Impact of energy price reform on energy intensity in Iranian manufacturing industries

Abstract

We study the impact of energy price changes on energy consumption intensity and its substitution effect on consumption intensity of labor, capital and raw materials, through the decomposition of input consumption intensity in Iranian manufacturing industries from 2006 to 2018. Using translog cost function, we find that increase in energy prices has a negative effect on energy intensity of all manufacturing industries and thus increasing energy prices as a strategy to reduce energy intensity is effective, although its effect on different manufacturing industries are not the same. Moreover, we find that the effect of energy price changes on consumption intensity of capital and raw material is small, while its effect on consumption intensity of energy and labor is large. An overall assessment of the change in energy prices on the input consumption intensity shows that an increase in energy prices improves not only energy efficiency but also the efficiency of labor and capital consumption. However, relative performance of energy price reform in Iran depends on general economic conditions, as well as the process of price changes.