Document Type : Research Paper
Authors
1 PhD Candidate in economics, Urmia University, Iran
2 Professor of Economics, Urmia University, Urmia, Iran
3 Associate Professor of Economics, Shahid Bahonar University, Kerman, Iran
Abstract
Concerns about energy prices, environmental sustainability, and economic stability highlight the need to examine the effects of energy market liberalization, as fluctuations in oil and gas prices have profound impacts on economic and environmental variables. This study, based on a dynamic computable general equilibrium model and GTAP-E database, investigates the impact of energy price liberalization on environmental variables and mineral products across three country groups—Iran, its major trading partners, and the rest of the world—under two scenarios: (1) a 5% gas price shock and (2) a 5% oil price shock, projecting up to the year 2050. The simulation results show that for Iran, the first scenario leads to a gradual and sustained reduction in carbon dioxide emissions, reflecting a negative relationship between CO₂ emissions and gas prices due to decreased fossil fuel consumption and a shift towards more efficient or alternative energy sources in mineral production. The second scenario results in a smaller but still significant reduction in carbon dioxide emissions. For Iran’s trading partners, the first scenario results in a long-term emission reduction owing to higher production costs and adoption of cleaner technologies, while the second scenario leads to faster reductions due to the mining sector’s dependency on oil and accelerated investments in energy-saving measures. For other regions, the first scenario shows an initial moderate reduction in carbon dioxide emissions followed by a temporary rebound, indicating delayed decarbonization; scenario two, however, leads to a sustained decline, underscoring the key role of oil in energy and mining sectors. The findings emphasize that energy price liberalization must be aligned with market realities and should promote improved consumption efficiency and innovation in clean technologies.
Introduction
Energy market liberalization, particularly through the removal of subsidies and the alignment of domestic energy prices with international levels, has been a subject of growing interest due to its potential implications for economic efficiency, fiscal sustainability, environmental outcomes, and energy security. Fluctuations in oil and gas prices significantly influence macroeconomic variables, industrial competitiveness, and greenhouse gas emissions, particularly in resource-dependent economies like Iran. This study adds to the existing literature by using a dynamic computable general equilibrium (DCGE) model based on the GTAP-E database, an extension of the standard GTAP framework that explicitly incorporates energy substitution, fossil fuel combustion, and CO₂ emissions (Burniaux and Truong, 2002) to analyze the long-term effects of energy price liberalization on CO₂ emissions in mineral production sectors.
While prior research has utilized GTAP-E in static or limited dynamic contexts, the application of a fully dynamic version with intertemporal adjustments, solved using GEMPACK algorithms and drawing on comprehensive regional and sectoral data from the GTAP database, represents a methodological advancement. This approach enables detailed projections up to 2050 and captures sector-specific responses in mineral industries, which are particularly energy-intensive and play a key role in Iran's economy and trade. The central research question is: How does energy price liberalization modeled as exogenous shocks to natural gas and oil prices affect CO₂ emissions in mineral production across Iran, its major trading partners, and the rest of the world?
Methods and Material
This study employs the Global Trade Analysis Project-Energy (GTAP-E) model, a multi-region, multi-sector, multi-agent computable general equilibrium (CGE) framework developed by Burniaux and Truong (2002). GTAP-E extends the standard GTAP model (Hertel, 1997) by explicitly incorporating energy substitution mechanisms and the linkage between energy consumption and greenhouse gas emissions, particularly CO₂ emissions from fossil fuel combustion. This allows for a detailed analysis of the environmental and economic impacts of energy price changes across sectors, regions, and agents. The multi-regional structure of GTAP-E provides significant advantages over single-region models by capturing inter-sectoral, inter-country, and inter-factor linkages on a global scale (Wu et al., 2019). Computable General Equilibrium (CGE) models have been widely applied in energy and environmental policy analysis since the 1980s, offering a consistent framework for evaluating the economic and environmental consequences of policy interventions (Rao et al., 2017; Chi et al., 2014). Their comprehensive treatment of resource allocation distortions caused by energy subsidies further justifies their use in this context (Manzoor et al., 2021).
To capture long-run dynamics and cumulative effects of policy reforms, this study employs a dynamic version of the GTAP-E model (DCGE). Unlike static CGE models, which are limited in their ability to account for growth effects, capital accumulation, and transitional paths, dynamic CGE models incorporate intertemporal adjustments, enabling realistic projections of medium- to long-term impacts where short-run and long-run effects may differ substantially (Zhang et al., 2020). The model is calibrated using the GTAP-E database and solved with GEMPACK software, allowing for the simulation of exogenous energy price shocks and their propagation through the global economy up to 2050.
