A conceptual review of emission trading schemes: lessons for Iran’s energy market

Companies often prioritize maximizing profits without considering environmental costs, leading to significant ecological damage. This is the rationale behind carbon pricing policies, like carbon taxes or emissions trading schemes, which hold emitters accountable for greenhouse gas emissions by internalizing the costs of climate change. In energy-rich countries like Iran, where energy production is inexpensive, firms are similarly disinclined to improve energy efficiency. This neglect of long-term resource scarcity, social costs, and environmental impacts has contributed to Iran’s energy imbalance, with the government relying on short-term solutions like electricity and natural gas rationing. Despite the substantial potential for energy efficiency and renewable energy development, the availability of cheap fossil fuels continues to hinder progress. Both corporate neglect of environmental harm and Iran's energy inefficiency stem from the same root problem: external costs are not internalised in decision-making. Readily available resources and environmental services are undervalued, while long-term threats like climate change and resource depletion are overlooked. In this context, Iran's energy sector can learn from the global expansion of Emissions Trading Schemes, which limit greenhouse gas emissions through cap-and-trade mechanisms. These schemes encourage firms to either reduce emissions or face penalties, aligning business interests with environmental goals. This paper reviews Iran’s energy sector and examines both market and non-market approaches to reform. We conceptualize designs for revolving funds, energy efficiency and environment market, feed-in tariffs, direct government investment, and the implementation of cap-and-trade mechanism to regulate energy intensity and promote renewable energy. These strategies provide a roadmap for addressing Iran's energy challenges and advancing toward a more sustainable future.