Group Members: Deron Hong (75627117), Yan Chen (47529086)

Topic: Norwegian Nitrous Oxide Tax

Introduction: (Policy’s political origin, its goals and how it works)

Norwegian originally implemented a subsidy system in order to fulfill the agreement that it signed in Gothenburg Protocol in 1997. Its goal was to reduce the amount of NOx emissions from 215,000 tons to 156,000 tons, which is approximately 27% reduction by the end of 2010. However, until 2007, Norway was only able to reduce 8% out of 27%. In order to fulfill the rest of the 19% reduction in 2010, Norway decided to change its policy to impose taxation on NOx. The amount of tax charged for each kilogram of NOx emission is NOK$15.39. There is also an exemption on tax application in Norway, which applies to 650 enterprises in Norway now until the end of 2010. These companies have to pay a less than tax amount to “Business Sector’s NOx Fund,” which the money collected in this fund will be mainly using to measure the NOx emission and redistribute to some sectors covered by the tax by the end of 2011. If the reduction is less than 90% of total reduction requirement indicated in the agreement until 2011, these 650 enterprises will have to pay tax for the non-reduction amount.

1) The coverage of the policy. Discuss the sector covered and exempted. How does the policy implement over time?

The sectors covered in this policy:

-Shipping within domestic area

-Fishing vessels

-Aviation

-Railways using diesel (Railway operations)

-Engines, boilers and turbines used as energy plants within the manufacturing industries

-It only covers land and off-shore activities in Norway geographically under the Gothenburg Protocol that signed in 1997

This taxation also applies to the engines with large capacities only:

-The kinds of motors, boilers and turbines will only be covered if its total installed capacity is greater than 10MW

-The propulsion engines have to be over 750 kW in its installed capacity in order to be covered

-If the oil and gas installations are on-shore, then they will be covered in this tax too

The sectors exempted:

-The engines with capacity smaller than what above indicates

-The areas that Gothenburg Protocol did not cover in Norway

-Foreign sea activities

-Air transport

The amount of tax covered in these sectors represent 55% of Norway’s total NOx emissions.

How does the policy implement over time:

As we mentioned in the introduction, every sector covered in this policy will have to pay NOK$15.39 for every kilogram of NOx that they emit until the end of 2011, except the 650 enterprises which participate in the NOx Fund and temporarily exempted from the policy. The 650 enterprises generally pay NOK$4 for each kilogram of NOx emission, however, if the company is working on oil extraction, then it will have to pay NOK$11 instead. By signing this agreement, the companies are obligated to reduce:

-2,000 tonnes in 2008

-4,000 tonnes in 2009

-12,000 tonnes in 2010

-7,000 tonnes in 2011

 

2) Discuss the use of revenue from the tax. Is the tax revenue neutral? That is, it is designed to pay back all its revenue collected back to its population. Is its revenue earmarked towards a particular use? Or is the tax revenue put into general tax receipts?

According to our research, there is no any information about how the NOx tax collected by government will redistribute back to its population. We can only find out that what the money generated by the 650 enterprises from NOx emission will be used to. The NOx Fund will be mainly earmarked towards the measurement of a cost-effective amount of NOx in society, so we could assume that the money collected in the fund is designed to pay back to the society since the measurement of a cost-effective amount of NOx will be very important for setting the level of tax. Although the amount of money collected in NOx Fund is redistributed back to the society, we could not conclude that whether the NOx tax policy imposed in Norway is revenue-neutral or not since we cannot get information about how the government is using the NOx tax for.

 

3) Discuss the appropriateness of the tax rate? Do you believe it is approximately equal to the marginal damage from the pollutant regulated?

• Abatement cost for the 650 enterprises: since after they join the agreement in the NOx Fund, although they are paying the cost of participation in the Fund, which is lower than the cost of tax, the amount of money that they pay for the Fund will not return back to them unless they are working for measurement of NOx and apply to get the fund for support, so they have to incur the abatement costs themselves to reduce NOx emissions in order to fulfill the reduction units under the agreement. Therefore, (their abatement costs) + (the payment to the Fund) + ((the probability that the total reduction in 2011 is smaller than 90%)*($15.39/kilogram of NOx emission) * (estimated non-reduction amount of NOx emissions)) should not exceed their marginal abatement cost plus NOK$15.39, otherwise they will rather pay for the tax instead of paying for the Fund. We can think of the tax is the same as the external cost per kilogram of NOx emission, which means the marginal total cost to the firm should be the sum of marginal abatement cost plus the tax/external cost. Now since most of the companies are applying to join this agreement instead of paying the tax, it implies that the tax is actually higher than the payment which is calculated by the above underline function, so the negative externality cost to society is overestimated by the tax. Therefore, we can conclude that after the tax adding to the marginal abatement cost of firms, the marginal total cost (equals to marginal abatement cost + tax) is higher than marginal damage from the pollution. Since we cannot get the data for the probability that the total reduction in 2011 is smaller than 90%, and estimated non-reduction amount of NOx emission, we cannot estimate how much the marginal total cost is higher than the marginal damage to society.

 

In conclusion, about cost-effectiveness of tax policy in NOx: this tax policy is not cost-effectiveness since in part (2), we know that the government will have to use the NOx Fund to make measurement of the cost-effectiveness level of NOx emissions. Also, by implementing a tax policy in environmental issues, it is very hard to determine a cost-effective level of tax since the company has to know the abatement cost curve in each company covered in the sector in order to equalize them and decide a cost-effective level of tax. However, the abatement cost curve of each company is hard to obtain in reality.

Also, we can think of the other way. If there are more firms joining the agreement, it will be easier to measure how much tax it should exactly charge since this Fund is used to measure the NOx emission. Now they realized that the tax might be higher if more firms are joining , it will eventually reach a cost-effectiveness level after all of the firms join. So they could know how much they should charge for the tax in the future.

 

Resources

http://ec.europa.eu/environment/enveco/water/pdf/ANNEXES.pdf

http://www.ssb.no/english/magazine/art-2009-05-19-01-en.html

http://ec.europa.eu/transport/maritime/events/doc/2011_06_01_stakeholder-event/item14_norway_business_sector_nox_fund_brochure.pdf