Sweden could be one of the most attractive place for environmentalists. In 2007, Sweden made its mark on a list that did the most to save the planet. From year 1990 to 2006, the carbon emission in Sweden decreased significantly by 9%, while the Kyoto Protocol allowed for a 4% increase in emissions. At the meantime, Sweden still enjoyed economic growth of 44% in fixed price[1]. All this remarkable success has not happened on its own, one of the main reason is the introduction a carbon tax in 1991.

What is a carbon tax?

Carbon tax is a form of pollution tax. It is usually defined as a tax based on greenhouse gas emissions generated from burning fuels[2]. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas or oil[3]. Since there is a price added on carbon emission, the price of electricity, natural gas or oil will, therefore, increase. It sends out a massage to the market that to reduce the conventional energy consumption. Under the affect a carbon tax, industries, business and individuals tend to pursue clean alternative energies and increase energy efficiency.

However, a main problem with a carbon tax is that by raising the price of energy it disproportionately impacts the poor. In the case of Sweden, introducing a carbon tax actually stimulated its economic growth. Since 2010, Switzerland has led the ranking as the most competitive economy in the world according to the Global Competitiveness Report 2010-2014, but it does not mean that there is no impact on the poor. We will discuss this later.

Snapshot of carbon tax in Sweden

• The origin of the carbon tax: Sweden enacted the carbon tax with the reformed of energy tax system in 1991.
• The goal is to discourage oil use.
• How it works: The tax is levied as a specific tax on oil, coal, natural gas, bottled gas, and petrol.

Which fuels are covered and which fuels are exempted?

As a complement to the energy taxes system in 1991, the carbon tax is a general level tax. The major taxed sectors are natural gas, gasoline, coal, light and heavy fuel oil, liquefied petroleum gas, and home heating oil[4].

The tax is not levied for biofuels, and peat is also exempt from taxation (Folke Bohlin, 1998). For energy intensive industries, like electricity production, no tax is applied but non-industrial consumers have to pay a tax on electricity consumption. Additionally, no tax applied on 50% of the general level on fuels used in industry (Bengt Johansson, 2000).

How does the policy implement over time?

The tax was initially set at a general level of UUS $133 per ton carbon. But since it put a heavy loan on industries that relied on natural gas, coal and oil (a double total tax for natural gas, 80% increase in total tax for coal and around 20% increase in total tax for oil), the tax rate was amended in 1993 considering the competitiveness of industry. After the emendation, industry, agriculture, forestry, and fisheries paid only about 21% of the tax and this remains the same today. Besides, these sectors can receive additional reductions (and refunds) depending on the company’s value of sales versus their tax payment. In year 2009, the standard tax rate was $104.83/metric ton CO₂ while the tax rate for industry was largely lower at $23.04/metric ton CO_2.

Potential negative distribution effects

“In 2011, for example, Swedish households faced the highest prices for natural gas which was 4.2 times more expensive than the cheapest gas prices in Europe – in Romania. Furthermore, nearly half the cost of natural gas in Sweden – 44.3 percent – was due to taxes and levies in 2011.” (James Burgess of Oilprice.com)

Distribution problem is reported as a primary issue on the carbon taxes application. The poor would suffer more because a larger proportion of their available income has to be paid for daily energy usage than their wealthier counterparts. In 1995, energy and environmental taxes generated a total national revenue of US $6 billion or 3% of the gross national product[5]. If the fiscal revenues collected from the carbon tax would be recycled to support R&D projects or just return some amount to the poor, some of the regressive impacts may be offset.

Is it a cost-effective tax policy?

Cost-effectiveness means that using the lowest cost to achieve a set target. Therefore, we need to know the degree to which carbon tax has achieved its goal as well as the cost.

As mentioned before, the goal of this carbon tax is to discourage oil use and hence decreasing the carbon emission. The result was very satisfying – by 2003, oil accounted for only 32% of Sweden’s energy, and Sweden is now pursue to become the first completely oil-free economy in the world by 2020[6].

The distributional implications discussed above is one part of the social cost of the carbon tax policy, competitiveness impacts could be another social cost.

Competitiveness implies the ability of an economic entity to sell its products and services in domestic and global market. Take a company as an example, if the company emit CO₂, a carbon tax will affect the cost structure and increase expense, thus loss its price advantages. The emendation of tax rate in 1993 in Sweden was a result of such concerns.

Another cost would be generated from a standard level of tax rate in different sectors throughout Sweden. This can result in some sectors do not operate in their most efficient way. In conventional economics, a tax policy would be cost-effective when the tax rate equals a company’s marginal abatement cost. However, it is very difficult for the government to know all the detailed information in all sectors. If the tax rate is higher for some industries, they need to pay higher than they should, but if the tax rate is lower for some high carbon emitting industries, they are required to pay less than they should and it may lead to more pollution as the tax is too low.

Policy makers prefer a carbon tax for its simplicity but it could be costly as well. So government of Sweden need to be thorough to keep their success of the carbon tax policy.