Policy Paper 6
Low domestic prices for fossil energy are part of the social contract in Iran. All layers of society and the economy are used to enjoy the benefits of abundant and cheap energy, what induces wasteful consumption and ever-increasing energy intensity. The government artificially sustains the low levels of energy prices and ignores the opportunity costs of energy. Nonetheless, increasing energy prices in Iran is inevitable to reduce energy intensity and to achieve Iran’s social, economic and environmental goals.
Policymakers face the challenge of raising energy prices, while at the same time giving firms and households the information and time to adjust to the changing economic conditions. This paper addresses this challenge by suggesting an instrument borrowed from monetary policy: “Forward Guidance”.
Forward guidance is a communication tool used by central banks to provide information about the future path of monetary policy. Transferring its logic to energy price reforms, forward guidance serves as a golden middle-way: communicating future price changes will prepare firms and households for price increases and enable them to mitigate the negative effects since they have time to adjust business plans and household consumption levels.
Link to Policy Paper [2.4 MB | en]