The potential role of a carbon tax on CO2 emission reduction in the agriculture sector of Iran

A carbon tax is one of the fundamental cost-effective market tools to limit global temperature and reduce greenhouse gases emissions. In this study, using the provisions of the Paris Agreement and the shadow price of carbon, the potential role of the carbon tax on carbon emission reduction in the agricultural sector of Iran is investigated. To this end, the GMM (generalized method of moments) approach and data for 28 provinces of Iran during 2001–2017 is implemented. The own price and income elasticity of diesel are calculated at −0.26 and 0.32, respectively. Results indicated that each 300 Rial ($0.0.0071) increase in diesel price led to a 44 kg/capita decrease in carbon emission. Each 10% decrease in electricity price led to a 1.5% decrease in diesel consumption and a 0.21% decrease in per capita carbon emission. To comply with Paris Agreement, the recommended carbon tax will be 0.360 Dollar/liter. According to carbon shadow price in the agriculture sector of Iran, to cover external costs from agriculture products, the carbon tax should be determined at 1.459 Dollar/liter. In the short term, such a high tax rate may affect the welfare of producers. Hence, moderating fuel prices, transferring fossil fuel subsidies to providing clean energy sources, electrification of agricultural wells, use of solar panels in the agricultural sector, modernization of agricultural machinery, and equipment that use less fuel are recommended.