This study investigates the effects of increasing real energy prices on technical environmental efficiency in Iran using a directional distance function. To achieve this purpose, six variables are used, namely labor, capital stock, energy consumption, real energy price, industrial value added, and environmental cost index, for the period 2009–2015. Moreover, two indexes for industrial environmental cost and real energy price are introduced. The environmental cost index is derived from the pollution cost of six types of emissions (NOx, SO2, CO2, CO, CH4, SPM) produced by 23 industries. The results show that the real energy price and distance function have an inverse relationship. Specifically, higher real energy prices cause industries to move toward using more energy-efficient technologies and more technical environmental efficiency. This study is one of the few studies that have evaluated the environmental effects of targeted subsidy law or energy price liberalization in Iran and demonstrates that an increase in real energy prices would lead to improved environmental technical efficiency.

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