Reza Ebrahimi - Research Economist, Institute for Advanced Education and Research on Management and Planning, Tehran, Iran.

Air pollution is an example of a negative externality; it imposes harmful effects and costs on people other than polluters. In controlling air pollution, efficiency argument implies that, there is a role for the government to play. Studies show that taxation of fuels can be a powerful indirect instrument for controlling air pollution because of the association between fuels use and emissions. In Iran, fuel’s consumption is highly subsidized and energy prices have for several years been below opportunity costs as measured by border prices. The present study examined the impact of fuel price increases—removing energy subsidies—on the emissions of air pollutants in the industry sector. We analyze interfuel substitution in this sector—within a translog cost model—and combine the results with emission factors to assess the potential for emission reductions via demand changes. The empirical results indicate that: (1) substitution possibilities were found for most combinations of fuel types in industry sector; (2) for SOx, NOx, SPM and HC, emission elasticities with respect to the price of heavy petroleum products are -0.289, -0.220, -0.255 and -0.072, respectively. Also, a 10 percent price increase for light petroleum products would reduce total emissions of CO and HC by 3.36% and 0.47% respectively.

Air pollution; Negative Externality, Energy, Translog Cost System, Price Distortions