The Nitrogen Oxide Charge on Energy Production in Sweden

The Policy in Brief

Economic Instrument: Emissions charge and feebate.

Problem: Acidification of soil and water due to nitrogen oxide emissions. Acidification has damaged ecosystems and completely wiped out sensitive organisms in at least 15,000 lakes in southern Sweden. Some 20% of forest land is so acidic that the forests have been damaged.

Goal: Reduction of air pollution from nitrogen oxide emissions without distorting the competitiveness of industry.

Description: The Swedish nitrogen oxide charge is a leading example of how an economic instrument can be used to reduce pollution without distorting an industry's competitiveness. The charge is SEK 40 (US $4.80 at the August 1993 exchange rate) per kilogram of nitrogen oxide emitted, and the revenue from the charges paid by liable operations is redistributed among the plants in proportion to their energy production. The charge on nitrogen oxides began on January 1, 1992.

Administering Institution: Swedish Environmental Protection Agency (SEPA) Key Stakeholders: SEPA, large and small combustion plants, and other energy producers.

An Overview

Combustion plants produce energy - electricity and heat - by burning different kinds of fuel. But during combustion, air-polluting compounds such as nitrogen oxide (NO) and nitrogen dioxide (NO2), collectively termed nitrogen oxides (NOx), and sulphur dioxide (SO2) are released. Since January 1, 1992, large combustion plants have paid an environmental charge on NOx emissions. 'Large' plants are defined as having a capacity of 10 MW or more and an annual energy production exceeding 50 GWh. Smaller combustion plants are not liable because of the higher relative cost of continuously measuring the emissions. The charge of SEK 40 (US $4.80) per kilogram of NOx is not a tax. Instead it is redistributed among liable plants in proportion to their energy production. As a result, plants which produce much energy relative to their total emissions benefit, while those with a low ratio of energy to emissions lose. Some plants earn money from this system while others underwrite it.

Most of the liable combustion plants are found in energy production, that is, heating and power plants. The pulp and paper industry, the chemical industry and the metal industry also have combustion plants for energy production. Waste incineration plants producing energy are similarly liable for the charge. There is a wide variation in net payment (charge minus refund) within the industries. For example, energy production plants range from making a net payment of SEK 10m ($1.2m) to receiving a net income of SEK 14m ($1.7m). In 1992, approximately SEK 100m ($12m) was redistributed.

The refund system was necessary in order to achieve a fair system. The competition between small (non-liable) and large (liable) combustion plants would have been distorted if the charge was not refunded to the liable plants. The fact that the charge is refunded and thereby only has an environmental purpose has facilitated acceptance of the charge. A positive side effect is that less polluting plants are favoured economically and thus given a competitive advantage. The refund system has contributed to the considerable success of the charge.

Many companies started NOx-reducing projects as soon as a parliamentary decision was taken in 1990, in order to have as low emissions as possible when the charge came into force in January, 1992. The management and the operators at the plants have become more focused on reducing NOx. At one plant the operators are given a salary bonus if NOx emissions are low.

Though the combustion plants are given an economic incentive to reduce their emissions, they are not forced to do so by regulation. It is up to the individual plant to decide. Companies can choose whether to reduce their NOx emissions or pay the charge. Generally speaking, the liable plants have a greater incentive to seek ways to reduce emissions than any government body. It is therefore much more efficient to leave it to the liable group to formulate individual responses to the charges.

Some Further Reading

Swedish Ministry of the Environment (1991). Economic Instruments in Sweden with Emphasis on the Energy Sector, Stockholm.

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