Economic Research and Perspectives

Economic Research and Perspectives

The Role of Good Governance in Shaping the Effects of Oil Rents and Carbon Taxation on Sustainable Development in Iran: Evidence from a QARDL Approach

Document Type : مقالات علمی پژوهشی

Authors
Bahare Baghaeipour
Morteza Sameti 1
Teymour Mohammadi 2
1 Retired Professor of Economic Department of Isfahan University , Isfahan, Iran.
2 Professor of Economics, Department of Economics, Faculty of Economics, Allameh Tabataba’i University.
10.48311/ecor.2025.115546.1000
Abstract
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.
Keywords
Carbon Tax
Good Governance
Oil Rents
Quantile.Autoregressive Distributed Lag Model
Sustainable Development
Subjects
References
Abiad, A., Furceri, D., & Topalova, P. (2016). The macroeconomic effects of public investment: Evidence from advanced economies. Journal of Macroeconomics, 50, 224-240.
Alam, M. S., Alam, M. N., Murshed, M., Mahmood, H., & Alam, R. (2022). Pathways to securing environmentally sustainable economic growth through efficient use of energy: a bootstrapped ARDL analysis. Environmental Science and Pollution Research, 29(33), 50025-50039.
B. Zhang, S. Liu, J. Zang, and Y. Zhang. (2016). Carbon tax, subsidy policies and the low carbon transition of China's energy system, Applied Energy, 184: 1093-1102.
Bazzazan, F. and Karbasi Vayghan, S. (2022). Price effects of carbon dioxide tax on development path. Iranian Economic Development Analyses, 8(1), 175-198. doi: 10.22051/ieda.2021.36316.1280 [In persian]
Bhaisare, M., & Bhaisare, G. (2020). Carbon tax and sustainable development, International Journal of Advances in Engineering and Management, 2(9): 74-79.
Bos, K., & Gupta, J. (2019). Stranded assets and stranded resources: Implications for climate change mitigation and global sustainable development. Energy Research & Social Science, 56, 101215.
 Bovenberg, A. L., & de Mooij, R. A. (1994). Environmental levies and distortionary taxation. American Economic Review, 84(4), 1085-1089.
Cahyadi, H. K., Marcheila, M., & Panggabean, R. R. (2023). Development in Implementation of Carbon Tax: A Bibliographic Study. In E3S Web of Conferences (Vol. 388, p. 03012). EDP Sciences.
Cavallo, E., & Daude, C. (2011). Public investment in developing countries: A blessing or a curse?. Journal of Comparative Economics, 39(1), 65-81.
Dehshiri, M. R. (2016). Globalization and sustainabile development. Journals of Environmental Education and Sustainable Development, 4(2), 64-75. [In persian]
Dirkvand, Z. , Nademi, Y. and Maaboudi, R. (2023). The effect of oil rent on social capital in OPEC member countries: Threshold panel approach. Iranian Energy Economics, 12(48), 85-106. doi: 10.22054/jiee.2023.74250.2016[In persian]
Delgarm, A. , Pahlavani, M. and Radnia, M. (2024). Investigating the effect of the quality of institutions on the reduction of carbon dioxide emissions (a selection of members’ countries of the Shanghai Cooperation Organization). Journal of Environmental Science Studies, 9(1), 7919-7937.
doi: 10.22034/jess.2023.397444.2030. [In persian]
Del Monte, A., & Papagni, E. (2001). Public expenditure, corruption, and economic growth: The case of Italy. European Journal of Political Economy, 17(1), 1-16.
Gillanders, R., & Powell, M. (2016). EITI, institutional quality and resource governance. World Development, 83, 75-86.
González, L. I., & Lodola, G. (2019). The impact of oil rents on subnational development: Evidence from Argentina. Studies in Comparative International Development, 54(4), 550-570.
Grossman, G. M., & Krueger, A. B. (1995). Economic growth and the environment. The quarterly journal of economics, 110(2), 353-377.
 Goulder, L. H. (1995). Environmental taxation and the double dividend: a reader’s guide. International Tax and Public Finance, 2(2), 157-183.
Güney, T. (2017). Governance and sustainable development: How effective is governance?. The Journal of International Trade & Economic Development, 26(3), 316-335.
Hallegatte, S., Heal, G., Fay, M., & Treguer, D. (2011). From growth to green growth: A framework. In: Policy Research Working Paper 5872. Washington, D.C, World Bank.
Imam, A. (2022).  Impact of carbon taxes, economic growth, globalization, forest rent, inflation and urbanization on sustainable development in China. International Journal of Research-Granthaalayah, 9(12) :303-314.
doi: 10.29121/granthaalayah. v9.i12.2021.4450.
