Anuar Tuleshov

Nicole Hannay

Economic Instruments – Charges and taxes

Sweden Nitrous Oxide Charge

Introduction

One of the most destructive creations of human-made-pollution is acid rain, sulphur dioxide (SO2) and airborne emission of nitrogen oxides (NOx) are the main components of acid rain, this rain causes significant widespread damage throughout Sweden and the rest of the world. Acid rain is especially harmful to vegetation and wildlife. The consequence of airborne emission (NO2) could be further eutrophication of forestland and marine ecosystems. This reaction that the ecosystems are forced to endure act as a response to increases in additional external affluences (nitrates & phosphates). Consequently that leads to high concentrations of unnatural nutrients, especially phosphates and nitrates. These typically promote excessive growth of algae, as the algae die and decay high levels of organic matter and the decomposing organisms deplete the amount of available oxygen. This depletion causes the death of other organisms and is felt the entire way up the food chain resulting in overall losses in biodiversity.

Sweden initiated a new agency in 1967; the Sweden Environmental Protect Agency (SEPA) it was founded with the purpose to implement environmental policies.  Acid rain or any kind of acidification is harmful to Sweden because most of its areas are covered by granite bedrock, which is very vulnerable and can be heavily affected by acidification. The main problem Europe is facing is that even if a country for example, Sweden will reduce its pollution their environment will still be affected by pollution that was produced in the nearest country or elsewhere. This has made the producers of acid rain elements, nitrogen oxides (NOx) and sulphur dioxide (SO2) important factors as environmental policy targets in Sweden (and Norway). In 1985 the Swedish Parliament established a target to reduce nitrogen oxide emissions to 30% below their 1980 level by 1995. By 1991 emissions had been reduced by over 70% (OECD, 1997) the objective was met in 1998 (Hőglund, 2000). Existing regulatory policy was not deemed sufficient to meet the target, thus the NOx charge was introduced. This policy was initiated in 1991 and implemented by the government in 1992.

Changes were taking place as early as 1990 when some companies took the initiative to reduce emissions in anticipation of the charge. In 1992, the initial year of the charge, emision levels dropped 36%. (R.Branlund, B. Kristron 1997)

 

Primary sources of nitrogen oxides (OECD, 1997, pp43):

• road transport 41%;
• industrial machinery and processes 27% ;
• power generation 11%

 

Main goals

In combination with the reduction of the pollution, the policy aimed to rise and foster investments in new technologies that will further reduce emissions. Moreover, the policy was introduced in order to improve the existing policy and its regulatory measures. (Barde & Smith, 1997) and ‘to allow cost-effective implementation of measures to reduce emissions below the levels required under the permit procedure’ (OECD, 1997). The NOx charge has been directed at reducing emissions from the power generation sector and large combustion plants in industry, and is thus aimed at a relatively small proportion of total emissions (OECD, 1997).

Coverage and how it works

The mechanism can be considered partially implemented because only large combustion plants had to pay the compulsory charge. There were also high costs of metering and abatement, which were unreasonable for small plants, thus small plants were excluded. If a tax without refunds had been applied to only a subsection of some industry then this would have been unfair compared to other firms in the same industry. In this case, if the tax were applied only to the large plants, large companies would have an incentive to set up several small combustion plants instead of one big one and this is typically not environmentally friendly or economically feasible.  As the system progressed and turned out to be effective, costs for abatement and metering have dropped and the criterion for inclusion has been lowered twice: in 1996 plants producing at least 40 GWh useful energy per year were included and in 1997 the boundary was lowered to 25 GWh. In 1992, only 200 plants were subject to the charge, compared to 400 plants in 1998.

SEPA has approved technology for measuring pollution. Firms should measure their emissions by this equipment otherwise standard assessment was used for measuring. There is a form that all firms and plants must fill out. This form was pertaining to their NOx emitted and energy produced. SEPA audits the firms and randomly selects a number of firms each year for inspection. The goal is to make an inspection of each firm every fifth year. In the beginning of each calendar year the plants send in the form declaring their respective emissions and energy produced. The firms have to pay their net charge before October 1st and SEPA refunds the plants before December 1st each year. Each firm can have several production units, which are monitored separately. This two-month period keeps cash flow problems to a minimum. The policy instrument was well adopted and firms reduced emissions. (incentive effect) (Sterner, 2003)

Tax & Taxation Rate.

The tax rate emissions charge that is applied to firms is 40 SEK per kg NOx that operate beyond 10MW, approximately 66.6% of plants and industrial factories were subject to the tax. The NOx charge is in place to help combat the effects of the power-generating sector, hence the rate for large and medium firms emissions. The rate was set at 40 because the range showed costs varing from 20-80 SEK per kg. Taxed plants have been able to reduce emissions on an average cost of 10SEK in the initial year.

Revenue from the tax are rebated back to taxpayers, the rebated amount is established on the amount of energy generated.  Firms record and measure the NOx emissions generated in within the year and submit the information to SEPA.  Total revenue and refunds are calculated on a per MwH rate, the charge shifts the income from high to low emitting plants creating a balance. “In 1992, for example, approximately 15,300 metric tons on NOx emissions were subject to the charge, generating about 610 million SEK ($90 million). As a result of the revenue and rebate calculations, over 100 million SEK ($15 million) was transferred from high-emitting to low-emitting facilities.” (yosemite.epa.gov)

(for 1992 reductions of 9,000 metric tons) Source: Swedish Ministry of the Environment and Natural Resources (1995), p. 47.

Overall it is an idyllic policy, unfortunately as is the nature of the environment and air pollution until all producing countries sign on to the same initiative results we be inconclusive.  Not all NOx emissions are captured in the charge; companies still operate just below the threshold and avoid the tax. Until the minimum level is lowered firms will use this as a loophole.  Generally speaking emission levels have decreased in Sweden since the implementation of this NOx charge, that is ultimately a benefit to Sweden nationally as well as a benefit to the global community.  Other countries could benefits from the research and development and advances in technology Sweden has made and future policy planners and implementers can look to Sweden for a successful model for this type of tax

References

UCD Environmental Policy Research Manager

http://www.economicinstruments.com/index.php/air-quality/article/73-

Barde, JP. and Smith, S. 1997. Do Economic Instruments Help the Environment? The OECD Observer, No.24, Feb/Mar 1997, pp22-26

http://www.oecd.org/publications/observer/209/ART_IDXE.HTM

Hőglund, L. 2000. Evaluating Economic Instruments for Environmental Policy, OECD 1997, pp43-46 (order form at http://www.oecd.org//env/policies/publications.htm#eistrpub ) Review Meeting First Draft Update Taxes Report: Agenda Updated

R.Brännlund and B. Kriström  Energy and Environmental Taxation in Sweden: Some Experience from the Swedish Green tax Commission Invited Paper ”Environmental Implications of Market Based Policy Instruments” Gothenburg, Nov 20-21, 1997

http://www-sekon.slu.se/~bkr/gbg.pdf

Parry, I. W. H. (1995). Pollution Taxes and Revenue Recycling. Journal of Environmental Economics and Management, November 1995, 29 (3).

G. Harrison, and B. Kriström, 1997 Carbon Taxes in Sweden, i Skatter, miljö och Sysselsättning, SOU 1997:11, underlagsrapporter till Skatteväxlingskommitténs slutbetänkande.

http://yosemite.epa.gov/EE/epa/eed.nsf/fa6512c6e51c4a208525766200639df2/f5f2680e0a67338385257746000aff2d!OpenDocument