital and, primarily, the additional higher interest burdens of future generations. Moreover, the green line shows that the financing case with adjustments of consumption taxes is relatively comparable with the laissez-faire solution, both quantitatively and qualitatively. Therefore, such a policy makes little sense from an economic point of view. In contrast, see the blue lines, asset income taxes most efficiently improve the welfare of young individuals who are alive in period 1; whereas, the positive effects on the oldest individuals are much less pronounced. However, this financing form slightly exacerbates the situation of the wealthiest individuals at ages 21 (RLA 46) to 52 (RLA 77). Nevertheless, this result shows that these age groups are better able to cope with the economic burdens that result from adjustments of asset income taxes, in comparison with the very pronounced additional welfare losses of younger generations under debt financing. The left panels in the second and third row of Fig. 4 depict the contribution of higher government revenues from windfall profits and excess revenue caps for 𝜏wp =0.25 and 𝜏wp =0.5 , respectively. On the one hand, young and future generations in particular benefit from these higher tax revenues, with the largest improvements in Cases 2 and 3 with debt financing and labor income taxes. If, for example, a government implements a debt-financed energy price brake and increases 𝜏wp from 0.0 to 0.50, then the CEC of individuals at age 1 (RLA 26) increases from − 0.27 to − 0.20%. On the other hand, the effects on the life time utilities of older individuals are much less pronounced. Thus, these results suggest that the collection of these potential tax revenues by governments is especially relevant for young and future generations if the emergency measures are financed by increases in government debt. Also note, however, that these tax revenues are not always necessarily associated with a Pareto improvement across all generations. For example, with respect to an energy price brake financed by taxes on labor incomes, the CECs of young retirees even moderately decline with higher additional tax revenues due to less pronounced general equilibrium effects of labor supply on the real interest rate. The right columns of Fig.4 show the results with respect to price subsidies. In comparison with the cases with an energy price brake in the corresponding left panels, the welfare effects of energy price subsidies are both qualitatively and quantitatively almost identical. 6 Sensitivity analysis Interestingly, the previous presented results also hold for the (rather extreme) case with 𝜑=1 that is displayed in Fig.5. Compared with Fig.4, this figure shows the same qualitative results. However, the welfare losses are much less pronounced because of the additional effect of a lower domestic demand that dampens the price of energy and the associated fiscal burdens of fiscal interventions with respect to Cases 2 to 5. Interestingly, even if we take this price mitigating effect into account, then the welfare differences between an implemented energy price brake and an energy price subsidy still remain almost negligible. Nevertheless, this finding should be interpreted with caution since energy price brakes were much more efficient at reducing energy demand in our simulations, which is why we recommend this measure despite the very small welfare differentials observed in this study. 1266 J.Huber, C.Scharrer 1 3 As previously mentioned, the European Commission (2022) initially estimated additional revenues of about 142 billion Euro, 117 billion Euro from revenues caps and 25 billion Euro from solidarity contributions. Given these figures, François etal. (2022) propose to tax the increase in market capitalization of companies that strongly benefited from higher energy prices. According to their results, this tax instrument is less prone to tax avoidance strategies and generates additional tax revenues of around 0.25% of EU GDP from windfall profits, in sum 65 billion Euro versus 25 billion Euro from solidarity contributions. In this context, it is therefore interesting to review the welfare results in a sensitivity analysis by assuming that governments implement such Fig. 5 Consumption equivalent changes (CECs) - benchmark calibration with 𝜑 = 1 (EPB = energy price brake, EPS = energy price subsidy) 1267 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… recommendations and thereby generate tax revenues of 0.75 or 1% of GDP. With respect to 𝜏wp ∈{0.75, 1} , Fig.6 shows that, for all financing forms except debt financing, additional tax revenues of about 0.75% of GDP or more allow to introduce Pareto improving energy price brakes or energy price subsidies that make all current and future generations better off. However, this result should be interpreted with caution. On the one hand, the empirical validity of our exogeneity assumption about tax revenues from windfall profits, see equation (26), is likely to decline with increasing 𝜏wp . On the other hand, such very pronounced tax measures can be distortionary and increase the uncertainty of investors. However, these results indicate that such tax proposals might play a key role with regard to the implementations of Pareto improvements. Put differently, if the additional revenue opportunities of windfall profit taxation are ignored, then the distribution of welfare effects, depending on the form of financing, is often more like a zero-sum game between generations, as depicted in the first rows of Figs.4 and 5. Fig. 6 Consumption equivalent changes (CECs) - benchmark calibration with higher tax revenues from windfall profits (EPB = energy price brake, EPS = energy price subsidy) 1268 J.Huber, C.Scharrer 1 3 7 Conclusion The unprecedented increases of