An Environmental & Economic Analysis for Reducing Energy Subsidies

Abstract

This paper estimates the trend of total energy subsidies from year 2003 (that is 16.68% of GDP) and running a model, predicts that energy subsidies will reach to 20% of GDP by 2019 if subsidies continue. Also environmental damage costs of energy consumption have been entered the model (Environmental Cost-Benefit Analysis Model: ECBA Model) in addition to the vast amounts of subsidies. So damages caused by energy consumption as air pollution and Green House Gases have been considered as an attempt to internalize energy cycle externalities. Using an ECBA Model which considers changes in level of social welfare and environmental quality as probable benefits, the Benefit/Cost ratio for running price reform policy under two scenarios has been analyzed and calculated. The analysis shows that reducing energy subsidies for each energy form is considerably beneficial. Apart from the environmental benefits, the increase in prices can be a base for a redistribution of income within the poor deciles of economy and this policy would increase the government revenue and economic growth in long-term.