THEME

Economic Instruments - Charges and taxes

Carbon and Energy Tax (Sweden)

Sweden Carbon and Energy Tax

Background

The energy tax on fossil fuels had been part of the Swedish tax system since the late 1950s. An energy tax on mineral oil and coal was introduced in 1957 and on LPG in 1964 (Speck et al., 2006). Carbon dioxide emissions are responsible for about 80% of the Swedish contribution to greenhouse gases.

Introduced

The energy tax rate peaked in 1990 when the tax rate was 960 SEK (€103.96)/m³ on oil and 460 SEK (€49.62)/tonne on coal (Speck et al., 2006). The Swedish energy tax system was reformed in 1991 to be based on a carbon tax and an energy tax on fuels (not connected to the carbon content). As the carbon tax was introduced, general energy taxes were reduced by 50%. Under this reformed taxation system, industry was exempt from energy tax and subject to only 50% of the carbon tax. In 1993, this fraction was reduced further to 25%, and in 1997 raised back to 50%. A sulphur tax was also introduced in 1991.

Aims

To reduce CO₂ emissions and to spur innovation of industry before the EU introduced such a tax (Schlegelmilch 1999)

Design

Coverage

It is levied as a specific tax on oil, coal, natural gas, bottled gas and petrol. (Tindale & Holtham 1996). In 1993 the tax burdens were differentiated according to economic sectors,- in industry CO₂ taxes fell and the general energy tax was abolished, whilst in other sectors the CO₂ tax increased (EEA 1996).

Tax Rates (Source, Speck et al., 2006)

1996

2000

2002

2005

Light fuel Oil

Heavy fuel Oil

(cent/l)

Energy tax

6.93

8.8

7.72

8.17

CO₂ tax

12.38

12.53

19.63

29.02

Total Tax

19.31

21.33

27.34

37.2

Natural Gas

Energy tax

2.24

2.85

2.5

2.65

Cent/m3

CO₂ tax

9.25

9.38

14.69

21.74

Total Tax

11.5

12.23

17.19

24.39

LPG

Energy tax

1.35

1.72

1.51

1.6

Cent/l

CO₂ tax

12.98

13.17

20.63

30.53

Total Tax

14.33

14.88

22.14

32.13

Coal

Energy tax

2.95

3.74

3.29

3.48

Cent/l

CO₂ tax

10.76

10.89

17.07

25.25

Total Tax

13.71

14.64

20.36

28.73

This table reflects the household tax burden. Until 1993, industry and households had been charged with the same energy and CO₂ taxes, but competitive concerns led to these taxes being lowered for industry.

Exemptions

Bio-fuels (including peat) are not taxed. Energy intensive industries were given transitional relief until 1995, following dismissal of an EU carbon/energy tax and industry succeeded in forcing the government to lower the rate paid by industry with the short-fall in revenue made up through increases in rates paid by households. At present, industry, agriculture, forestry and fisheries are entirely exempt from the energy tax and pay only 21% of the CO₂ tax (Speck et al, 2006). These sectors can also receive further tax reductions (24% of the duties actually paid) if the CO₂ tax burden paid by the company exceeds 0.8% of the value of sales. If the tax payment exceeds 1.2 % of the value of sales the company receives a full refund of the share of the tax exceeding 1.2% (Speck et al., 2006).

Sweden's finance ministry has tabled plans to reduce the carbon
dioxide tax on fuels used by factories and cogeneration plants
covered by the EU's carbon emission trading system (ENDS, 2008). The six per cent cut, to take effect from July 2008, would be the first in a series of taxreliefs related to participation in the scheme. Emissions from the
plants concerned are regulated at EU level and should not be subject
to additional domestic control measure, according to the ministry (ENDS, 2008).

Allocation of Revenue

The revenue goes to the central budget (EEA 1999).

Performance

Swedish greenhouse gas emissions have oscillated between 1990 and 2002, mostly depending on annual temperatures, but since 1999 have remained below the 1990 level (Speck et al., 2006, SEPA, 2004). The Third National Report on Climate Changes estimated that CO₂ emissions were 5,000 tonnes less that they would have been in the absence of the energy and CO₂ taxes in the year 2000 (Sweish Ministry of the Environment, 2001).

