Sweden Nitrous Oxide Charge
Background
Together with sulphur dioxide (SO2), airborne emissions of nitrogen oxides (NOx) are the main persecutors of acid rain, which causes widespread damage on vegetation and animal life in forests and lakes in Sweden. Emissions of airborne NO2 are also a main cause of eutrophication of forestland and seabeds. (Hőglund, 2000). Sweden is especially vulnerable to acidification due to the specific granite bedrock covering most of the country. This has made the precursors of acid rain, nitrogen oxides (NOx) and sulphur dioxide (SO2) important environmental policy targets in Sweden (and Norway), although deposition in Sweden of acid precursors often results from emissions elsewhere. 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), but the objective was not met until 1998 (Hőglund, 2000). Existing regulatory policy was not deemed sufficient to meet the target, thus the NOx charge was introduced.
Main sources of nitrogen oxides (OECD, 1997, pp43):
- road transport 41%;
- industrial machinery and processes 27% ;
- power generation 11%
Introduced
Introduced in 1991, and enforced in 1992.
Aims
The charge aimed to ‘accelerate and stimulate investment in advanced combustion and pollution-abatement technologies and as a supplement to existing 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).
Design
Scope
The design mechanism was partly chosen due to the fact that only large combustion plants are obliged to pay the charge. The decision to exclude smaller plants was based partly on the high costs of metering which (together with abatement costs) were considered unreasonable for smaller plants. 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, companies like Gothenburg Energy would have an incentive to set up several small combustion plants instead of one big one and this is typically not desirable (from any viewpoint including emissions of NOx and other pollutants). As the system developed and turned out to be effective, costs for abatement and metering have fallen 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.
Tax Rates
Large/medium sized boilers taxed at SEK 40 (approx. 4.54 euro) per kg NOx (Ekins, 1999) (4,500 Euro/tonne of NOx).
The charge is assessed directly on emissions or presumptive emissions - firms can select their preferred method and since measured emissions usually results in lower charges it is generally selected (OECD, 1997).
Refunds
The charge is very high - more than 200 times higher than the French charge. However, it is distributed back to the polluting companies in relation to the amount of energy produced by the specific plant. This means that the polluting industry as a whole does not pay anything to society - and it is presumably this fact that has made the charge politically feasible. The charge is limited to a small number of large emissions sources due to the high monitoring costs (OECD, 1997) and is refunded to plants in relation to the quantity of useful energy produced, i.e., creating an incentive not to waste energy and aiming to avoid distortions in competition between those firms which are charged and those which are not, ‘thus sources with high emissions relative to their energy output are net payers to the scheme, whilst sources with low emissions relative to energy output are net recipients' (OECD, 1997, p44).
The refund mechanism also acts as an incentive to prevent the larger plants switching to smaller, less environmentally friendly plants in order to avoid the charge (Hőglund, 2000).
Institutional Arrangements
The administration of the charge is carried out by the Swedish Environmental Protection Agency (SEPA), and has been kept at a very low cost, approximately 0.3% of revenues collected. The metering costs are estimated at approximately 3% of total charges paid. The SCNE-systems for nitrogen oxides reductions have also been developed as a direct effect of the nitrogen charges (Johansson, 2000).
Monitoring and Enforcement
The emissions are measured by equipment approved by SEPA. If the firm does not measure its emissions, a standard assessment is used. All plants are obliged to fill in a form regarding their energy production and NOx emitted. 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 cashflow problems to a minimum. Firms adapted quickly to this economic policy instrument, and emissions were even reduced before the introduction of the charge (incentive effect) (Sterner, 2003).
Expectations (Ex ante Analysis)
Charges were set at a level ‘reflecting a balance between the need to ensure that the tax was high enough to have a clear incentive effect, and the potential costs to high emitters of an excessive charge level' (OECD 1997, pp44).
Revenue was expected to fall due to a reduction in emissions resulting from charge and permit conditions - a tightening of permits was expected to reduce emissions by 9000 tonnes/year by 1995, and the charge was expected to encourage abatement measures in the cases where boilers were not covered by the permit regulations, leading to a 3000-5000 tonnes reduction in emissions/year by 2000, the combined effect ‘should lead to reductions in emissions of the order of 5000 to 7000 tonnes per year' (Swedish Ministry of Environment 1991, pp112-3, cited in OECD 1997, pp45).
Performance
The charge has been regarded as a relative success, since it appears to be a prime cause for extensive emission reductions from targeted plants. On average, the group of targeted plants since 1992 has reduced emissions per unit of useful energy by about 40% since the charge introduction. (Hőglund, 2000). NOx emissions fell by 35% in 20 months (Barde & Smith, 1997).
The announcement of the charge stimulated a rapid reduction prior to implementation (Ibid.). Innovation and incentive to use more efficient technology caused the costs of lowering emissions to fall from 20-80 SEK €2.20-8.80)/kilo to a possible 10 SEK (€1.10)/kilo (Ibid.). Emission levels between 1992-3:
- Fell by 42% from waste incineration
- Fell by 23% from energy production plants
- Fell be 17% from the pulp and paper industry
- Fell by 13% from the metal industry (Lovgren 1993, cited in OECD 1997).
