Energy Carrier Subsidies

Demand-side energy subsidies are very common in many developing countries. Petroleum product subsidies are very large in certain cases, especially in some major oil‐exporting countries, like Iran. These subsidies that result from underpricing, causes excessive losses.

While subsidies can have a few benefits in terms of support for the poor, they also carry costs. These include fiscal costs and effects on the balance of payments, growth, and externalities. In particular, in economies with large energy consumption, extra demand for energy induced by the lower consumer prices can work against energy security and have global effects through increased GHG emissions from the combustion of fossil fuels and possibly higher prices for widely traded forms of energy. It is important that governments design their subsidy scheme so as to achieve the desired benefits with the lowest overall costs.

The Challenge: In Iran, the volume of energy subsidies is very high. In addition to all the problems caused by the high volume of energy subsidies, the lack of optimal supply of resources for these subsidies has led to budget deficits and inflation. What is the optimal way to target energy subsidies in Iran?