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Green tax as a path to greener economy: A game theory approach on energy and final goods in Iran

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  • Norouzi, Nima
  • Fani, Maryam
  • Talebi, Saeed

Abstract

The use of environmental taxes is a tool for the optimal allocation of resources to increase social welfare. This study aims to design an appropriate model and calculate the optimal amount of indirect green taxes for the Iranian economy using the game theory method. Fossil-based energy production functions, renewable energy (as an intermediate commodity), and final commodity production are estimated during the analysis process of this model. A dynamic game is designed for three actors: government, energy intermediaries, and the final product firm. In the first stage, the government determines the tax rate intending to maximize welfare, and in the second stage, firms maximize their profits by obtaining this rate by choosing the factors of production. After solving this dynamic game with recursive induction, the model for the Iranian economy has been calibrated. Based on the obtained results, the optimal green tax rate in 2020 is estimated at 9% of final goods production. In other words, to compensate for the environmental damage caused by the consumption of fossil fuels, a 9% tax rate should be implemented on the Iranian Gross domestic product. Also, the green tax rate on fossil energy production should be 18% of the fuel price. This indicates the need for policymakers and planners’ special attention to collect green taxes to achieve sustainable development in this country.

Suggested Citation

  • Norouzi, Nima & Fani, Maryam & Talebi, Saeed, 2022. "Green tax as a path to greener economy: A game theory approach on energy and final goods in Iran," Renewable and Sustainable Energy Reviews, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:rensus:v:156:y:2022:i:c:s1364032121012338
    DOI: 10.1016/j.rser.2021.111968
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