Energy prices increased several folds due to the 2010 Iranian Energy Subsidy Reform. This study assesses the impact of the reform on the performance of manufacturing firms using a detailed micro-panel dataset at the 4-digit ISIC level for the period 2009 to 2013. Since the reform universally affected all firms, the analysis relies on a quasi-experimental framework implementing first an explorative before-after design with structural fixed-effects and second a difference-in-difference analysis exploiting energy-sensitivity. The subsidy removal caused a shrinkage in output and manufacturing value-added of at least 3 and 7%, respectively. This results in a deterioration of profits by nearly 9%. Manufacturing firms have been affected through three channels: increasing costs of direct energy inputs, pass-through costs for inputs from upstream firms and an energy-price-induced demand contraction. To successfully implement an energy subsidy reform while maintaining growth in the manufacturing sector, not only the direct but also the indirect, pass-through effects have to be considered since capital or technology-led responses to mitigate negative repercussions in the short-run are unlikely at large scale. The results can inform price reforms that aim to mitigate climate change.
|Series||ISS working papers. General series|
- ISS Working Paper-General Series