energy prices after the Russian invasion of Ukraine prompted many European governments to implement fiscal support measures that mitigate the associated economic burdens on households and firms. In this context, this paper studies how different financing rules for untargeted energy price brakes and energy price subsidies, which shield households and firms from rising energy prices, affect the intergenerational welfare. For our analysis, we use a large-scale overlapping generations model that is calibrated, for merely illustrative purposes, for the German economy. Overall, we expect our results to be valid for a wide range of industrialized countries. Irrespective of the financing form, the age-specific differences in welfare between energy price brakes and energy price subsidies are both qualitatively and quantitatively almost negligible. Thus, from a welfare perspective, it is relatively irrelevant which of these two measures is actually implemented in practice. Nevertheless, energy price brakes are more effective at reducing the aggregate demand for energy, so they should be considered as first choice. Moreover, in comparison with a laissez-faire solution, the results indicate that debt-financed implementations of energy price brakes or energy price subsidies primarily make older generations better off. In contrast, if governments choose this financing form but forgo potential tax revenues from windfall profits, then the welfare of young and future generations strongly declines. These generations are economically overburdened by the additional fiscal cost of higher government spending. The corresponding sensitivity analysis shows that the taxation of windfall profits plays a very important role in this regard, as it is particularly effective at lowering the economic burdens of younger generations and, thus, improving their welfare under debt financing. Furthermore, also in comparison with a laissez-faire solution, financing rules that primarily tax asset incomes are beneficial for young and future generations. If potential tax revenues from windfall profits are, however, also largely ignored, then they only marginally increase the welfare of the oldest individuals and even slightly decrease the welfare of older workers and young retirees. Note that the results of this study should be interpreted with caution. For example, on the one hand, our assumption about exogenous additional tax revenues from windfall profits is empirically plausible for small shares of GDP. However, the empirical validity almost certainly declines as both tax rates and the associated revenues strongly increase. On the other hand, our model does not take tax avoidance strategies, like international profit shifting, or distortions of investments into account. For these reasons, it is possible that our welfare results are biased upwards due to excessively high tax revenues that result from high tax rates on windfall profits. 1269 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… A Appendix A.1 Robustness Check ‑ CES production function In this section, we conduct a robustness check of our results with respect to a (KN)E nesting structure for the CES production function as proposed by van der Werf (2008). The production function is given by Fig. 7 Consumption equivalent changes (CECs) - benchmark calibration with a (KN)E nesting structure for the CES Production Function (EPB = energy price brake, EPS = energy price subsidy) 1270 J.Huber, C.Scharrer 1 3 with (34) Y t=Y ⎡⎢⎢⎣ 𝜇 � Et E � 𝜒1−1 𝜒1+(1−𝜇) � Qt Q � 𝜒1−1 𝜒1 ⎤⎥⎥⎦ 𝜒 1 𝜒1− 1 (35) Q t=Q ⎡⎢⎢⎣ 𝛼�Kt K�𝜒2−1 𝜒2+(1−𝛼)�Nt N�𝜒2−1 𝜒2 ⎤⎥⎥⎦ 𝜒 2 𝜒2−1 . Fig. 8 Consumption equivalent changes (CECs) - benchmark calibration with 𝜌 = 0.75 (EPB = energy price brake, EPS = energy price subsidy) 1271 1 3 The fiscal andintergenerational burdens ofbrakes andsubsidies… According to the estimates for West-Germany, see Table3 in van der Werf (2008), we choose 𝜒1=0.3311 and 𝜒2=0.4271 . Moreover, we follow the same calibration strategy as in our benchmark model and set 𝛼=0.277 and 𝜇=0.031 . Then, the labor income share and E∕Ce also equal 70 percent and 1.74, respectively. Figure7 displays the corresponding consumption equivalent changes (CECs) of both present and future age groups after an energy price shock in period 1. In comparison with Fig.4, our results remain qualitatively unaffected. However, the welfare losses are somewhat more pronounced among younger and future generations. In contrast, the welfare losses of older generations are much less pronounced and young retirees can even achieve small welfare gains. These cohorts benefit from stronger increases of real interest rates after an energy price shock, in particular in Cases 2 and 3 with debt financing and labor income taxes, respectively. A.2 Robustness check ‑ shock persistence This section presents a robustness check that studies the effects of a more persistent price shock on our welfare results by setting 𝜌=0.75 . Figure 8 shows that a higher persistence does not qualitatively affect our results. However, as expected for such a scenario, price shocks are much more detrimental for current and future cohorts. Acknowledgement We are grateful to the editor Ronald B. Davies and one anonymous referee for very helpful comments. Johannes Huber is thankful to the Deutsche Forschungsgemeinschaft (DFG) for financial support (project number 465135565, ‘Models of Imperfect Rationality and Redistribution in the Context of Retirement’). Funding Open Access funding enabled and organized by Projekt DEAL. Declarations Conflict of interest No funding was received for conducting this study. The authors have no relevant financial or non-financial interests to disclose. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. 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