Abstract
Sustainable development represents a central economic objective in oil-rich economies such as Iran and is shaped by institutional quality and policy instruments, including carbon taxation. Despite extensive discussion of resource dependence and environmental taxation, limited attention has been paid to the mediating role of good governance in the relationship between oil rents, carbon taxes, and sustainable development in Iran. This study addresses this gap by examining quarterly data from 1996:Q2 to 2024:Q1 using the Quantile Autoregressive Distributed Lag (QARDL) model, which captures nonlinear and asymmetric dynamics across different points of the conditional distribution. Data were sourced from reputable international databases. Descriptive statistics reveal a mean sustainable development index of 0.65 and non-normality in several variables, supporting the use of the QARDL framework. The long-run estimates demonstrate that good governance, oil rents, and carbon taxes exert positive effects on sustainable development at the lower (0.25), median (0.50), and upper (0.75) quantiles. However, the interaction between good governance and oil rents is negative across all quantiles, while the interaction between good governance and carbon taxes is negative at the median and upper quantiles. Marginal effect analysis reveals threshold effects: when the governance index exceeds 0.58 at the lower quantile and 0.74 at the median quantile, the effect of oil rents on sustainable development becomes negative. This finding suggests that improvements in governance quality may reduce rent-seeking incentives and shift the development process toward non-oil sectors. No governance threshold is identified for carbon taxation, and its positive contribution remains robust. Achieving sustainable development in Iran, therefore, requires effective management of oil revenues, efficient implementation of carbon taxation, and sustained improvements in governance quality through enhanced transparency, accountability, and anti-corruption measures
Purpose/Aims:
Sustainable development constitutes a fundamental dimension of societal welfare and progress, encompassing sustained economic growth, poverty reduction, and environmental preservation. In resource-rich countries, oil rents represent a major source of foreign exchange earnings; nevertheless, many such economies have not achieved comprehensive development. While some economists argue that oil revenues may stimulate economic growth—provided they do not crowd out private investment or weaken non-oil sectors—the nonrenewable and intergenerational nature of oil resources implies that excessive extraction may compromise the rights of future generations and constrain long-term development prospects.
Moreover, the intensive use of fossil fuels has resulted in substantial emissions of greenhouse gases, particularly carbon dioxide, contributing to global warming and associated environmental and economic damages. To address such externalities, Pigou (1920) proposed environmental taxation as a corrective instrument to achieve Pareto efficiency and mitigate market failure. A carbon tax, or Pigouvian tax, directly prices carbon dioxide emissions by requiring fossil fuel users to bear the social costs of their emissions.
From an institutional perspective, proponents of institutional economics emphasize that good governance plays a pivotal role in promoting sustainable development. However, some argue that the pursuit of good governance may slow development in the short term due to regulatory and institutional constraints. In oil-dependent economies, governance quality is particularly decisive in determining whether natural resource wealth facilitates development or entrenches structural dependence.
Accordingly, this study aims to examine the role of good governance in moderating the effects of oil rents and carbon taxation on sustainable development in Iran.
Methodology & Framework:
This study analyzes the moderating role of good governance in the relationship between oil rents, carbon taxes, and sustainable development in Iran over the period 1996–2023 using the QARDL approach. The dependent variable is sustainable development. The independent variables include oil rents, carbon taxes, good governance, human development, and economic growth.
To capture potential interaction effects, two multiplicative terms are incorporated: the interaction between carbon tax and good governance, and the interaction between oil rents and good governance. The QARDL framework enables the estimation of both short-run and long-run dynamics across different quantiles of the conditional distribution, thereby accounting for potential asymmetries and distributional heterogeneity.
Findings:
The empirical results indicate that good governance, oil rents, carbon taxes, and human development exert positive long-run effects on sustainable development at the lower (0.25), median (0.50), and upper (0.75) quantiles. Economic growth exhibits a negative effect at the lower quantile but positive effects at the median and upper quantiles.
The interaction term between good governance and oil rents is negative across all quantiles, suggesting that governance quality conditions the influence of resource rents. Similarly, the interaction between good governance and carbon taxation is negative at the median and upper quantiles.
Threshold analysis of long-run effects shows that when the governance index exceeds 0.58 at the lower quantile and 0.74 at the median quantile, the impact of oil rents on sustainable development becomes negative. These findings indicate that improvements in governance quality alter the transmission mechanism of oil rents, reducing rent-seeking incentives and encouraging structural diversification.
Discussion:
Good governance—characterized by transparency, accountability, rule of law, and institutional effectiveness—provides the institutional capacity necessary for the efficient management of economic, natural, human, and financial resources. Through these channels, it supports sustainable development.
Carbon taxation internalizes environmental externalities by incorporating the social cost of emissions into production decisions. By increasing the cost of high-emission activities, it incentivizes the adoption of cleaner fuels and technologies and contributes to reductions in greenhouse gas emissions. When appropriately calibrated to a country’s economic conditions, carbon taxation can simultaneously support environmental objectives and sustainable economic growth.
Natural resource rents, including oil revenues, may exert positive effects at relatively low levels by financing infrastructure, education, social protection, environmental preservation, and institutional strengthening.
However, sustained and excessive dependence on resource rents is commonly associated with adverse consequences, including reduced innovation, diminished investment in renewable energy, lower total factor productivity, revenue mismanagement, and widening socioeconomic inequality.
The overall impact of resource rents on sustainable development appears to be threshold-dependent. As governance quality improves beyond certain levels, institutional reforms reduce rent-seeking behavior, strengthen non-resource sectors, and promote structural transformation away from excessive resource dependence. Consequently, governance acts as a pivotal moderating factor in shaping the developmental outcomes of resource wealth.
Conclusion & Implications:
The findings underscore the importance of optimizing the management and equitable distribution of oil revenues across social groups. Strengthening public awareness of carbon taxation and its environmental and economic benefits may facilitate its acceptance and effectiveness. Policymakers should determine an optimal carbon tax rate that achieves meaningful emission reductions without imposing high costs on economic growth.
Furthermore, sustained improvements in governance are essential. Policy priorities include combating corruption, enhancing regulatory quality, strengthening the rule of law, ensuring political stability, safeguarding citizens’ rights to participation and expression, increasing governmental accountability, and improving public sector effectiveness. These institutional reforms are critical to ensuring that both resource revenues and environmental taxation contribute effectively to sustainable development in Iran.