In 1995 revenue totalled approximately SEK 11 billion (€1.19 billion) and in 1994 emissions fell by 5 million tons, i.e. 9% (EEA 1999, pp70). A 1994 study by the Ministry of the Environment and Natural Resources found energy production plants were shifting fuels, increased use of bio-fuels, increased use of wood fuel in district heating, and ‘combined heat and power production has become more competitive, especially when coal and oil are used,' (EEA 1996, pp53) Tax relief in the industrial sector contributed to an increased consumption of fuel oils whilst overall industrial production fell, and ‘the consumption of fuels in the energy-intensive paper and pulp industry increased by more than 30% in one year, compared with about 20% for industry as a whole, illustrating the environmentally perverse effect of exemptions,' (EEA 1996, pp53).

In 1991-1994: CO₂ emissions fell by 9% (5 million tons) ( EEA Draft Report 2000, pp5).

In 1990-1995: ‘amount of biomass fuel used at heating plants doubled from 10.2 to 20.4 TWh or from 25% to 42% of total district heating , where as fossil fuels decreased from 36% to 30%' (EEA Draft Report 2000, pp5).

The Swedish energy system is different from other countries in a number of ways (Johansson, SEPA): Electricity production is almost entirely fossil free - instead based on nuclear and hydro. Renewable energy contributes 27% to Swedish energy supply, mostly biomass and hydro. The per-capita electricity use in Sweden is high because of heating by electric space heaters and a large electricity-intensive industry. The most obvious effect of the reformed tax system has been the expansion of biomass use in the district heating system. Johansson (2000) found small effects on industry of the tax because of: the lower tax level for industry; the small share of energy supply to industry (30%) based on fossil fuels when the tax was introduced; the reduction of the total taxation level on fossil fuels for industry in the 1991 tax reform; and the fact that for most industries fuel costs are only a small share of the total costs and thus have low priority. The Ministry of Environment estimates that the CO₂ emissions in 1995 were 15% lower than they would have been in the absence of the taxes, and by the year 2000 they estimated that they were 20-25% lower. They attribute 90% of this to the new tax system and 10% to investment grants and other programmes (Johansson, 2000). The most important development is probably the development of the methods of biomass extraction and a biomass market. Biomass prices are the same today as in the 1980s (Johansson, 2000). In 2005, the budget increase in environmental taxes will total about SKr3.3bn (€364m). Many of these will fall on road transport, including increases averaging SKr340 (€36.67) and SKr100 (€10.79) in vehicle taxes on petrol-driven and diesel-driven cars respectively. Vehicle taxes on light lorries and light buses will rise by 40%. Petrol and diesel taxes will be up SKr0.15 (€0.016) and 0.30 (€0.03) per litre respectively. Electricity tax will be SKr0.012 (€0.0013)per kilowatt-hour higher. The increases, "lessened by the lower diesel tax for agricultural and forestry use", will be offset by higher basic income tax deductions. In a statement, the finance ministry noted that in 2000 the government had put at SKr30bn (€3.24 billion) the scope for shifting taxes in the period 2001-2010. In budgets for 2001 and 2002 just over SKr7bn (€0.76 billion) had already been shifted. In the term of office 2002-6 a total of SKr12bn (€1.29 billion)will be shifted. (Swedish Finance Ministry, 2004).

The European Commission reviewed the entire Swedish system in 2003 and found that the combined tax level was 23% compared with the standard rate (and despite the industry reductions and exemptions) and could be considered substantial.

Sweden was one of the first countries to tax carbon dioxide and this is evidently having an effect. Without a tax emissions would, according to a new estimate, have been 10 per cent higher today.

This figure has come as the result of using a computer model, named MARKAL, to determine the effect of the tax on carbon dioxide as well as other taxes on energy. The program was run in two stages, one with taxes as they were in 1990, the other with what was called "current instruments" (taxes, etc.). All other factors were the same in both cases.

The big difference between the two scenarios was that "current instruments" included not only the tax on carbon dioxide but also a somewhat lowered tax on energy, VAT on energy, subsidies to wind-power, a tax on sulphur emissions as well as a charge on emissions of nitrogen oxides from combustion plants.

