Environmental Policy, Energy Subsidies, and Carbon Emissions in a Fossil-Fuel-Dependent Economy: Structural Imbalances in Iran’s Gas Market

Iran’s natural gas sector faces persistent imbalances that generate significant environmental consequences, including amplified carbon emissions and worsened air pollution. These imbalances are exacerbated by policy-driven price distortions and fossil fuel dependence, hindering environmental policy effectiveness. This study analyzes the environmental implications of Iran’s gas market dynamics using a Vector Autoregression (VAR) framework in first differences on time-series data from 1995 to 2024. The bounds cointegration test reveals no long-run equilibrium relationship, indicating that environmental and subsidy policies have only temporary short-run effects due to structural inertia and infrastructural constraints. Sanctions significantly worsen the gas market balance, with indirect negative environmental consequences. To align Iran’s energy sector with environmental policy goals, this paper proposes a sequenced framework: (1) prioritising infrastructure modernisation to reduce flaring and methane leakage; (2) replacing distortionary subsidies with targeted social protections while introducing carbon pricing; (3) implementing a renewable portfolio standard conditional on grid reliability; and (4) establishing an independent energy and environmental data agency. These recommendations aim to transform Iran’s fossil-fuel-dependent market to support environmental sustainability and climate commitments.