Carbon Dioxide Taxes in Sweden

The Policy in Brief

Economic Instrument: Carbon dioxide tax.

Problem: Emissions of greenhouse gases which may induce global warming.

Goal: Reduce or stabilize CO2 emissions, generate revenue for the national budget and serve as a model for applications internationally.

Description: A tax on CO2, levied primarily on fossil fuels including oil, coal, natural gas, LPG and gasoline. Part of the wider energy taxation system, the tax is generally higher for the household sector than for the industrial one so as not to hamper competitiveness on international markets.

Administering Institution: National Tax Board (Sweden).

Key Stakeholders: Industry and consumers.

An Overview

Economic instruments have become increasingly important in Scandinavian environmental policy. The carbon dioxide (CO2) tax within the energy taxation system in all the Scandinavian countries is a prime example. Each country introduced its CO2 tax or taxes at different times, at different tax levels, with different sets of exceptions. The Finnish CO2 tax is both the first and lowest, the Swedish tax the highest and the Danish industrial tax the latest.

The CO2 tax is least suitably applied to energy-intensive industries (for instance, pulp and paper, and iron and steel) which must compete on international markets. This is because a high CO2 tax rate would hamper competitiveness if similar measures were not also taken abroad. For a small country like Sweden, highly dependent on international trade, special rules had to be established to safeguard the international competitiveness of Sweden's energy-intensive industries, international aviation and shipping included. Tax abatement rules were thus introduced for energy-intensive industries, causing the industries most vulnerable to increased energy taxes to be unaffected until 1993, when a new energy taxation system was introduced.

Of the Scandinavian CO2 taxes, the Swedish one is the leading example of the 'greening' of the taxation system. Not only are the tax rates high, causing total energy taxation to increase considerably, but the revenue generated is used to decrease taxes on labour. The CO2 tax was accompanied by a reduction in the general energy tax, as well as a tax on sulphur and a value-added tax on energy. When the Swedish CO2 taxes were first introduced in January 1991, their rates varied according to the average carbon content of different fossil fuel types, but they were applied equally across "basic" users (households and non-manufacturing industries) and industries (mining, manufacturing and horticulture). In January 1993, however, the industry rate was reduced to one-quarter of the (now modestly increased) basic rate. The only exceptions are for gasoline and LPG (motor fuel), which share identical basic and industry tax rates along lines similar to those in the EU.

Some Further Reading

Swedish Environmental Protection Agency (1992). Strategies to Prevent Climate Changes, SEPA Report 4186.

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

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