Evaluating the Impact of Carbon Market Policy on Consumer Welfare Changes (EV) via Eight-Component Decomposition: A Dynamic General Equilibrium Approach

Document Type : Original Article

Authors

1 Ph.D. Candidate, Department of Economics, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

2 Professor, Department of Economics, Faculty of Management and Economics, Shahid Bahonar University, Kerman, Iran

3 Faculty of Management and Economics, Shahid Bahonar University, kerman, Iran

4 Professor, Faculty of Management and Economics, Shahid Bahonar University, kerman, Iran

Abstract

Climate change and the need to reduce greenhouse gas emissions have made the use of market-based instruments, such as the Emissions Trading System (ETS), a global priority. The Emissions Trading System (ETS) is a market-based environmental policy and an alternative incentive mechanism designed to encourage emission reductions by imposing a cost on emitters. Although some studies emphasize the effectiveness of this policy in achieving environmental objectives, others have expressed skepticism about its effectiveness because of potential consequences, including reduced output, higher production costs, and higher prices, and have therefore adopted a more cautious perspective. The primary concern in this regard is the adverse effects and changes in the welfare of households and society. This study aims to evaluate the welfare effects of implementing an Emissions Trading System (ETS) on the Iranian economy and major global economic blocs, including the OECD, China, India, and Latin America, through 2050. To this end, a dynamic computable general equilibrium (CGE) model was employed. The data used in this study were obtained from the GTAP 10 database, while forward-looking macroeconomic variables from the CEPII database were used to calibrate the baseline scenario through 2050. The welfare measure, Equivalent Variation (EV), was decomposed into eight components and analyzed. The analysis was conducted under two scenarios, namely “Passive Iran and the Rest of the World” and “Active Iran and the Rest of the World,” with emission reduction targets of 5%, 10%, and 30%. The findings indicate that Iran experiences welfare losses under all scenarios, primarily owing to the deterioration in the terms of trade. Under the 30% passive scenario, the welfare loss reaches USD 8,205.89 million, of which USD 7,409.46 million is attributable to the deterioration in the terms of trade. In the active participation scenario, despite higher allocative efficiency costs, only this scenario yields an improvement in the technological change component, which increases to USD 216.0867 million. Finally, Iran’s active participation in the Emissions Trading System (ETS) is recommended, and structural diversification of the export basket together with the recycling of carbon revenues are proposed to mitigate its welfare effects.

Keywords

Main Subjects

References

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History

  • Receive Date: 26 May 2026
  • Revise Date: 22 August 2026
  • Accept Date: 31 August 2026

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