The changes, which had mostly been made in 1991-92, resulted in price increases for fossil fuels. Included in "current instruments" is also a system of certificates for renewable energy, which has been decided in principle in parliament and is scheduled to come into operation 2003, and is expected to stimulate the production of electricity from renewable sources.

The measures included in the second scenario show clear results. Not only do the figures for carbon dioxide now turn out to be 10 per cent lower - in round figures 5 million tons compared with what they would have been if nothing had been done - but will continue to fall, according to these estimates, by 15 per cent in 2010 and 20 per cent in 2020 (10 and l5 million tons lower) under the depicted policy. See chart.

The tax changes have had a clear effect, although they may not have been the most cost-effective way of reducing the emissions of carbon dioxide, according to Håkan Sköldberg of Profu consultants, who made the calculations. He also points to limitations in the model. It takes no account, for instance, of the effect of price changes on the demand for energy.

The question is then how the Swedish energy system would be affected through application of the "current instruments" scenario.

Most striking is the powerful boost it would give to the use of bioenergy. That would increase even with 1990 taxes, although much more slowly. The difference would be most marked for district heating.

If certificates for renewable energy should enter the picture, as seems likely, the developments in the use of bio energy in district heating, wind and small-scale hydro-power would be greater and occur earlier. Under the 1990 scenario there would be almost no expansion of wind power.

At present almost half of the country's electricity comes from nuclear plants, and most of the remainder from hydroelectric generation. Today fossil fuels are hardly being used at all for electricity generating.

In both of the MARKAL scenarios the country's nuclear plants are assumed to have a lifespan of 40 years, which would mean that electricity from those sources will start to drop off after 2010 and be down to zero in 2025. The decline would be fastest after 2020.

After that year the diminishing availability of nuclear power would, according to the model, have to be compensated by increased production from condensing plants, which would mostly be fired with coal - the use of which is actually favoured under the Swedish system of taxation, where electricity production is exempted from the carbon dioxide and energy taxes.

Transportation would remain largely dependent on fossil fuels in both scenarios. The competitiveness for alternatives would however be somewhat improved by the increases in the taxes on petrol and diesel fuel, but not sufficiently to have any real effect.

In 2010 the net import of electricity would be about 4TWh according to both scenarios. At worst that amount would have been produced in coal-fired condensing plants, giving rise to the emission of 3.5 million tons of carbon dioxide a year, equal to about 5 per cent of the Swedish emissions.

The study, called Beräkningar med MARKAL is only available in Swedish. ER 14:2001. Published by the Swedish National Energy Administration, Box 310, SE-631 04 Eskilstuna. Website: www.stem.se. See also the Profu website, www.profu.se.

How the Model Works

The MARKAL model has been developed internationally through IEA, the International Energy Agency, and has found use in numerous countries. It is intended to calculate developments in an energy system from input data such as the availability of biomass, windpower potential, future oil prices, and taxation levels. By varying the inputs, scenarios can be developed which will be most cost-effective in different circumstances. A limitation is that energy demand is an input that don't change as a result of changed energy prices in the various scenarios.

Acid News 1/02 http://www.acidrain.org/pages/publications/acidnews/2002/AN102.asp#CLIMATE

Sweden's greenhouse gas emssions fell by 1.6% in 2006 (SEPA, 2007), contributing to a 9% drop since 1990 and the economy having grown by 44% in the same period. Carbon dioxide and florinated gas levels have risen but methane and nitrous oxide levels have dropped.

In early 2009, the Swedish government announced plans to raise carbon dioxide taxes and reverse its decades-old effort to phase out nuclear power as part of a new energy and climate policy (ENDS, 2009).

Citing a 40 per cent emission reduction target for 2020 in sectors not covered by the EU's emissions trading scheme (ETS) the government said the tax increase, which has yet to be specified, would be fundamental for long-term energy policy. Two-thirds of these reductions will take place in Sweden, with the remainder achieved through investments in other EU member states or developing countries through Kyoto's clean development mechanism (CDM), the government says. Formal proposals for "advanced economic policy instruments" will include, in addition to higher carbon taxation, "fewer or cancelled exemptions" and possibly increased fuel and other energy taxes (ENDS, 2009).

Posted by admin on 09/06/08

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THEME

Economic Instruments - Charges and taxes

Carbon and Energy Tax (Sweden)

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