Economic-Environmental Analysis of Policy Reforms in Agricultural Input Subsidies in Iran

This study aimed at evaluating the effects of reducing the subsidies allocated to agricultural sector in the form of a general equilibrium model on economic and environmental variables. In this regard, the reduction of subsidies in the agricultural sector was considered at five levels. The study results showed that subsidy reform and reduction in the agricultural sector would lead to a reduction of domestic agricultural production, increased prices and a decrease in the final demand for agricultural products, especially basic products for households, consequently endangering the food security. In addition, moving towards the last scenario of 80 percent reduction in the subsidies, the extent of reduction in real government expenditures was estimated by -5.87 percent. The results showed that the highest decrease in production was related to wheat and the lowest was related to barley; also, by applying the desired scenarios, the fisheries sub-sector would experience a higher decrease in production, compared to livestock and forests and rangeland sub-sectors. Thus, with a 10 percent reduction in the subsidies allocated to the agricultural sector, the extents of reduction in the production of livestock, fisheries, forests and rangeland products were estimated by -2.4, -10.4 and -8, respectively. Implementing the policy of reduction in the subsidies allocated to the agricultural sector would reduce the level of domestic production and, consequently, increase the price of agricultural products and ultimately, reduce the final demand for agricultural products. In addition, the reduction rates of CO2 production in the first and fifth scenarios were estimated by -0.92 and -22.90 percent, respectively, indicating that the reduction of subsidies in the agricultural sector would lead to a reduction in environmental pollution in the future. Given the need to revise the subsidy payment system, the policy of reducing the agricultural input subsidies should be implemented gradually and with optimal combination and simultaneous implementation of several policy tools appropriate to the production structure and market structure of each product.