Faraji Dizaji, S. , Zeighami Dehaghani, F. and Sadeghi, H. (2023). The effects of natural resources rents and good governance on happiness in selected countries: A generalized method of Moments approach. Quarterly Journal of Quantitative Economics (JQE), 20(2), 1-31.
doi: 10.22055/jqe.2020.31073.2146 [In persian]
Feyzi Yengjeh, S. , Hekmati Farid, S. and Yahyavi Miyavagi, S. (2017). Impact of oil resource rent on good governance indicators of the oil exporting countries. Iranian Journal of Economic Research, 22(71), 189-218.
doi: 10.22054/ijer.2017.8283[In persian]
 Fullerton, D., & Metcalf, G. E. (1997). Environmental Taxes and the Double Dividend Hypothesis. Journal of Environmental Economics and Management, 24(1), 85-102.
 Fullerton, D., & Metcalf, G. E. (2002). Tax Incidence. In A. J. Auerbach & M. Feldstein (Eds.), Handbook of Public Economics (Vol. 4, pp. 1787-1872) Amsterdam: Elsevier.
Fullerton, D., Metcalf, G. E., & Zodrow, G. R. (2011). Tax incidence review and applications in environmental policy. Journal of Public Economics, 95(11-12), 1173-1180.
Jahangard, E., Banoe, A. A., Barkhordari, S., Amadeh, H. and Doudabi Nezhad, A. (2019). Comparison of economic effects of carbon taxes and energy taxes on Iran's economy: A Computable General Equilibrium approach. Iranian Energy Economics, 8(30), 61-92. doi: 10.22054/jiee.2019.10487[In persian]
Kahia, M., & Omri, A. (2024). Oil rents and environmental sustainability: Do green technologies and environmental technological innovation matter?. Journal of Open Innovation: Technology, Market, and Complexity, 10(3), 100366.
Kabumba, I. (2005). Good Governance and Sustainable Development in Africa: Meaning, Relationship, Problems and Strategies. In International Conference on the Social Sciences in Africa (Vol. 21).
Khan, S., Murshed, M., Ozturk, I., & Khudoykulov, K. (2022). The roles of energy efficiency improvement, renewable electricity production, and financial inclusion in stimulating environmental sustainability in the Next Eleven countries. Renewable Energy, 193, 1164-1176.
Khodadadkashi, F., Akaaberi Tafti, M., Mosavi jahromi, Y., Khosravi nejad, A. (2016) The comparison of welfare and environment impacts of carbon tax in different general equilibrium modelegions of Iran: Application of dynamic regional. J. Tax Res., 23(28). [In persian]
 Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., & Stern, N. (2018). Making Carbon Pricing Work for Citizens. Nature Climate Change, 8(8), 669-677.
Lee, N., & Sissons, P. (2016). Inclusive growth? The relationship between economic growth and poverty in British cities. Environment and Planning A: Economy and Space, 48(11), 2317-2339.
Montero-Moraga, J. M., Benavides, F. G., & Lopez-Ruiz, M. (2020). Association between informal employment and health status and the role of the working conditions in Spain. International Journal of Health Services, 50(2), 199-208.
Majidzadeh, F. and Dahmardeh, N. (2023). Investigating the role of institutional quality in the impact of natural resource rents on Iran's financial development. Economic Growth and Development Research, 13(49), 122-107. doi: 10.30473/egdr.2022.61355.6350 [In persian]
Marron, D. B., & Morris, A. C. (2016). How to Use Carbon Tax Revenues Tax Policy Center. Urban Institute & Brookings Institution.
Marron, D. B., Toder, E. J., & Austin, L. (2015). Taxing Carbon: What, Why, and How. Tax Policy Center Urban Institute & Brookings Institution. 1-19
Meng, L., & Li, J. (2023). Efficient natural resource rents and carbon taxes in BRICS green growth. Resources Policy, 86, 104043.
Metcalf, G. E., & Stock, J. H. (2020). the macroeconomic impact of carbon taxes. NBER Working Paper 27488.
Murshed, M., Apergis, N., Alam, M. S., Khan, U., & Mahmud, S. (2022). The impacts of renewable energy, financial inclusivity, globalization, economic growth, and urbanization on carbon productivity: Evidence from net moderation and mediation effects of energy efficiency gains. Renewable Energy, 196, 824-838.
Nordhaus, W. D. (2017). Revisiting the social cost of carbon. PNAS, 114(7), 1518-1523.
OECD. (2021). Effective Carbon Pricing and Governance Transparency.
OECD. (2022). Distributional Impacts of Carbon Pricing and Energy Taxation. Paris: OECD Publishing.
Ologunde, I. A., Kapingura, F. M., & Sibanda, K. (2020). Sustainable development and crude oil revenue: A case of selected crude oil-producing African countries. International Journal of Environmental Research and Public Health, 17(18), 6799. doi: 10.3390/ijerph17186799
Omri, A., & Mabrouk, N. B. (2020). Good governance for sustainable development goals: Getting ahead of the pack or falling behind?. Environmental Impact Assessment Review, 83, 106388.
