Cash instead of subsidy: Assessing the impact of the iranian energy subsidy reform on households

The 2010 energy subsidy reform in Iran is a unique case of redistributive policy as the savings from the subsidy cut have been redirected to households as unconditional, universal cash transfer. While theoretically, the cash transfer was large enough to keep the utility of the average household at the initial level, this study explores the practical impacts of the reform. We analyze panel data on income/expenditure of Iranian households for the period 2010–2012. Since this is a universal reform, we exploit the time dimension and the intensity of energy consumption in the identification and assess the robustness of the results with sub-sample and placebo analyses. Overall, the energy subsidy reform caused a significant shrinkage (7%–9%) in households' real consumption. The cash transfer failed to fully compensate the negative impact of the subsidy removal. The impact is heterogeneous, varying along the intensity of energy consumption, geographical location, income and the share of the cash transfer in a household's income. A non-negligible policy accomplishment of the reform is that within its first two years poverty was mitigated in absolute and relative terms and income inequality slightly improved. Nevertheless, the government is under pressure because inflation counteracts these gains.