1. An analysis of Energy Price Reform: A CGE Approach Davood Manzoor, Asghar Shahmoradi, Iman Haqiqi International Energy Workshop, 17-19 June 2009 Venice, Italy

2. Outline of the paper  Implicit energy subsidy in Iran  Short literature review  Data Structure: Modified Micro-consistent Matrix (MCM) with implicit energy subsidies  Model specification  Preliminary results and sensitivity analysis

3. Implicit Energy Subsidy  Energy subsidy is of implicit nature distributed in the form of low energy prices (cheap oil, gas and electricity), as the government sacrifices its monopoly rents out of the ownership of energy resources which can be called “energy specific capital”  The implicit government burden: $32 billion (11 percent of GDP) 2007/08.

4. Implicit Energy Subsidy  Highly regulated energy market and state-owned energy industry  Under-pricing energy carriers in the domestic market, the gap between consumer prices and production costs being subsidized by the government  Rapid growth in energy demand putting pressure on government budget  Low efficiency in energy use and high energy intensities  Restructuring the energy market Toward competition is a necessity

5. Implicit Energy Subsidy Subsidy rates Electricity227% Natural Gas600% Gasoline140% Kerosene809% Gas oil809% Fuel Oil784% LPG2797%

6. Implicit Energy Subsidy  How would the removal of implicit energy subsidies influence the production and consumption patterns and expenditures and households welfares?  This paper develops a CGE model to find some answers for this questions.

7. Short literature review  The pervasive role of energy in the economy and the numerous ways in which energy taxes and subsidies can distort resource allocations implies the necessity of a general equilibrium framework.  Kerkelä(2004 ) analyses a new market-based natural gas and electricity pricing initiative in Russia in a GTAP based CGE model.  Yusuf & Resosudarmo (2007) examined the massive fuel price increase in Indonesia in a CGE framework.

8. Micro Consistent Matrix with implicit subsidy From SAM to Modified MCM

9. Modified Micro-consistent Matrix (MCM)  Since government owns energy resources and sacrifices its monopoly rent to maintain low level domestic energy prices, the IO and SAM tables fail to include this capital endowment of the government.  We include this capital endowment into a Modified Micro-consistent Matrix ( MCM) table constructed for Ministry Of Energy.

10. Expenditures Receipts Activity Commodity FactorsInstitutionsWorld Activity Total sales Exports Commodity Intermediate inputs Final demand Factors Value added Institutions Factor income Inflows World Imports Totals Total costsTotal supply Total factor income Domestic income Foreign Exchange inflow A Typical SNA SAM Indirect taxes and tariffs Transfers And taxes Indirect taxes

11. A modified SAM: MCM non energyenergyrepresentative agentgovernment abreviationsaseragvt Non- energyg+(g,sa)-(g,se)-(g,ra)-(g,gvt) Energyen-(en,sa)+(en,se)-(en,ra)-(en,gvt) Factorsf-(f,sa)-(f,se)+(f,ra)+(f,gvt) tax/subsidytax-(tax, sa)-(tax,se)-(tax, ra)+(tax, gvt)

12. A modified MCM: in export prices non energyenergyrepresentative agentgovernment saseragvt non energy +(g,sa)-(g,se)-(g,ra)-(g,gvt) energy-(en,sa) *px en /pd en +(en,se) +Σ -(en,ra) * px en /pd en -(en,gvt) * px en /pd en factors-(f,sa)-(f,se)+(f,ra)+(f,gvt) tax/ subsidy -(tax,sa)-(tax,se)-(tax, ra)+(tax, gvt) implicit subsidy + Σ(en,sa)*(px en /pd en -1)0+Σ(en,ra)*(px en /pd en -1)+ Σ(en,gvt)* (px en /pd en -1) -Σ specific factor 0-Σ0+Σ Σ= (px en /pd en -1)(Σ(en,sa) + Σ(en,ra) + Σ(en,gvt)) *px stands for export price and pd stands for domestic price.

