Economic and environmental analyses of Iranian energy subsidy reform using Computable General Equilibrium (CGE) model

Abstract This study analyzes economic and environmental implications of the elimination of energy subsidies in Iran applying a CGE model. The subsidy reform was investigated under two scenarios namely, redistributing total subsidy revenue back to households (complete payment) and allocating it to households and producers (half payment) proportionally (50% and 30% respectively). The results show that elimination of energy subsidies via resource reallocation causes a fall in GDP relative to the initial equilibrium by at least 15%, while the general level of prices (CPI) tends to increase by more than 10% compared to the initial level. However, redistributing a part of the subsidies revenue back to households increases overall welfare. Eliminating energy subsidies induces emission reduction of most of the pollutants. Considering the economic, welfare and environmental aspects, half payment scenario is preferred compared to complete payment option.