alternative way to deal with local resistance
against energy price changes. The effect of water
and energy prices on the water-energy relationship is not minor; subsidy changes affiliated with
these prices is a crucial factor. If the price of water
does not accurately reflect the cost of energy
required to obtain it, phasing out energy subsidies
may improve the management of existing water
resources by making them more costly. Getting
the prices right is a key policy tool that can provide incentives to develop and adopt the most
appropriate technologies for water management
(OECD 2012, p. 147). Prices that don’t reflect the
true provision costs of water send the wrong
signals to the water users and increase inefficient
water use. Although water demand in agriculture
is considered to be inelastic for lower irrigation
water prices (de Fraiture and Perry 2007), a
considerable reduction in water consumption
because of price increases has been observed
throughout different studies. For instance, in an
Indian context, Shah et al. (2012) found that a
10% reduction in subsidies would reduce
groundwater extraction by 5.4% and cost farmers
12% of their revenue. Similarly, in the high plains
of the USA, a one dollar increase in energy prices
(a 13.6% price increase) would reduce water
pumping by 3.6% on average, thereby affecting
crop selection and the use of technologies
(Pfeiffer and Lin 2014). Importantly, investments
in technologies that allow for cheaper water
extraction and more efficient transportation can
offset the effects of rising energy prices (Zilberman et al. 2008). Nevertheless, despite the clear
economic arguments in favour of higher energy
prices, the implementation of policies that affect
voters’ welfare negatively is challenging. Phasing
out any type of subsidies is widely considered a
complicated undertaking for politicians because
they may risk facing opposition from the subsidy
recipients. Policymakers all around the world
have strong incentives to adopt, retain, and even
expand consumer and producer subsidies because
their constituents react to a redistribution of
budgetary resources (Dixit and Londregan 1996).
The logic of consumer subsidies is to shield the
population from price shocks to basic commodities (food, gasoline, electricity, etc.) and other
risks due to open economic policies (Garrett
1998). Without these protections, democratic or
authoritarian regimes may be threatened by protests or even coups organized by dissatisfied
recipients (Bates 1983). On the other hand, producer subsidies (such as energy subsidies) are to
ensure the political loyalty of an industrial group
that might otherwise threaten with redirecting
political support to a competing party or parties
(Acemoglu and Robinson 2001; Thomson 2014).
In light of such high stakes for politicians themselves and possibly even entire countries, the
political economy of reform processes must be
carefully considered. Otherwise, any prospective
policy change is unlikely to be effective, especially in the sphere of groundwater pumping
subsidies (Scott and Shah 2004; Shah et al. 2012).
The depletion of groundwater resources due to
irrigation water pumping in Iran is a clear problem that threatens rural life and sustainable rural
development and sustainable agricultural production. The devastating effects of subsidies are
recognized by experts and researchers in this area
(Madani 2014). For instance, Moazedi et al.
(2011) have demonstrated a non-linear relationship between groundwater levels and energy use.
It can be concluded from this finding that higher
energy subsidies should be provided as groundwater levels drop in order to keep the same level
of production. As Dinar (2000) has presented,
factors related to the political economy of irrigation water pricing can hinder any price reforms
for surface water. Political factors may well
influence the pricing of groundwater pumping.
The experience of the Iranian government from
2010 until now highlights the consequences of
disregarding the political pressures arising due to
similar reforms. The following chapter reviews
the political processes in Iran that may have
contributed to the failure of phasing out subsidies
for groundwater pumping. We first provide an
overview of groundwater depletion and energy
consumption in Iran. We then present a literature
review on energy subsidy cuts and their respective effects on water pumping in Iran. Section 3
examines Iran’s political economy surrounding
its 2010 subsidy reform in detail and its interaction with rural energy subsidies. Finally, we
The Energy-Water Nexus in Iran …
109
against energy price changes. The effect of water
and energy prices on the water-energy relationship is not minor; subsidy changes affiliated with
these prices is a crucial factor. If the price of water
does not accurately reflect the cost of energy
required to obtain it, phasing out energy subsidies
may improve the management of existing water
resources by making them more costly. Getting
the prices right is a key policy tool that can provide incentives to develop and adopt the most
appropriate technologies for water management
(OECD 2012, p. 147). Prices that don’t reflect the
true provision costs of water send the wrong
signals to the water users and increase inefficient
water use. Although water demand in agriculture
is considered to be inelastic for lower irrigation
water prices (de Fraiture and Perry 2007), a
considerable reduction in water consumption
because of price increases has been observed
throughout different studies. For instance, in an
Indian context, Shah et al. (2012) found that a
10% reduction in subsidies would reduce
groundwater extraction by 5.4% and cost farmers
12% of their revenue. Similarly, in the high plains
of the USA, a one dollar increase in energy prices
(a 13.6% price increase) would reduce water
pumping by 3.6% on average, thereby affecting
crop selection and the use of technologies
(Pfeiffer and Lin 2014). Importantly, investments
in technologies that allow for cheaper water
extraction and more efficient transportation can
offset the effects of rising energy prices (Zilberman et al. 2008). Nevertheless, despite the clear
economic arguments in favour of higher energy
prices, the implementation of policies that affect
voters’ welfare negatively is challenging. Phasing
out any type of subsidies is widely considered a
complicated undertaking for politicians because
they may risk facing opposition from the subsidy
recipients. Policymakers all around the world
have strong incentives to adopt, retain, and even
expand consumer and producer subsidies because
their constituents react to a redistribution of
budgetary resources (Dixit and Londregan 1996).
The logic of consumer subsidies is to shield the
population from price shocks to basic commodities (food, gasoline, electricity, etc.) and other
risks due to open economic policies (Garrett
1998). Without these protections, democratic or
authoritarian regimes may be threatened by protests or even coups organized by dissatisfied
recipients (Bates 1983). On the other hand, producer subsidies (such as energy subsidies) are to
ensure the political loyalty of an industrial group
that might otherwise threaten with redirecting
political support to a competing party or parties
(Acemoglu and Robinson 2001; Thomson 2014).
In light of such high stakes for politicians themselves and possibly even entire countries, the
political economy of reform processes must be
carefully considered. Otherwise, any prospective
policy change is unlikely to be effective, especially in the sphere of groundwater pumping
subsidies (Scott and Shah 2004; Shah et al. 2012).
The depletion of groundwater resources due to
irrigation water pumping in Iran is a clear problem that threatens rural life and sustainable rural
development and sustainable agricultural production. The devastating effects of subsidies are
recognized by experts and researchers in this area
(Madani 2014). For instance, Moazedi et al.
(2011) have demonstrated a non-linear relationship between groundwater levels and energy use.
It can be concluded from this finding that higher
energy subsidies should be provided as groundwater levels drop in order to keep the same level
of production. As Dinar (2000) has presented,
factors related to the political economy of irrigation water pricing can hinder any price reforms
for surface water. Political factors may well
influence the pricing of groundwater pumping.
The experience of the Iranian government from
2010 until now highlights the consequences of
disregarding the political pressures arising due to
similar reforms. The following chapter reviews
the political processes in Iran that may have
contributed to the failure of phasing out subsidies
for groundwater pumping. We first provide an
overview of groundwater depletion and energy
consumption in Iran. We then present a literature
review on energy subsidy cuts and their respective effects on water pumping in Iran. Section 3
examines Iran’s political economy surrounding
its 2010 subsidy reform in detail and its interaction with rural energy subsidies. Finally, we
The Energy-Water Nexus in Iran …
109