Sweden's carbon tax

Stockholm's archipelago (source)

If we have to have a tax, we should tax "bads" rather than "goods".  For example, you should tax junk food rather than greens, tobacco rather than water, and so on.

A carbon tax raises revenue for the government which allows other taxes to be cut, or allows spending to be higher, just like any other tax.  Carbon emissions are a "bad".  Burning fossil fuels is unambiguously bad.  Carbon dioxide produced when fossil fuels burn is raising global temperatures, and that rise is imposing costs on society, so on equity grounds we should discourage, even penalise the emissions of carbon dioxide.  Plus burning coal and oil produces air pollution, which causes ill health and death.  This also justifies a carbon tax.  Obviously, when you introduce a carbon tax, you start out low and slowly increase it year by year, because introducing a high carbon tax in one go would cause major economic disruption.

But if it is introduced at a low rate and gradually stepped up, does it reduce economic growth?  The Swedish experience says not.

Sweden has the rare distinction of having consistently curbed carbon dioxide emissions over the past two-and-a-half decades while enjoying solid growth. In so doing, it has set a model that much of the world could emulate.

Sweden introduced a CO2 tax in 1991. At the time, the price was EUR29 per ton, and it has since risen to today’s price of EUR137 per ton – the highest CO2 tax rate in the world. The effect of such a tax on fossil fuel consumption has been, among other things, a rise in the contribution of biomass to district-level heating from 25 percent in 1990, to 70 percent in 2012.

Speaking at a recent High Level Assembly of the Carbon Price Leadership Coalition, Swedish Minister of Finance Magdalena Andersson, said “We’ve had GDP growth of 60 percent, and at the same time, our emissions have been reduced by 25 percent. So, it shows that absolute decoupling is possible.”

[Read more here]

By the way, Sweden suffered a deep recession in 1992/93, caused by (what else?) excessive lending for property by banks, and without that, GDP growth since 1991 would be more like 66%.

The tax is more complicated than the statement above implies.  See this interesting blog post.  Industry pays a carbon tax 80% lower than consumers.  Now if the tax were a purely revenue raising exercise, then that might be justified, in the same way VAT is refunded when goods are exported.  But if it's designed to cut carbon emissions, then everybody who emits CO2 should pay the tax, because the whole point is to provide a price signal to discourage the burning of fossil fuels.  Even despite this flaw, Sweden's energy intensity (energy use/GDP) has fallen 54%.  This is a remarkable achievement.  British Columbia's carbon tax also appeared to have no effect on growth while reducing carbon emissions. 

A carbon tax is undoubtedly one of the best ways to reduce carbon emissions.  If it starts at (say) $10 per ton of CO2 emissions, and rises by $2.50 a year, it will push our economies towards zero carbon, while not reducing living standards.  One megawatt-hour of coal-fired electricity creates approximately one tonne of carbon dioxide.  (Source)  So a $10 per tonne carbon tax will up the cost of coal-fired electricity by $10.  As each year goes by, the impulse to switch to renewables would increase, steadily and inexorably, and each year, CO2 emissions would fall.