Emissions tax in Iran: Incorporating pollution disutility in a welfare analysis

Abstract The emission of carbon dioxide per unit of GDP for Iran is more than 30% higher than what is available around the world. The present study aims to implement a dynamic Computable General Equilibrium model to evaluate the impact of pollutants (NO x , SO 2 , CO, CO 2 , CH 4 and N 2 O) emissions tax on their emissions and households’ welfare. In welfare analysis, consumer utility maximization is examined based on both standard utility and the pollution incorporated utility functions. Two levels of emission tax known as medium and high emission tax were evaluated. In medium emission tax scenario, tax rates are equal to medium estimates of damage costs while the rates are twice more than the medium estimates in high emission tax. In general, the simulation results indicated a significant effect of emission tax on the pollutant emissions rather than output contraction. However, the effect of taxing on the emission of pollutants increased significantly under incorporating pollution disutility, compared to standard utility alternative, leading to higher welfare and lower emissions. In addition, the emissions of all pollutants in high tax scenario except for CH 4 and N 2 O decreased by at least 20%, compared with their current level at the end of the simulation horizon. Further, the distribution of welfare gains improved under the pollution incorporated option, compared to the standard one as it favored low income and rural groups.