Estimates of the Macroeconomic Impacts of Fossil Fuel Consumption and Reduction of Carbon Dioxide Emissions in the Iranian Economy

Document Type : Original Articles


1 Ph.D in Economics, Department of economics, Faculty of Economic and political Science, University of Shahid Beheshti, Tehran, Corresponding Author.

2 Associated Professor, Department of economics, Faculty of Economic and political Science, University of Shahid Beheshti, Tehran


The objective of this paper is to estimate macroeconomic impacts of fossil fuel combustion and associated carbon dioxide emissions, in order to evaluate economic costs of policies to reduce carbon dioxide emissions. Therefore, using Vector Autoregressive (VAR) method, long-term elasticity’s of macroeconomic variables such as production, investment and employment to the different types of fossil fuels consumption are calculated. Since the carbon dioxide emissions are related to the amount of fossil fuel consumed, our estimates of marginal variation and long-run elasticity’s of macroeconomic variables were applied to calculate the potential economic costs or welfare loss for carbon dioxide emissions. The results show that energy consumption in long term has a positive impact on production, investment, employment and labor productivity. Long-run elasticity of output, investment and employment with respect to energy consumtion are .26, 1.22 and .02 respectively. Increase of one million tons of total energy consumption in the long run will lead to changes in GDP and investment by 323.9 and 216.1 billion Rails respectively and also changes in employment by 550 jobs. The economic cost (welfare loss) per ton of carbon dioxide emissions to the overall energy consumption estimated as 9.78 million Rails and the lowest cost are related to the gas consumption. Therefore, switching the use of other fossil fuels toward gas (switching consumption policy) has the lowest economic cost. The results also show that due to a high economic dependence on fossil fuels, the potential economic costs of carbon dioxide abatement are some higher than some other countries and the world average, So targeting the carbon dioxide abatement as much as 10, 25 and 70 percent will lead to the reduction in economic growth as much as .7, 1.9 and 3.9 percent respectively.