The Double Dividend Hypothesis for Iran Economy: Modeling Carbon Taxes with a CGE Model

The Double dividend hypothesis briefly demonstrates that by replacing different kinds of distortionary taxes with environmental ones, not only the lesser pollutants would be emitted (the first merit), but the more productivity and public welfare would be gained (the second one). Given the urgent need of reducing emissions in Iran, levying taxes on carbon, aimed at reducing carbon dioxide by 12 percent, is simulated at present article by a computable general equilibrium model which hypothesized three recycling tax incomes scenarios. In order to calibrate the model, the social accounting matrix of 1390 is used, which comprises of 26 sectors, 36 commodities and two type of households, based on the input-output tables of the Iranian Statistics Center. The results of the present research show that the goal of 12 percent reduction of the emission would be met by 51.3 Rials taxing per each kg carbon dioxide in the scenario of restoring the whole taxes to the households, 73.5 Rials in the scenario of reducing production taxes and finally 58 Rials in the scenario of reducing labor taxes. In all the three scenarios, increase of the real consumption budget of household and the equivalent welfare index is evident. In the first scenario, employment decreases and in the second and third ones, it increases, whereas the real GDP decreases and in the second and third ones, it stands approximately the same. The results of the present research bear out the weak form of the double dividend hypothesis, in the sense that the welfare effects of reducing distortionary taxes are more than those of restoring the whole distortionary ones. The strong form of the hypothesis, however, is not approved in Iranian economy. Moreover, the reduction of labor tax policy, is accompanied by the optimum welfare and viability effects.