Household Demand Responses to Carbon Pricing by Energy Poverty Status: Evidence from Belgium

This paper develops a behavioral microsimulation framework to analyse how carbon pricing affects energy vulnerable households in Belgium. We focus on two groups: energy poor (EP) households, who devote a large share of their income to energy, and hidden energy poor (hEP) households, who spend little on energy as they severely restrict their consumption. Using eleven cross-sections of the Belgian Household Budget Survey (2003–2016), we first document structural differences between EP and hEP households with logistic regressions. We then estimate a demographically specified Quadratic Almost Ideal Demand System (Banks et al., 1997) and develop a two-stage residual inclusion procedure to address the endogeneity of energy poverty statuses. The resulting price and income elasticities by vulnerability profiles are used to simulate responses and welfare impacts of a carbon price on heating and transport fuels, consistent with the forthcoming EU ETS 2. Behavioral adjustments are highly heterogeneous: lower-income and energy vulnerable households show higher fuel price elasticities than wealthier groups, with hEP households responding most strongly to price increases. Consequently, EP households face substantial carbon costs but comparatively smaller welfare losses, whereas hEP households suffer disproportionately large welfare losses despite their low expenditure exposure. These results reveal horizontal equity concerns that are invisible in income-based metrics alone and highlight the need to integrate detailed energy vulnerability profiles into carbon pricing design.