Industrial firm and household responses to energy price changes: evidence from energy subsidy reform in Iran
The rise in global average temperature due to greenhouse gas emissions is a serious international concern. Yet, one of the important barriers for clean energy transition in the world is the existence of energy subsidies. Consequently, examining how industrial and residential sectors in countries with heavily subsidized energy markets, like Iran, would respond to energy price reforms can shed light on developing more effective energy policies. In the first chapter, I discuss a broad range of related issues including the political economy behind the existence of high energy subsidies and the Targeted Subsidies Reform (TSF) conducted by Iran in 2010. Further, I review some of the most important studies on modelling energy demands. In the second chapter, I use a unique firm-level panel (2005-2011) and a translog cost system and estimate both price elasticities of demand and Morishima elasticities of substitution for Iranian manufacturing firms. The price elasticities show that labor is slightly more sensitive than capital to energy price reforms, but energy is more elastic than both. In addition, Morishima elasticities indicate the substitution of capital for energy, labor for energy, and capital for labor dominate the opposite directions. Finally, it is seen that firms exhibit heterogeneity in adjusting to energy price reforms according to labor structure and energy intensity. In the third chapter, I apply an Exact Affine Stone Index (EASI) implicit Marshallian demand system on Iranian Household Expenditure and Income Survey (HEIS) data on 10 commodity groups. I estimate the parameters of interest (elasticities, Engle curves, and welfare index) for 2008-2010 (before the subsidy reform) and 2011-2014 (after the subsidy reform). As household income level increases, the nature of energy changes from being normal to inferior. Further, the estimated nonlinear Engel curves for energy, furnishing, communication, and clothing exhibit the largest change between the two time periods. Finally, a simulated 90% increase in energy prices is estimated to be associated with an average of 4.7% rise in the cost of living before the reform and 2.6% afterwards.