Utility subsidy reform in Abu Dhabi: A review and a Computable General Equilibrium analysis

Electricity and water consumption in Abu Dhabi has increased substantially in recent years along with rapid economic and population growth As one of the oil producing economies located in arid regions, Abu Dhabi׳s electricity and water are produced predominantly with fossil fuel based power-water co-generation, which generate carbon emissions. The consumption of electricity and water is heavily subsidized to support industrial growth, lower cost of living, and distribute state wealth to the population. The low utility prices, however, may have contributed to high per capita carbon emissions for the emirate. This paper reviews critical literature on energy subsidy policy for oil exporting economies. We then examine the economic and environmental effects of water and electricity subsidy reduction in Abu Dhabi using a Computable General Equilibrium analysis. The result shows that utility subsidy reduction alone increases Gross Domestic Product (GDP) of the emirate through expanding the high value-added service sector, and reduces carbon emissions with decreasing carbon-intensive industrial and utility productions. Meanwhile, private consumption declines with decreasing wage. Electricity subsidy reduction in general has greater economic and environmental effects than water subsidy reduction. The positive economic and environmental gains may incentivize utility subsidy reform in the long run when the negative wage effect is mitigated.