Impact Analysis of Energy Price Reform and Cash Subsidy Payment in Iran: CGE Approach

This paper studies the impacts of domestic energy price increase along with cash subsidy payment to households and also to production sectors. We applied the MOF_CGE (Ministry of Finance_Computable General Equilibrium Model) which considers transport and trade margins and introduces a modified Armington aggregator for foreign transactions. The data is based on the 2001 social accounting matrix which includes energy carriers. We assume two policy scenarios for price increase and two scenarios for cash subsidy payment. The energy prices increase up to FOB price in one scenario and to the 75% of FOB in another. The government pays 50% of the policy revenue to households in one scenario and 60% in another with 30% to production sectors in both. We found that increasing the household share from 50% to 60% will compensate half of welfare reduction. The results show that in short run the welfare and production decline but imports and exports increase. Comparing with those studies with no redistribution consideration, we found that the cash payment policy compensates the welfare and productivity reduction to some extent.