Background

Known as Persia until 1935, Iran is the second largest Middle Eastern country by area, after Saudi Arabia, with a total area of 1,648,195 km2. With total land boundaries of 5,894 km and a coastline of 2,440 km, Iran borders countries including Afghanistan, Iraq, Azerbaijan, Turkey, Turkmenistan, Pakistan and Armenia, as well as the Gulf of Oman, the Persian Gulf and the Caspian Sea. The total population of Iran is about 82 million as of July 2017, with 99.4% of the total population identifying as Muslim, the country’s official religion. Iran has a mostly arid or semiarid climate. The main natural hazards are periodic droughts, floods, dust storms and earthquakes. Iran also currently suffers from several environment stresses including severe air pollution, especially in urban areas, from vehicle emissions, refinery operations and industrial effluents, deforestation and desertification, and oil pollution in the Persian Gulf. [1] Iran is endowed with ample natural resources, especially fossil fuels-including petroleum, natural gas and coal, enjoying the world’s fourth largest crude oil reserves and second largest natural gas reserves.[2] As one of the largest oil producers in the world, Iran is facing great challenges in terms of mitigating climate change and supporting sustainable development, with oil revenues playing a vital part in government budgets and current economic growth.

Overall Fiscal Profile

Iran is the second largest economy in the Middle East and North Africa region, with an estimated Gross Domestic Product (GDP) in 2017 of US $430.7 billion. The fiscal policy design of Iran faces numerous challenges. [3] The country’s economic activities and government revenues depend heavily on oil- for a large amount of time, 40% of the Iran’s total government budget relied on oil receipts- which  made it volatile and vulnerable. This fiscal vulnerability translates into a low growth performance, considerable shrinking of fiscal space, as well as overall pro-cyclical fiscal policies.

Since 2008, real GDP growth per capita has been stagnant on average. In 2012, the decline of oil prices from US $105 per barrel to US $96 per barrel, led to a reduction in infrastructure investment by 3% of GDP and a 2.5% reduction in human capital investment. In late 2014, global oil prices slid further down to around US$ 70 per barrel, [4] resulting 30% decrease in Iran’s oil revenue. [5] Meanwhile, Iran’s budget operates in a fragmented and rigid manner, lacking effective expenditure controls and cash management, all of which collectively make the country’s public finances more vulnerable. In the face of vulnerable economy and low economic growth, the Iranian government has adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and the sixth five-year development plan for the 2016-2021 period, including reform strategies targeting the allocation and management of oil revenues and increasing the resilience of the economy. [6] The Iranian government has managed to tackle the fiscal system deficiencies and significantly reduce the inflation rate from approximately 43% in 2013 to below 12% in 2016. [7]

At the end of 2018 the Plan and Budget Organization of Iran drafted the budget bill for the next fiscal year (March 2019-2020) where it decided to reduce the budget reliance on oil revenues to 27%, as well as set average oil prices at $54 a barrel [8]. This comes as a response to the sanctions imposed by the USA on the country, which highlighted the extent of Iran’s dependence on petroleum revenues. The “Sixth Economic Development Plan” stipulates that Iran’s dependence on petroleum export revenues will be reduced to 20% by 2022 and eliminated by 2024 [9].

Policies and Strategic Framework for Green Economy

Iran has yet to develop an official policy framework for the green economy; nevertheless the country has realized the importance of reforming the energy sector.

Energy Subsidies. The total amount of energy subsidies in Iran was the second highest in the world in 2016, with public support for oil, natural gas and electricity collectively amounting to about US $35 billion. [10] In 2018, Iran became the country with the highest fossil fuel consumption subsidies, which represented 15% of its GDP that year[11].  With USD $26.6 billion in oil consumption subsidies, USD $16.6 billion in electricity and USD $26 billion in natural gas. In 2013, Fossil fuel subsidies (coal and natural gas) comprised approximately 85% (US$ 30 billion) of total energy subsidies, and 12% of total GDP. [12] In 2015 it was estimated that, as a major oil producer, Iran’s energy sector was responsible for 77% of overall greenhouse gas emissions. [13] In fact, Iran is estimated to be the first responsible country to climate change in the Middle East, with total GHG emissions of nearly 616,741 million tons of CO2 [14]. Iran will experience an increase of 2.6°C in average temperature and a 35% decline in precipitation in the coming decades.

