Impacts of Energy Price Increase and Cash Subsidy Payments on Energy Demand

Energy demand is mainly a function of own price, price of substitute energies, activity level of sectors, cost of materials and labor and capital, cost share of energy, elasticity of substitution parameters and households income. The main purpose of this paper is to measure the changes in energy demand after energy price increase and cash subsidy payment to households. We apply a Computable General Equilibrium (CGE) model of Iran as a small open economy. The model is specialized in modeling energy market in Iran. We consider 7 energy goods; the discriminatory energy prices are considered between sectors; and energy markets are modeled to show how government controls the prices. The model is calibrated based on Energy Micro Consistent Matrix (EMCM) of Ministry of Energy. We found that Chemical Industry and Transportation Services face the highest reduction in sectoral energy demand. In the counterfactual scenario the relative price of electricity compared to other energies declines. Therefore electricity demand would increase in long run when compared to short run demand level. But as expected, the gasoil and fuel demand would decrease in long run.