Air pollution is an example of a negative externality; it imposes harmful effects and
costs on people other than polluterS. In controlling air pollution, efficiency
argument implies that, there is a rolefor the government to play. Studies show that
taxation of fuels can be a powerful indirect instrumentfor controlling air polluticn
because of the association between fuels use and emissions. In Iran, fuels
consumption is highly subsidized and energy prices have for several yean been
below opportunity costs as measured by border prices. The present study examined
the impact of fuel price increases-removing energy subsidies-on the emissions of
air pollutants in the industry sector. We analyze interfuel substitution in this
sector-within a translog cost model-and combine the results with emission factors
to assess the potential for emission reductions via demand changes. The empirical
results indicale that: (1) substitution possibilities werefound for most combinations
of fuel types in induStry sector; (2)for SOx, NOx, SPM and HC, emission elasticities
with respect to the price of heavy petroleum products are -0.289, -0.220. -0.255 and
-0.072, respectively. Also, a 10 percent price increasefor light petroleum products
would reduce t0tal emissions of CO and HC by 3.36% and 0.47% respectively.