A simulation-based optimization scheme for phase-out of natural gas subsidies considering welfare and economic measures

Abstract

Energy subsidies are granted by many governments to alleviate energy poverty, support domestic industries, promote economic development, and improve welfare levels. These energy subsidies can lead to overconsumption of energy and an increase in CO2 emissions. Hence, it is crucial to continuously investigate the overall benefits of subsidies compared to their costs and plan for their phase-out if required. The gradual phase-out and the selection of optimal period over which to phase-out subsidies are crucial in minimizing possible adverse impacts. A simulation-based optimization model is developed to find the optimal period for natural gas subsidies removal from multiple consumption sectors. Implementing the model on the case study of Iran illustrates that if the reserved fund saved from subsidies removal is invested in the natural gas industry to promote export, and a part of it is allocated to only vulnerable residential consumers and strategic industries, the aggregate economic, environmental and welfare measures improve significantly. Another finding is that the optimal phase-out periods vary for different sectors and the industrial sector needs a longer phase-out period. The presented model quantifies the advantages of allocating subsidies only to targeted groups instead of subsidies on prices, and analyzes the tradeoffs between economic and welfare criteria.