Results and Discussion
Carbon intensity (CO₂ emissions per unit output) measures sectoral carbon efficiency. Table 4 reports changes under two 5% price shock scenarios—gas (Scenario 1) and oil (Scenario 2)—for Iran, trading partners, and other regions. The moderate price shock corresponds to historical fluctuations, consistent with prior studies (Eskandaripour et al., 2023; Lebrand et al., 2023).
In Iran, Scenario 1 reduced intensity markedly in oil (-26.22%), industry (-42.6%), minerals (-11.09%), and services (-13.27%) via cost-induced efficiency, but increased electricity (+46.9%) due to substitution to dirtier fuels (Barro et al., 2025). Gas intensity fell (-8.37%). Scenario 2 raised intensity in oil (+26.39%), gas (+4.69%), industry (+10.74%), and electricity (+16.73%) from fuel switching, while lowering it in agriculture (-16.12%), minerals (-8.93%), and services (-8.63%).
Trading partners exhibited heterogeneous responses: Scenario 1 increased gas (+0.52%) and coal (+0.23%) most; Scenario 2 amplified oil (+1.31%) and coal (+1.69%) rises, offset by non-energy sector declines. Other regions showed mostly reductions under Scenario 1 (except gas +0.65%, coal +0.29%), but energy sector increases under Scenario 2. Asymmetric patterns reflect fuel substitutability and sectoral vulnerabilities, implying uneven carbon pricing effects.
Table 5 shows fuel-specific CO2 emissions. Iran’s Scenario 1 raised oil/petroleum emissions but cut gas (-61.64%) and coal; Scenario 2 reversed oil trends. Trading partners shifted to coal/gas in Scenario 2; other regions reduced gas/petroleum more in Scenario 1 and oil in Scenario 2. Both scenarios trended downward overall.
Long-term mineral products CO2 emissions (Table 6, 2023–2050) declined steadily in Iran under Scenario 1 (~ -26.7 to -34 units) via efficiency incentives (Mosavi et al., 2017; Attílio et al., 2024), and less sharply under Scenario 2 (~ -9.5 to -12 units) due to lower oil substitutability (Ebaid et al., 2022). Trading partners had sharper Scenario 2 reductions (-0.95 by 2050); other regions showed sustained deepening under Scenario 2 (-0.87), consistent with oil-driven decarbonization and EKC dynamics (Kuznets, 1955; Zhou et al., 2021).
Gas shocks yield rapid gas-sector efficiency but risk dirty substitution in electricity; oil shocks promote broader long-term decarbonization. Policies should address substitution risks and facilitate technological transitions.
Conclusion
This study utilizes a dynamic computable general equilibrium (DCGE) model based on GTAP-E (version 10) data to simulate the effects of two energy price shocks—a 5% increase in natural gas prices and a 5% increase in oil prices—from 2023 to 2050. The results highlight distinct emission reduction pathways for Iran, its major trading partners, and the rest of the world, offering important insights for energy transition and climate mitigation policies.
In Iran, a natural gas price shock drives a gradual and sustained decline in greenhouse gas emissions, reflecting substitution toward cleaner energy sources and improved energy efficiency in mineral production. An oil price shock produces a milder but steady reduction, indicating lower substitutability in industrial sectors. These responses are consistent with the Environmental Kuznets Curve, where higher energy prices stimulate emission-reducing investments, with effects varying depending on sector-specific energy dependence and technological capacity. The reductions also stem from cleaner production technologies and a shift to low-carbon mineral products, consistent with Khan et al. (2022) and Antimiani et al. (2014).
Iran’s trading partners show a slow but steady emission decline under the gas price shock due to initial inelastic demand and subsequent technological adjustments. Oil price shocks lead to faster and sharper reductions, driven by greater oil reliance in their mineral sectors and stronger incentives for energy-saving innovations—patterns similar to those in developed industrial economies.
In other world regions, natural gas price increases result in an initial decline, temporary rebound, and eventual sustained reduction, reflecting structural rigidities and transition dynamics. Oil price shocks, however, cause more consistent and substantial declines, emphasizing oil’s pivotal role in global energy and industry.
Overall, energy price liberalization can effectively reduce greenhouse gas emissions, especially when supported by policies that promote technological innovation, energy efficiency, and cleaner alternatives in energy-intensive sectors. Region-specific policies are essential to balance environmental gains with economic impacts.
Keywords
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