Economic, Environmental and Social Impact of Carbon Tax for Iran: A Computable General Equilibrium Analysis

Abstract The environmental taxes, such as carbon tax, also affect other economic variables in a different way in addition to the main goal of politicians. The carbon tax aims to reduce energy consumption and pollutant emissions, while it can also reduce labor tax and labor costs which are incentives to create new jobs. It is necessary to evaluate the carbon taxation policy in Iran due to the special circumstances of the budget deficit mainly caused by the decline of exports and oil revenues. The present study is based on a general equilibrium model in the form of a nonlinear equations system. The model has been calibrated for the 2017 reference year using the data table adopted from Iran's economy. It has been shown that if the carbon tax revenue is employed to decrease the labor income tax, the environmental quality will be improved by reducing pollutant emissions on the one hand, and it will lead to positive effects on the welfare and employment on the other hand. In the present paper, the effect of applying this tax on two policies with redistribution (compensation) and without redistribution (no compensation) of income tax among the households is examined. Maximum, minimum, and optimal values of pollutant emissions reduction under the influence of carbon tax policies were calculated in both scenarios. The simulation results show that the taxation without redistribution of tax revenues decreases the welfare and household's actual consumed budget by 6.2%, but in policy with compensation of tax revenue, these indices will increase by 0.8%. The gross domestic product (GDP) decreases by about 1.7% and 2.1% in both policies, respectively, while the consumer price index (CPI) in both scenarios will increase by about 6.4% and 8%, respectively. According to this research findings, carbon taxation with the redistribution of revenue is a suitable policy to reduce greenhouse gas emissions and adhere to international commitments at the same time.