In December 2010, the Iranian government initiated a comprehensive economic reform process to phase out subsidies to fossil fuel products. The economic reform required energy carriers to gradually increase the prices of petroleum products, including gasoline, diesel fuel, and fuel oil among others, up to a level of not less than 90% of the Persian Gulf free on board (FOB) prices from 2010-2015. [15] Natural gas retail prices were also schedule to increase to at least 75% of average export prices net of transmission costs and export taxes according to the reform act. [16] As a result, energy prices increased by a factor of 4-15. [12] To compensate for the rising energy prices, households received universal cash transfers -US $45 per month per person regardless of people’s income levels.  However, despite a good start in 2010, the implementation of the reform was halted in late 2012 due to growing concerns over its financing and the deteriorating macroeconomic situation. [17] Although the reform program reduced poverty incidence and regional disparities in poverty, and cash transfers were able to be covered by increased revenues from higher energy prices, the program was in deficit after the first year and financed at the cost of inflation. The inflation rate increased from 12%, two months before the reform, to 22% in January 2012. Further, in January 2012, after the imposition of the new round of international sanctions, inflation continued to increase and reached almost 24% later in 2012. [16]

The situation worsened with the continued imposition of sanctions on Iran’s oil exports by the USA . Iran’s economy shrank by 3.9 % in 2018 and the IMF estimates it will shrink by 6 % in 2019, where inflation could reach 40 % or more [18].

Renewable Energy. The development of renewable energies is also receiving increasing attention from the government as renewable sectors could make contributions from social and economic perspectives, and in both the short and long term. Air pollution, especially in the capital city, Tehran, poses a considerable threat to Iranians.

Between 2004 and 2010, Iran developed a National Renewable Energy Master Plan to expand the installed capacity of renewable energies and incentivize clean technologies. The Plan set a target of installing 500MW of capacity of a variety of renewable energies and technologies by 2010, including small-scale hydro power (80MW), wind power (250MW), solar thermal power (17.25MW), solar photovoltaic (3MW), geothermal (100 MW), and solar water heating (50MW). [19]

Meanwhile, Iran has introduced a number of reforms to promote its renewable energy sector. The government’s fifth five-year plan (2010-2015) established feed-in-tariffs, which have allowed Iran’s leading electricity utility and subsidiaries of the country’s Energy Ministry to sign long-term Power Purchase Agreements with renewable energy producers at guaranteed prices, helping increase renewables’ competitiveness in the electricity sector. [13] In May 2016, the Renewable Energy Organization of Iran (SUNA) said that it would increase guaranteed prices for electricity generated at plants built with local skills and equipment by up to 30% — an attempt to boost domestic manufacturing and employment in the sector as well as foster its growing renewable energy industry.

More recently, the Iranian government has signaled that it is open to investment in the renewable energy sector, with efforts to attract investors showing some progress. In June 2017, Planet in Green, a German consultancy, signed a contract with SUNA to develop a 100MW solar park near Tehran. In August 2017, the British Photovoltaic Association agreed to cooperate with Iran’s Energy Ministry on up to 1 GW’s worth of solar projects. And KTC, the South Korean company, signed a US $820 million deal in October 2017 to build a solar plant and a wind farm in Iran. [13] In May 2016, a specific joint statement on energy has been agreed between Iran and the European Commission. It establishes a high-level dialogue on energy between the EU and Iran and defines the scope and aims of cooperation on fossil fuels as well as electricity, renewable energy and energy efficiency. This agreement also brings Iran a platform for foreign investors and businesses to look into investment opportunities for clean energy, renewables, energy efficiency and energy conservation actions in Iran. [20] There are now 27 provinces, out of the 31 total provinces, that are equipped with large-scale (having a capacity of over 1 MW) solar power plants [21]. Iran also has approximately 141 megawatts of installed wind power [22]. The country will soon be able to transfer and export renewable electricity to nearing countries.

As oil becomes a more volatile and unreliable source of revenue, and the impacts of climate change weight over the country, Iranian policy-makers are compelled to prioritize environmental policy and use foreign investment and oil revenue to stimulate the renewable energy sector. Moreover, Iran’s climate has a very high potential for the production of solar and wind energy.

However, despite the positive progress, Iran’s renewable energy sector still has challenges on its development pathway, with remaining limits on Iran’s access to foreign financing being the first problem ahead.