Emissions per energy unit fell by about 60 per cent between 1990 and 1996, whereas total emissions fell by approximately 50 per cent, from about 24,500 tonnes to 12,500 tonnes, and the tax reduced NOx emissions from combustion plants in the energy sector by about 25 per cent (10,000tons) which is about 3 per cent of total NOx emission of Sweden, i.e., greater than the 5000-7000 predicted (EEA 1999).
The refund nature of the charge provides incentive for plants to minimise its NOx emissions per unit of energy output, which has caused in part an increase in energy output, whilst emissions have fallen (Ekins, 1999). Emissions from boilers would have been 80% higher without the NOx Charge (EEA, 2000). The refund system is an incentive to minimise NOx emissions per energy unit and thus a incentive for monitoring and abatement measures (EEA, 2000).
The positive environmental effect was biggest in the beginning of the period, but there are still improvements going on, although at a decreasing rate. This is somewhat obscured by the fact that the new smaller plants have been brought into the system since 1996/7. These have higher emissions per unit of output. The average for the original (larger) plants actually fell to 0.26 and 0.25 for 1997 and 1998 respectively. Compared to the costs of production, the charge is small. The refundable charge system was designed to be as neutral as possible regarding aggregate competitiveness. Still, there are some possible effects on individual producers. The sectors affected by the charge are the food and beverages industry, wood and wood products industry, paper and paper products industry, metal products - machinery and equipment industry, chemicals industry, energy industry and waste combustion industry (Ecotec, 2001).
In 1998, the paper and paper products industry was subject to a total net payment of the charge of approximately SEK 47 million, while the power industry had a positive net revenue of SEK 49 million. The net revenues, both positive and negative, for the other industries were significantly smaller, less than SEK 10 million - in absolute terms - except for the waste combustion industry in 1992-93 (SEPA, 1999). The total cost differential between firms should also take into account the different costs of abatement investment. As it happens, the abatement cost plus the refunded charge (positive or negative) is for each sector less than 1% of the total production value of each respective sector. Assessments of potential impact on competitiveness indicate that the pulp and paper industry is the sector that pays the most due to the NOx charge. There are however "winners" and "losers" at the firm level as well. The general pattern is that the "winners" are found in the energy sector (e.g. the firm which receives most gets SEK 10 millions back), while losers are found in the pulp- and paper sector (e.g. the firm which pays most pays SEK 6 millions) (Ecotec, 2001).
Total revenue from the Swedish NOx charge (which is refunded to the plants) was the equivalent of between US$50 million and US$100 million between 1992 and 1998 (Naturvardsverket, 2002 in Sterner, 2003).
The relatively limited reduction depends largely on technical difficulties to reduce emissions from mobile sources. These emissions were reduced by about 13% between 1980 and 1997, while the stationary sources were more successful with over 50% reduction on average (Statistics Sweden, 1998).
The larger plants have generally been more successful in reducing their emissions per unit of useful energy. The smaller plants that have entered the charge system at a later time, have started from about the same level (i.e. about 400 kg/GWh) as the large plants, but are still in 1998 on average emitting more per GWh of useful energy produced than the larger plants. (Hőglund, 2000). In addition to the NOx charge, many plants are subject to local regulations. Hence, people argue that the reduction in NOx has been due to both the refunded charge, and standards. According to one study, approximately two thirds of the total reduction in NOx can be attributed to the charge, and the rest to the standards (ÅF-Energikonsult AB, 1996). The methodology for this division is however shaky and typically it seems that almost all the plants are operating below their legal requirements. It might be the case that the standards alone would achieve 1/3 of the reduction but that the charge alone would give almost the same effect as the charge plus the standards.
According to SEPA it is reasonable to assume that if the NOx charge had not come into effect in 1992, the NOx emissions would have been 25% higher from combustion in 1995. It is also of importance to take into account possible side effects of the reduction in NOx. Ammonia, laughing gas (N2O), and particularly carbon monoxide may increase due to increased abatement. These increases were (in total) less than a quarter of the reduction in NOx (SEPA 1997b). It is, however, not easy to compare the associated environmental damage as against the benefits of NOx reduction, each of which may depend on a number of ambient factors, as well as on the underlying exposure-response functions which characterise these other emissions. Another potential drawback with refunding the charge is that the instrument no longer satisfies the 'polluter pays' principle and does not give an optimal resource allocation. An ordinary environmental tax would increase production cost and raise the market price of the final good, eventually inducing structural changes (Sterner, 2003).
References
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
Convery, F., The Potential Benefits of Integration of Environmental and Economic Policies in the European Periphery, Convery, pp7
Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States. In association with CESAM, CLM, University of Gothenburg, UCD, IEEP http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm
Ekins, P., 1999. European environmental taxes and charges: recent experience, issues and trends, Ecological Economics 31 (1999) 39-62, pp48
EEA, 2000. Environmental Taxes, EEA Draft Report, February 2000, pp6, 88 Essays on Environmental Regulation with Application to Sweden,
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
EEA Report on Environmental Taxes (Draft 16th June 1999), Schepelmann, Schegelmich & Luhmann, EEA 18.06.1999, pp70
Johansson, B., 2000. The Carbon Tax in Sweden. in OECD 2000. Innovation and the Environment, Paris.
3:15PM Sterner, T. 2003. Policy Instruments for Environmental and Natural Resource Management. RFF
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