BY Nicholas Choy & Caroline Chiu

The policy
Carbon policies began to emerge in the European countries in the early 1990s due to rising concerns of climate change with increasing greenhouse gas (GHG) emissions. In tackling the global climate crisis, Norway, the third largest oil exporter in the world, was one of the first to implement a carbon tax in 1991.

Figure 1. Norway tax rates vary from $15.93 (NOK 89) to $61.76 (NOK 345) per metric ton of CO₂ (Sumner, Bird and Smith, 2009, p.13).

How it works: The tax covers ~68% of CO₂ emissions (about half of Norway’s GHG emissions) and applies varying tax rates on each metric ton of CO_2. The rationale for the exemption of certain sectors was the argument of competition; the table below shows the sectors that are taxed and exempt (Sumner, Bird and Smith, 2009).

*NOK = Norwegian currency
1 Norwegian krone = 0.179937 U.S. dollars

Changes in energy intensityFigure 3. Change in energy intensity from 1990 to 1999 (in percentage) (Bruvoll and Larsen, 2002, p.8)
The negativity shows a decrease in energy intensity across sectors which contributes to the reduction of CO₂ reduction.Figure 4. Energy use and growth in energy use from 1990 to 1999 (Bruvoll and Larsen, 2002, p.9)
Higher fuel prices lead to a decrease of energy use in gasoline and heavy oil, but we see greater diversification in energy alternatives that do not generate as much carbon emissions.

The big change
In 1998, the government decided that the EIIs should be included in the carbon tax regime, so a quota commissions known as the “Norwegian Emissions Trading System (ETS)” (Gullberg and Skodvin, 2011) was proposed. The rationales for this change were 1) polluter’s pay principle and 2) half of each Kyoto participant’s commitment was to be implemented at home This proposed ETS would cover 90% of total GHG emissions; however, when it was actually implemented from 2005 to 2007, it only covered 10% of the GHG emissions. At the same time, Norway participated in the EU ETS where 40% of the carbon emissions were covered while EIIs received free emissions allowances, and petroleum industries continued to pay the carbon tax.

Evaluation of the Tax
Cost Effectiveness: the variation in tax rates across sectors creates differentiated prices for emissions leading to non-uniform marginal abatement costs, thus the policy is not cost minimizing (Gullberg and Skodvin, 2011). The graph below indicates the largest emitters of CO₂, the extractors of crude oil and natural gas, pay the highest tax rate (Bruvoll and Dalen, 2009, p. 17).

Distributional effects: Rather than employing income tax cuts, Norway channeled these tax revenues into general government accounts. In addition to revenues from offshore drilling licenses, Norway financed a pension fund worth $373 billion dollars or $80,000 for each of its citizens by 2007 (Sumner, Bird and Smith, 2009). Such a lump-sum transfer could address the regressive effects of a carbon tax as lower income groups would gain a larger proportion in terms of earnings relative to the wealthy. On the other hand, some would argue lump-sum transfers are less cost-efficient as carbon tax revenues can be used maximize efficiency gains by reducing the distortionary effects of existing taxes (Zhang and Baranzini, 2004).

Positive Impacts of Norway’s Carbon Tax:

• Technological Innovation: to avoid paying approximately $60 million in carbon taxes every year Norway’s giant gas and oil extractor, Statoil Hydro, has sequestered an estimated 1 million metric tonnes of CO₂ by investing in its $200 million Sleipner project (Sumner, Bird and Smith, 2009).
• Economic Growth with Improved Emissions Intensity: from 1990-2005 Norway’s per capita economic output increased by 47% while its per capita GHG emissions fell by 0.4% (Jaccard, Rivers and Keith, 2007).
• Compared to a simulated scenario without the tax, energy efficiency and substitution towards to less carbon intensive sources reduced emissions by 14% from 1990-1999 (Bruvoll and Larsen, 2008).

Failures of the Carbon Tax:

• Total GHG emissions increased by 15% from 1991 to 2008 (Sumner, Bird and Smith, 2009).
• Simulation results comparing with to without the tax scenarios suggest that from 1990-1999 the carbon tax only reduced emissions by 2.3% (Bruvoll and Larsen, 2008).
• MAC too low: Despite tax rates on transport and fossil fuel extraction over Norway’s tax rate, these sources of emissions have been on the rise from 1990-2006 and combined accounted for 52% of national emissions.  E.g. Statoil’s total emissions have quadrupled from 1990 to 2008 (Aboud, 2008)

(Hansen, 2008, p. 8).

Conclusion
As total GHG emissions rose by 15%, Norway’s carbon tax failed to achieve its goal of reducing emissions. Implementation of the tax is not cost-minimizing, so it is sub-par in terms of cost effectiveness. However the technological progress encouraged by the tax, especially in the field of carbon sequestration, and improvements in energy intensity illustrate a better scenario than if the tax had not been implemented.

References

Aboud, L. (2008, September 30). An Exhausting War on Emissions.  Retrieved from http://online.wsj.com/article/SB122272533893187737.html#articleTabs%3Darticle

Bruvoll, A. & Larsen, B. M.  (2002). Greenhouse gas emissions in Norway: Do Carbon taxes work? Statistics Norway, Research Department, Discussion Papers (No. 337), 1-28.

Gullberg, A. T., & Skodvin, T. (2011). Cost Effectiveness and Target Group Influence in Norwegian Climate Policy. Nordic Political Science Association.34, 123-142

Hansen, K. L. (2008). Official Statistics on GHG emissions – the Norwegian Model [Powerpoint Slides].  Retrieved from http://unstats.un.org/unsd/climate_change/docs/presentations/CCPresentation_StatNorway_session2.pdf

Jaccard, M., Rivers, N., & Keith, D. (2007, November 12). Carbon taxes, the economy and the poor. The Financial Post, pp. 1, 3.

Sumner, J., Bird, L., & Smith, H. (2009). Carbon Taxes: A Review of Experience and Policy Design Considerations. National Renewable Energy Laboratory, Technical Report (NREL/TP-6A2-47312), 1-30.

Zhang, Z. X., & Baranzini, A. (2004). What do we know about carbon taxes? An inquiry into their impacts on competitiveness and distribution of income. Energy Policy, 32, 507-518.