Liberalizing Energy Price and Abatement Cost of Emissions: Evidence from Iranian Agro-Environment

Iran is one of the most energy-rich countries subsidizing energy carriers, especially in the agricultural sector, to the extent that the resulting growth is at the expense of the environment. This study tries to investigate the potential impacts of energy price reform on the agro-environment, based on the Marginal Abatement Costs (MACs) of emissions. Firstly, the energy demand function of the agricultural sector and the probable reaction of inputs and outputs to the reform were estimated. Then, using an Input Distance Function (IDF), the country and provincial-wide MAC were simulated through counterfactual reform scenarios. The results indicated that energy price reform would increase the MAC of emissions and socio-environmental benefits. However, the reform adversely affected the income of farmers. Also, the results provided detailed information both at a nationwide and provincial scale. Finally, it was recommended to implement complementary policies alongside reforms to compensate for the reduction in farmers’ income.