Towards agricultural demand for the main energy carriers in Iran: Application of linear approximate almost ideal demand system (LA-AIDS) analysis

Abstract

Due to the necessity of cognizance of demand for the various forms of energy in the agricultural sector in Iran’s economy and considering the effects of price liberalization policies on forms of energy, analysis of the main energy carriers’ demand is very important. This study used the LA-AIDS approach and ISUR technique to estimate the demand and elasticities for various energy carriers. Also, the welfare effects of increasing energy prices under the 20, 40, 60, 80 and 100% scenarios are evaluated using the compensating variation (CV). The uncompensated and compensated own-price demand elasticities for oil products, electricity and, natural gas carriers were −1.21, −0.85 and −0.55, and −0.98, −0.32 and −0.30, respectively, confirming the demand theory. The cross-price elasticities showed that electricity has substitutability and complementarity relationship with oil products and natural gas, respectively, while the relationship between natural gas and oil products is a substitutability relationship. The income elasticities of energy usages estimated to be 0.64, 1.2 and 1.05. Agricultural producers’ welfare would experience a further decrease in oil products and electricity price liberalization, though the welfare impacts of natural gas are trivial. As price elasticity is different in the agricultural sector, price policies, then price liberalization and omitting energy subsidy should be applied based on the elastic or inelastic of energy carriers. The price policies effectiveness on oil products is more than electricity and natural gas. Given the prevalence of consumption and high price elasticities of oil products and pollutants, rising oil prices can reduce their consumption and environmental pollution.