An analysis of energy price reform: a CGE approach

Abstract

Abstract This paper identifies two types of implicit and explicit energy subsidies in Iran as an oil‐producing country. Using a computable general equilibrium model, we study the impacts of reducing implicit and explicit energy subsidies, which entails a huge increase in domestic energy prices. The model is based on a Modified Micro Consistent Matrix (prepared by the authors for the Ministry of Energy in Iran), which includes implicit subsidies and sector‐specific capital. The model consists of 36 commodity goods and 18 production activities. Our findings suggest that, except for energy and services, overall economic activity declines and the consumer faces a lower level of welfare after subsidy reduction. Energy exports would increase and non‐energy exports decline. Domestic energy demand by households and producers would decline as well. On the demand side, the results show a crowding out effect on public goods and services.