13. CategoriesSectorsProducts (in joint production) Primary EnergyCrude Oil and Natural Gas Coal Secondary EnergyDownstream oil and gasGasoline Kerosene Gasoil Fuel Oil Liquid Gas Gas Other Refineries Electricity Energy intensive sectorsIron stone Copper Mines Glass producing ManufacturingBrick Cement Plaster Non-Metal Manufacturing Iron and Steel Copper Aluminum Other Metals Machineries and equipments Transport, RailTransport Services, Rail Passenger Transport Services, Rail Cargo Passenger Transport, Road Cargo Transport, Road Transport, Pipe Transport, Sea Transport, Air Transport Supports Non-energy intensive sectorsAgriculture and Animal Husbandry Water Services Less energy intensive manufactures

14. The CGE Model Production, utility and tax Structure

15. Incorporating implicit energy subsidies Implicit subsidy Factor market Representative agent Exchange market Foreigners Other sectorsEnergy sectors Natural resources Implicit subsidy Facto r tax Consumption tax Tariffs or subsidy Intermediate input tax Goods market Investment options Saving

16. Nested CES production structure Sector s Value addedComposite Energy Composite intermediate s=0 σ=η s σ=λ s σ=β s σ=τ Composite Fossil Fuels Intermediate inputs Capital Labor Sector specific capital Joint products Electricity Non-electric Energy inputs σ=δ s

17. A modified Armington aggregator Export Armington Aggregator Import Domestic production s=1 Domestic consumption t=3 Foreign exchange Representative agent To differentiate between import price, export price, producer price and consumer price of a commodity we use a A modified Armington aggregator

18. Nested CES consumption structure Utility SavingComposite Energy Composite non- energy s=0 σ=η h σ=β h Composite Fossil Fuels Intermediate inputs Electricity Non-electric Energy inputs σ=δ h

19. Nested CES household welfare

20. Zero-profit condition in each sector

21. Preliminary Results and sensitivity analysis

22. Assumed substitution elasticities SC1SC2SC3SC4SC5 Substitution elasticity between non- energy intermediate goods β0.0 0.5 0.0 Substitution elasticity between electricity and fossil fuels composite θ el 1.00.0 1.0 Transformation elasticity between export and domestic supply τrτr 3.0 1.0

23. Output effect Activities Percent of change in activity level Transport, Sea-24.46 Transport, Pipe-14.85 Ironstone-14.62 Coal-13.60 Glass-12.33 Transport, Air-11.87 Copper Mines-11.79 Manufacturing-11.67 Electricity-10.86 Agriculture and Animal Husbandry -9.54 Passenger Transport, Road-9.49 Water-8.00 Transport, Rail-7.35 Cargo Transport, Road-5.42 Energy Industry-3.91 Crude Oil and Natural Gas-1.07 Transport Supports0.41 Services and less energy intensives 5.52 Fall in activity levels due to rise in input prices Shifts toward less energy intensive sectors

24. Price effects Percent of change in prices Transport Services, Pipe108Transport Services, Road Cargo40 Transport Services, Sea98Agricultural Related Goods39 Transport Services, Rail Passenger84Coal38 Plaster71Aluminum38 Cement68Iron and Steel37 Brick62Iron Stone36 Non-Metal Manufacturing54Other Services36 Copper54Transport Support Services32 Water53Agriculture and Animal30 Transport Services, Air53Copper Stone30 Glass Products51Machineries29 Other Mine50Crude Oil23 Other Metals48Natural Gas20

25. Initial price increase Final price increase (equilibrium) Electricity227%250% Gas600%610% Gasoline140%162% Kerosene809%815% Gas oil809%821% fuel Oil784% LPG2797%2808% Real energy cost in production will increase due to subsidy cut. As energy sectors are using energy inputs themselves, therefore, cost of energy production will increase Change in energy Prices

26. Welfare effect Percent of change in welfare level Rural household welfare-12.88 Urban household welfare-12.34 Welfare index-12.47 Consumer price index40.79 With no compensation household welfare will decrease due to price increase A very complex chain of income effects and substitution effects will happen on both energy and non-energy commodities

