Effects of long-term subsidies elimination of energy carriers, oil, gas and electricity on the level of production and inflation in Iran

Iran as a developing and growing country and the vast resources of energy and large oil and gas reservoirs, is among the countries with the growth pattern of the pressure on natural resources. Therefore plan to consume of energy is very important and must be done carefully. It is clear that to accomplish this, must have accurate knowledge of the relationship between energy consumption and production. This paper investigates the effect of long term subsidies elimination of energy carriers oil, gas and electricity on the production level and inflation in the period 1352-1387 with use of Vector Error Correction Model (VECM) in Iran.The results of Johansson test indicate that there are 3 long-term relationship in the 95% significant level and 2 in the 99% significant level between variables. According to the impulse response analysis, removal of energy carriers subsidies cause to reduced consumption of these carriers in the short, medium and long term, thus it reducing GDP in the short, medium and long term. With removal of energy carriers subsidies, price of these carriers are increased in short, medium and long term, and this price increase, cause to reduce consumption of energy carriers too. Hence government should develop optimal pattern of consumption of all carriers in all sections and take additional tax of consumption, who those don’t observe this pattern.