 Bibliography:

[1] CIA, 2017, The World Fact Bookhttps://www.cia.gov/library/publications/the-world-factbook/geos/ir.html

[2] U.S. Energy Information Administration, 2014, Country Analysis Brief: Iranhttp://www.iranwatch.org/sites/default/files/us-doe-irananalysisbrief072114.pdf

[3] IMF, 2017, Islamic Republic of Iran: selected issues, https://www.imf.org/en/Publications/CR/Issues/2017/02/27/Islamic-Republic-of-Iran-Selected-Issues-44708

[4] Samuelson, R.J, 2014, Key facts about the great oil crash of 2014, The Washington Post, https://www.washingtonpost.com/opinions/robert-samuelson-key-facts-about-the-great-oil-crash-of-2014/2014/12/03/a1e2fd94-7b0f-11e4-b821-503cc7efed9e_story.html?utm_term=.c0cf2e8d4f60

[5] DiPaola, A. and  Motevalli, G., 2014, Iran’s Oil Revenue Falls 30% Because of Global Price Decline, Bloomberg, https://www.bloomberg.com/news/articles/2014-10-29/iran-oil-revenue-shrinks-30-percent-on-price-drop-rouhani-says

[6] World Bank, 2017, The World Bank In Islamic Republic of Iran: Overviewhttp://www.worldbank.org/en/country/iran/overview

[7] Soorghali, H., 2016, Iran’s Renewable Energy Sector: Measuring Economics and Mapping Investment Opportunities and Risks, https://static1.squarespace.com/static/5599163ee4b07172a30a4fca/t/575ee2b04c2f85ce6900c887/1465836210111/Renewable+report+-+executive+summary.pdf

[8] Financial Tribune (2018), “Iran Lowers Reliance on Oil Revenues in 2019-20 Annual Budget Bill”, Available at https://financialtribune.com/articles/domestic-economy/95457/iran-lowers-reliance-on-oil-revenues-in-2019-20-annual-budget-bill

[9] Tavakol, Mohsen (2019) “Iran’s Crude Oil Exports: What Minimum Is Enough to Stay Afloat? Iran’s Crude Oil Exports: What Minimum Is Enough to Stay Afloat?”, Available at https://www.atlanticcouncil.org/blogs/iransource/iran-s-crude-oil-exports-what-minimum-is-enough-to-stay-afloat

[10]-IEA, Energy Subsidies, https://www.iea.org/weo/energysubsidies/

[11] IEA (2018) World Energy Outlook, Fossil Fuel subsidies, Available at https://www.iea.org/weo/energysubsidies/

[12]-Moshiri, S. 2013. Energy Price Reform and Energy Efficiency in Iran. International Association for Energy Economics. https://www.iaee.org/en/publications/newsletterdl.aspx?id=197

[13]-Nachmany., M, 2015, The 2015 Global Climate Legislation Studyhttp://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/05/IRAN.pdf

[14] Mansouri Daneshvar, M.R., Ebrahimi, M. & Nejadsoleymani, H. Environ Syst Res (2019) « An overview of climate change in Iran: facts and statistics”, available at  https://link.springer.com/article/10.1186/s40068-019-0135-3

[15]-Vagliasindi, M. 2013. Implementing Energy Subsidy Reforms: Evidence from Developing Countries. Directions in Development. Washington, DC: World Bank, http://hdl.handle.net/10986/11965

[16]-Hassanzadeh, E. 2012, Recent Developments in Iran’s Energy Subside Reforms, International Institute for Sustainable Development, https://www.iisd.org/gsi/sites/default/files/pb14_iran.pdf

[17]-Fad, S. G., 2013, Case Studies on Energy Subsidy Reform, International Monetary Fund, www.imf.org/external/np/pp/eng/2013/012813a.pdf

[18] Barbuscia, Davide (2019) “Iran inflation could reach 40 percent this year as economy shrinks further – IMF”, available at: https://www.reuters.com/article/us-iran-economy-imf/iran-inflation-could-reach-40-percent-this-year-as-economy-shrinks-further-imf-idUSKCN1S509Q

[19]-Burlinghaus, E., 2017, The Other Green Movement: Renewable Energy’s Prospects in Iran, Foreign Affairs, https://www.foreignaffairs.com/articles/iran/2017-04-27/other-green-movement

[20]-European Commission, 2016, Iran and the EU, https://eeas.europa.eu/delegations/iran/2281/iran-and-eu_en.

[21] Financial Tribune (2019) “Zanjan Solar Power Plant Hooked to National Grid”, available at:  https://financialtribune.com/articles/energy/98785/zanjan-solar-power-plant-hooked-to-national-grid

[22] Pouyan K. Jan (2018), “Renewables are Booming in Iran”, available at https://medium.com/age-of-awareness/renewables-are-booming-in-iran-98781650669d