27. SC1SC2SC3SC4SC5 Transport, Sea -24.46-23.94-28.40-29.18-24.45 Transport, Pipe -14.85-14.81-19.97-20.05-15.06 Ironstone -14.62-14.59-16.46-16.50-14.43 Coal -13.60-13.59-16.30-16.34-13.43 Glass -12.33-12.35-16.21-16.23-12.22 Transport, Air -11.87-12.11-16.85-16.21-11.80 Copper Mines -11.79-11.80-12.01-12.07-11.63 Manufacturing -11.67-11.68-12.93-12.96-11.50 Electricity -10.86-5.90-6.30-11.51-10.83 Agriculture and Animal Husbandry -9.54-9.58-8.91-8.89-9.42 Passenger Transport, Road -9.49-9.61-12.39-12.17-9.35 Water -8.00-8.08-13.02-13.00-7.88 Transport, Rail -7.35-7.26-12.27-12.38-7.41 Cargo Transport, Road -5.42-5.46-6.57-6.51-5.37 Energy Industry -3.91-5.49-5.53-3.85-3.83 Crude Oil and Natural Gas -1.07-1.08-0.59-0.57-1.53 Transport Supports 0.410.22-0.66-0.310.36 Services and less energy intensives 5.52 5.79 5.56 Output effects under different elasticity of substitutions

28. Price effects under different elasticity of substitutions SC1SC2SC3SC4SC5 Transport Services, Pipe108113109103104 Transport Services, Sea98101 97 Transport Services, Rail Passenger8489827686 Plaster7176716673 Cement6872716569 Brick6266676163 Non-Metal Manufacturing5458615655 Copper5458645962 Water5357635755 Transport Services, Air5359645754 Glass Products5155605552 Other Mine5054585352 Other Metals4852575249 Transport Services, Rail Cargo4347555043 Transport Services, Road Passenger4347534844 Transport Services, Road Cargo4044504541 Agricultural Related Goods3943484440 Coal3842474239 Aluminum3842494440 Iron and Steel3740474238 Iron Stone3639454036 Other Services3640443937 Transport Support Services3236413633 Agriculture and Animal3033383430 Copper Stone3033383431 Machineries2933383330 Crude Oil2326312725 Natural Gas2021292621 Other Refineries1923302520

29. Welfare effects under different elasticity of substitutions SC1SC2SC3SC4SC5 Rural household welfare -12.88-13.01-12.98-12.84-12.66 Urban household welfare -12.34-12.47-12.39-12.26-12.21 Welfare index -12.47-12.60-12.54-12.41-12.32 Consumer price index 76.0779.4284.1079.7977.01

30. Energy cost share in input goods cost (current prices) Energy cost to output Energy cost to input goods Electricity Gas Gasoline Kerosene Gasoil fuel Oil Liquid Gas Agriculture and Animal Husbandry 4%16%4%0%1% 8%0%1% Coal16%47%36%1% 7%0%1% Crude Oil and Natural Gas1%40%29%3%1%0%7%0% Ironstone17%55%49%0%1%0%4%2%0% Copper Mines8%40%26%0% 9%4%0% Energy Industry1%6% 0% Glass35%45%12%19%0% 1%7%5% Manufacturing16%26%12%7%0% 2%4%1% Electricity16%86%0%67%0% 3%16%0% Water25%56%25%3% 0%20%0%6% Transport Rail14%49%10%0%1%0%34%3%0% Passenger Transport Road20%43%1%0%18%0%24%0% Cargo Transport Road15%40%0% 13%0%27%0% Transport Pipe66%78%32%12%0%6%7%20%0% Transport Sea28%75%0% 1%74%0% Transport Air33%39%1%0%37%0% Transport Supports10%34%17%3%2%0%9%0%2% Services6%29%13%6%2%1%4%1%2%

31. Thank you for your attention