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An evaluation of the welfare effects of reducing energy subsides in Iran

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  • Khalili Araghi, Mansor
  • Barkhordari, Sajjad

Abstract

Energy prices in Iran have traditionally been heavily subsidized by the Government, and as a result, energy consumption per capita in Iran is close to the European Union level. The welfare effects of efforts to raise energy prices closer to world levels are examined in this paper. Reform of energy prices is an important element of the “Economic Reform Plan” (2010–2014) for Iran. We first analyze the relationship between energy consumption, energy and non-energy prices by estimating the household expenditure function. The results show that a higher energy prices will decrease energy consumption by Iranian households. Second, we evaluate the impact of a rise of energy prices on the household welfare by measuring the compensating variation (CV) in five steps with a compensating payment. The results show that Iranian household welfare will increase with a 100% or 200% rise in energy prices, if the government pays 20%, 30% or 50% of the $20 billion income resulting from removing energy subsidies. While, in contrast, Iranian household welfare will decrease with a 400% and 500% rise in energy prices, if the government payment is 20% or 30% of $20 billion income.

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  • Khalili Araghi, Mansor & Barkhordari, Sajjad, 2012. "An evaluation of the welfare effects of reducing energy subsides in Iran," Energy Policy, Elsevier, vol. 47(C), pages 398-404.
    • Handle: RePEc:eee:enepol:v:47:y:2012:i:c:p:398-404
    DOI: 10.1016/j.enpol.2012.05.007
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    10. Ramírez, José Carlos & Ortiz-Arango, Francisco & Rosellón, Juan, 2021. "Impact of Mexico's energy reform on consumer welfare," Utilities Policy, Elsevier, vol. 70(C).
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    13. Mirshojaeian Hosseini , Hossein & Majed , Vahid & Kaneko , Shinji, 2014. "The Inflationary Impact of Energy Subsidy Reform in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(2), pages 64-85, October.
    14. Hussain Ali Bekhet & Lee Lian Ivy-Yap, 2014. "Highlighting Energy Policies and Strategies for the Residential Sector in Malaysia," International Journal of Energy Economics and Policy, Econjournals, vol. 4(3), pages 448-456.
    15. Gelan, Ayele U., 2018. "Kuwait's energy subsidy reduction: Examining economic and CO2 emission effects with or without compensation," Energy Economics, Elsevier, vol. 71(C), pages 186-200.
    16. Aryanpur, Vahid & Fattahi, Mahshid & Mamipour, Siab & Ghahremani, Mahsa & Gallachóir, Brian Ó & Bazilian, Morgan D. & Glynn, James, 2022. "How energy subsidy reform can drive the Iranian power sector towards a low-carbon future," Energy Policy, Elsevier, vol. 169(C).
    17. Aryanpur, V. & Ghahremani, M. & Mamipour, S. & Fattahi, M. & Ó Gallachóir, B. & Bazilian, M.D. & Glynn, J., 2022. "Ex-post analysis of energy subsidy removal through integrated energy systems modelling," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).
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