Pearce, D. W. (1991). The role of carbon taxes in adjusting to global warming. The Economic Journal, 101(407), 938-948.
Pearce, D. (2007). Financing for Sustainable Development. Handbook of Sustainable Development, 447.
Pigou, A. (1932). The Economics of Welfare (4th. ed.). Macmillan.
Pour Ghafar Dastjerdi, Javad. (2014). Green tax (Environmental taxes). Economic Journal, 1 and 2, 135-148. [In persian]
Qian, J., & Chen, L. (2025). Impact of natural resources rents on green growth: Evidence from G7 countries. Frontiers in Environmental Science, 13, 1482812.
Raoofi, A., Haghighi, H., Khanjankhani, K., Ggholami, M., & Takian, A. (2025). Good governance: Challenges and opportunities of Iran's context in achieving sustainable health development. Payesh 2025, 24(2) :165-183. [In persian]
Safdar, S., Khan, A., & Andlib, Z. (2022). Impact of good governance and natural resource rent on economic and environmental sustainability: An empirical analysis for South Asian economies. Environmental Science and Pollution Research, 29(55), 82948-82965.
Sarr, M., & Wick, K. (2010). Resources, conflict and development choices: Public good provision in resource rich economies. Economics of Governance, 11, 183-205.
Sadeghi, Seyed Kamal and Mansouri, Rabab. (1400). Determining the impact of oil rent on economic development (Case study of Iran). First International Conference on Management, Economics and Accounting Sciences, Sari, https://civilica.com/doc/1464144
Sepehrdoust, H. , Rajabi, F. and Barooti, M. (2015). The impact of good governance on income performance of tax system. Quarterly Journal of Applied Theories of Economics, 2(2), 103-126. [In persian]
Shakerin, S. , Mosavi, S. N. and Aminifard, A. (2022). Economic-environmental analysis of adoption of green tax policy in Iran with Calculable General Balance approach. Journal of Applied Economics Studies in Iran, 11(42), 195-218. doi: 10.22084/aes.2021.25078.3360 [In persian]
Sedaghat Kalmarzi, H. , Fattahi, S. and Sohaili, K. (2019). New evidence from oil rent and economic growth in OPEC countries: An application of the hybrid model of threshold Markov Switching model. Journal of Econometric Modelling, 4(3), 37-58. doi: 10.22075/jem.2019.18089.1331 [In persian]
Sinha, A., & Sengupta, T. (2019). Impact of natural resource rents on human development: What is the role of globalization in Asia Pacific countries?. Resources Policy, 63, 101413.
Sghayri, B. (2022). The effect of natural resources on sustainable development: The institutional threshold. McGill Journal of Sustainable Development Law/Revue de droit du développement durable de McGill.
tiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector (4th. ed.). New York: W. W. Norton.
UNEPFI. (2022). Net zero asset owner alliance. Position Paper on Governmental Carbon Pricing, Availabel at: https://www.unepfi.org/wordpress/wp content/uploads /2022/06/NZAOA_Governmental-Carbon-Pricing.pdf.
Venables, A. J. (2016). Using natural resources for development: Why has it proven so difficult?. Journal of Economic Perspectives, 30(1), 161-184.
Wang, Y. (2023). What drives sustainable development? Evaluating the role of oil and coal resources for selected resource rich economies. Resources Policy, 80, 103078.
World Bank. (2022). Carbon Pricing and Just Transition Strategies. Washington, D.C.: World Bank Group.
World Bank.(2021). Carbon Pricing and Poverty Distribution: Policy and Practice Review. Washington D.C.: World Bank Group.
World Bank. (2020). State and Trends of Carbon Pricing 2020. World Bank.
World Commission on Environment and Development. (1987). Our Common Future Oxford. UK: Oxford University Press.
Yiadom, E. B., Mensah, L., Bokpin, G. A., & Mawutor, J. K. (2024). Carbon tax adoption and foreign direct investment: Evidence from Africa. Cogent Economics & Finance, 12(1), 2312783.
Zahiri, M. , Zayanderoody, M. and Jalaie, S. A. (2022). Investigating the effect of good governance on sustainable development of selected countries (OPEC Plus oil countries group). The Journal of Economic Studies and Policies, 9(1), 170-193. doi: 10.22096/esp.2022.136770.1416 [In persian]
Zahiri, M. , zaianderoodi, M. , & Jalaee, S. A. (2021). Investigating the effect of good governance dimensions on the sustainable development index of Iran. Macroeconomics Research Letter, 15(30), 210-231.
doi: 10.22080/iejm.2021.20090.1809 [In persian]