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Kuwait's energy subsidy reduction: Examining economic and CO2 emission effects with or without compensation

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  • Gelan, Ayele U.
Abstract
This paper examined economy-wide impacts of reducing energy subsidy in Kuwait. A social accounting matrix (SAM) was constructed and a computable general equilibrium (CGE) model was developed. The CGE model was used to simulate separate and combined effects of a 25% reduction of subsidy to three energy products: natural gas, oil, and electricity. This policy shock was applied to the model in two scenarios. In each round, the subsidy reductions were applied to each energy product separately in turn and then finally simultaneously to all energy products. In the first scenario, subsidy reductions were applied and results were compared with the baseline scenario given in the SAM. This yielded adverse effects across a range of endogenous variables. It leads to large energy price increases, as high as 255% (for electricity). Gross Domestic Product (GDP) marginally declined, by 0.28%. In scenario 2, the subsidy reduction was accompanied with cash transfers to energy users a compensation for welfare loss, the amount of transfer was equivalent to the sum of the amount of subsidy reductions. The results indicated that such transfers would reduce the adverse effects of the policy reform. The effects on GDP was reversed, it rose by 1.01%. The price effect was slightly lower, electricity price rose by 245%. Finally, sensitivity of the model results was examined by varying the elasticity of the substitution of composite energy and capital in production. Greater possibility of substitution seems to cause subsidy reform to have much larger positive (or smaller adverse) economy-wide effects. The simulation experiments suggest that subsidy reform would need to be accompanied by demand side stimulus or supply side initiatives to encourage energy conservation.

Suggested Citation

  • Gelan, Ayele U., 2018. "Kuwait's energy subsidy reduction: Examining economic and CO2 emission effects with or without compensation," Energy Economics, Elsevier, vol. 71(C), pages 186-200.
    • Handle: RePEc:eee:eneeco:v:71:y:2018:i:c:p:186-200
    DOI: 10.1016/j.eneco.2018.02.014
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    3. Gelan, Ayele & Al-Shamali, Shaima & Awadh, Wafa, 2023. "Economic and welfare effects of immigration policy: Lessons from the experience of Kuwait," Journal of Policy Modeling, Elsevier, vol. 45(5), pages 1015-1035.
    4. Kyungwon Park & Yoon Lee & Joon Han, 2021. "Economic Perspective on Discontinuing Fossil Fuel Subsidies and Moving toward a Low-Carbon Society," Sustainability, MDPI, vol. 13(3), pages 1-17, January.
    5. Marc Ringel, 2021. "Smart City Design Differences: Insights from Decision-Makers in Germany and the Middle East/North-Africa Region," Sustainability, MDPI, vol. 13(4), pages 1-23, February.
    6. Alireza Ghadertootoonchi & Maryam Fani & Masoume Bararzadeh, 2020. "The effect of energy subsidies on the sustainability of economy, society and environment: A case study of Iran," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2020(2), pages 93-129.
    7. Bader Alshuraiaan, 2021. "Renewable Energy Technologies for Energy Efficient Buildings: The Case of Kuwait," Energies, MDPI, vol. 14(15), pages 1-16, July.
    8. Fathi, Fatemeh & Bakhshoodeh, Mohammad, 2021. "Economic and environmental strategies against targeting energy subsidy in Iranian meat market: A game theory approach," Energy Policy, Elsevier, vol. 150(C).
    9. Sinha, Avik & Shah, Muhammad Ibrahim & Sengupta, Tuhin & Jiao, Zhilun, 2020. "Analyzing Technology-Emissions Association in Top-10 Polluted MENA Countries: How to Ascertain Sustainable Development by Quantile Modeling Approach," MPRA Paper 100253, University Library of Munich, Germany, revised 2020.
    10. Alfredo Marvão Pereira & Rui Marvão Pereira, 2023. "Energy Taxation Reform with an Environmental Focus in Portugal," Energies, MDPI, vol. 16(3), pages 1-23, January.
    11. Li, Zhi & Zhao, Qing & Guo, Hong & Huang, Ruting, 2024. "Impact of fossil fuel subsidies on energy-saving technological change in China," Energy, Elsevier, vol. 286(C).
    12. Arzaghi, Mohammad & Squalli, Jay, 2023. "The environmental impact of fossil fuel subsidy policies," Energy Economics, Elsevier, vol. 126(C).
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    14. Gelan, Ayele U. & Atkinson, Giles, 2022. "Climate change and food security: assessing the prospect for Kuwait using an economy-wide model," LSE Research Online Documents on Economics 124122, London School of Economics and Political Science, LSE Library.
    15. Aiman Albatayneh & Adel Juaidi & Francisco Manzano-Agugliaro, 2023. "The Negative Impact of Electrical Energy Subsidies on the Energy Consumption—Case Study from Jordan," Energies, MDPI, vol. 16(2), pages 1-17, January.
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    17. Kheiravar, Khaled H, 2019. "Economic and Econometric Analyses of the World Petroleum Industry, Energy Subsidies, and Air Pollution," Institute of Transportation Studies, Working Paper Series qt3gj151w9, Institute of Transportation Studies, UC Davis.

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    More about this item

    Keywords

    Energy; Subsidy; Impacts; Economy; Environment; Kuwait; SAM; CGE;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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