Inter-fuel substitution and decomposition analysis of energy intensity: Empirical evidence from Iran

Iran economy has high energy intensity and CO2 emission compared to other peer countries. This study adopts the Logarithmic Mean Divisia Index (LMDI-I) method to decompose the total energy intensity changes Delta(E /GDP) of the Iranian economy by considering inter-fuel substitution impacts of the economic sectors over the period of 2004-2017. Results show that the total energy intensity of Iran's economy increased by 43.59 barrels of oil equivalent to IRR 1000 (Iranian Rial at a constant price in 2011). Furthermore, results indicate that while intersector structural change, per capita GDP impact, and sectoral energy intensity impact lead to an increase in total energy intensity, household energy intensity impact leads to a decrease in total energy intensity during the research period. Extended findings from decomposition analysis demonstrate that household, services, and agriculture sectors have decreasing impact, while industry, power plant and transportation sectors have increasing impact on Delta(E forward slash GDP). In addition, removing the consumption of kerosene in household sector and reducing its share in most economic sectors has caused decline, whereas high consumption of fuel oil, gasoline and gasoil compared to other energy carriers, has led to an increase in total energy intensity. As such, it is concluded that substituting various types of fuels in economic sectors couldn't reduce energy intensity. Besides, serious revisions are needed in the energy policies and energy efficiency programs. It is recommended that nonprice policies along with price-based energy policies be implemented to reduce energy intensity and CO2 emission.