The Inefficiency of Energy Pricing Policy: The Case of Iran

Abstract

High-energy consumption leads to a serious threat to climate change and human health, while contributing to environmental pollution. Concerns about climate change, air quality, and water quality and availability have made Iranian people and government increasingly aware of the need to reconcile economic and environmental objectives. Government energy pricing policies have multiple and often conflicting objectives: economic efficiency, government revenues, maintenance or improvement of income distribution, promotion of particular sectors demand management and security of supply. Increasing energy efficiency is the quickest and least costly way of addressing energy security and the environmental as well as economic challenge. According to statistics, since 1988, the Iranian government has increased the price of energy by 23.2% annually to reduce the consumption of energy (Dargahi and Ghorbannejad in Iran Energy Econ 1(4):67–100, 2012). But in this period, the growth rate of energy intensity was about 1.6%. In Iranian economy, people know, in advance, to what extent the government would increase the energy price. People expect an increase in the price of all products due to the increase in energy price. In this paper, we study such a behavior which has led to inefficiency of the government policy. Consumer subsidies are quantified utilizing the price-gap approach that compares end-user prices and reference prices that would predominate in competitive markets where no subsidies are provided. An input–output analysis is undertaken to investigate impacts in the short term. We modify the conventional input–output price model to consider the effect of the increase in energy prices.