Energy Subsidies and the Climate Dilemma in Middle Eastern Petro-States: An Empirical Analysis

Abstract

This study examines the association between fossil fuel subsidies and greenhouse gas emissions in five major Middle Eastern petro-states: Iran, Iraq, Kuwait, Saudi Arabia, and the UAE, which face a severe dilemma as they weigh the imperative of addressing climate change against their economic reliance on fossil fuels. Covering the period 2010–2023, the analysis estimates the within-country association between per-capita emissions and total and fuel-specific subsidy levels in a two-way fixed effects panel model. The results indicate a consistent and statistically significant positive association between subsidies and emissions, with a 10% lower level of total subsidies associated with a 1.2% lower level of emissions. Among fuel types, gas subsidies show the strongest and most consistent correlation with emissions, while oil and electricity subsidies exhibit weaker or statistically insignificant patterns. The findings highlight the policy relevance of fuel-specific subsidy measures and provide empirical evidence to inform reform strategies that balance fiscal sustainability, resource management, social welfare, and emission-reduction objectives in Middle Eastern petro-states.