Fossil fuel price policy and sustainability: energy, environment, health and economy

Abstract

Purpose This study aims to develop a price policy for fossil fuel consumption, as it is an effective instrument to manage the demand-side of energy economics. Design/methodology/approach This research estimates the demand elasticities of diesel, gasoline, fuel oil and kerosene by using static, dynamic and error-correction models in log-linear form. Findings The findings show that fossil fuel demand responds to price changes less than income changes, as fuel price is inelastic, but income is elastic. In that respect, the impact of price change decreases constantly with increasing energy price, followed by subsidy reform. Subsidy removal and price policy reformation is the UN recommendation for subsidizing countries, including Iran, to reduce fossil fuel consumption, whose intensity depends on the price elasticities. Practical implications As a result of this price policy, diesel, gasoline and liquefied petroleum gas prices should increase at least 1.8%–7.3%, 4.4%–6.4% and 7%–8.6%, respectively, and gradually within 2018–2030. The price policy improves all the pillars of sustainable development, including economy, environment and social (health). Overall, such a target can potentially save 3%–29% of diesel, 34%–56% of gasoline and 15%–20% of liquefied petroleum gas, as well as reduce 15%–40% of CO2 emissions annually, and can save potentially more than 510,000 lives annually. Thus, the energy price policy can fundamentally improve sustainability. Originality/value The estimated elasticities outline the required prices to decrease the fossil fuels, according to the UN mitigation targets, as price policy recommendation. Graphical abstract