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Energy price fluctuations affect the level of economic activity through their effects on bank balance sheets, credit spreads, and financial markets. In this paper we use the consumer surplus approach to investigate the welfare costs of energy price increases. The welfare cost is defined as the change in the area under the energy demand curve corresponding to the change in the consumption of the energy good in question following a change in its price. We use flexible energy demand functions, based on the dual approach to demand system generation, explicitly considering the demand interactions among the energy goods. We find that the energy demand functions are stable and predictable and suggest less substitutable energy demand. They indicate that green policies based on price policies may not be effective in reducing non-green energy usage. We also find that the welfare cost of energy inflation is small and raise questions about government income and price support measures designed to lower the price of energy. We argue that they reduce the incentives to reduce the use of fossil-based energy, lead to larger budget deficits, and constrain the ability of central banks to hit their inflation targets. JEL classification: C22, C32, C51, E41, E42, E52.