How manufacturing firms respond to energy subsidy reforms? An impact assessment of the Iranian Energy Subsidy Reform

Abstract

Energy prices increased several folds due to the 2010 Iranian Energy Subsidy Reform. This study assesses the impact of the reform on the performance of the manufacturing sector using a detailed micro-panel dataset at the 4-digit ISIC level for the period 2009 to 2013. Since the reform universally affected all firms, the analysis relies on a quasi-experimental framework implementing first an explorative before-after design with structural fixed-effects and second a difference-in-difference analysis exploiting the energy-sensitivity of the studied firm-groups. The subsidy reform reduced output and value-added by 3 and 7%, respectively. Profits decreased by nearly 9%. Heterogeneity analyses show that the manufacturing sector has been affected through three channels: increasing costs of direct energy inputs, pass-through costs for inputs from upstream firms and an energy-price-induced demand contraction. We conclude that for successfully implementing an energy subsidy reform while maintaining growth in the manufacturing sector, direct and indirect costs have to be considered. Importantly, the results can inform expected energy reforms to mitigate climate change.