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.