Green Taxes in Energy and Final Goods Sectors in Iran: A Game-Theoretic Approach

Environmental tax and subsidy are two key instruments used in many countries to prevent environmental degradation and to achieve sustainable development. Using game theoretic approach, this paper develops and calibrates a model to determine optimum indirect environmental tax for Iran. More specifically, in the first stage the government sets green taxes and subsides, and in the second stage, the final goods and energy producing firms take these rates and choose their inputs. This dynamic game is solved by backward induction. Prior to our calibration, the production functions for fossil energy, renewable energy - as an intermediate goods - and final goods are estimated. The model is calibrated by using the Iranian data for the period 2015. The results indicate that the optimum green tax rate on fossil energy producing firm and final goods firm are 18 and 9 percent, respectively. These results have important policy implications for policymakers and social planners in Iran.