An Assessment of Stabilization Policies in Conjunction with Energy Price Reform in Iran: Insights from a Dynamic Computable General Equilibrium (DCGE) Model

Document Type : Research Paper

Authors

Department of Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

Abstract

Pricing energy below its full economic cost creates allocative inefficiencies and undermines the fiscal sustainability of the energy sector, making energy price reform a crucial policy priority in many economies. However, such reforms can generate adverse short-run effects on economic activity and household welfare, highlighting the need for well-targeted stabilization measures. This study evaluates alternative complementary policies implemented alongside electricity price reform in Iran using a Dynamic Computable General Equilibrium (DCGE) model. In the baseline scenario, electricity prices increase by 18% annually. Five tax-based stabilization policies are then assessed, covering taxes on labor income, capital income, factor demand, and output in the industrial and agricultural sectors. The results indicate that higher electricity prices contract output in the short run, particularly in energy-intensive sectors such as iron and steel, information technology (IT), and electricity. In contrast, some fossil fuel-dependent sectors benefit from substitution effects, while several sectors expand in the long run; nevertheless, adverse effects persist in selected modern industries. None of the examined fiscal policies fully offsets the negative effects of the electricity price shock. However, eliminating production taxes in agriculture and industry (S15) performs relatively better by partially mitigating output losses in key sectors. Moreover, S15 and S12 outperform the benchmark in reducing inflationary pressures and supporting GDP, although they reduce household consumption and welfare. Overall, the findings demonstrate that effective compensation requires policies tailored to the structural characteristics of the economy and appropriate sector-specific adjustment mechanisms over time.

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History

  • Receive Date: 17 June 2026
  • Revise Date: 09 September 2026
  • Accept Date: 09 September 2026

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