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An analysis of Energy Price Reform: A CGE Approach

An analysis of Energy Price Reform: A CGE Approach. Davood Manzoor , Asghar Shahmoradi , Iman Haqiqi International Energy Workshop, 17-19 June 2009 Venice, Italy. Outline of the paper. Implicit energy subsidy in Iran Short literature review

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An analysis of Energy Price Reform: A CGE Approach

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  1. An analysis of Energy Price Reform: A CGE Approach DavoodManzoor, AsgharShahmoradi, ImanHaqiqi 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

  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. From SAM to Modified MCM Micro Consistent Matrixwith implicit subsidy

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

  11. A modified SAM: MCM

  12. A modified MCM: in export prices Σ= (pxen/pden -1)(Σ(en,sa) + Σ(en,ra) + Σ(en,gvt)) *px stands for export price and pd stands for domestic price.

  13. Production, utility and tax Structure The CGE Model

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

  15. Nested CES production structure Joint products σ=τ Sector s s=0 Composite Energy Value added Composite intermediate σ=ηs σ=λs Electricity σ=βs Capital Composite Fossil Fuels Labor Sector specific capital Intermediate inputs σ=δs Non-electric Energy inputs

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

  17. Nested CES consumption structure Utility s=0 Composite Energy Saving Composite non-energy σ=ηh Electricity σ=βh Composite Fossil Fuels Intermediate inputs σ=δh Non-electric Energy inputs

  18. Nested CES household welfare

  19. Zero-profit condition in each sector

  20. Preliminary Results and sensitivity analysis

  21. Assumed substitution elasticities

  22. Output effect Fall in activity levels due to rise in input prices Shifts toward less energy intensive sectors

  23. Price effects

  24. Change in energy Prices 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

  25. Welfare effect 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

  26. Output effects under different elasticity of substitutions

  27. Price effects under different elasticity of substitutions

  28. Welfare effects under different elasticity of substitutions

  29. Thank you for your attention

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