Chapter 1
Literature review
1.1 Economic Instruments for Environmental Protection: An Overview on
the Carbon Tax.
Carbon taxes have been frequently advocated as a cost-effective policy
instrument for reducing emissions [9]. However, in the practice of environmental
policies, only few countries have implemented taxes based on the carbon content
of the energy products [9].
The Kyoto Protocol to the United Nations Framework Convention on Climate
Change has changed the context of global warming policies by prescribing
legally binding greenhouse gas (GHG) emissions reduction targets to countries
listed in its Annex B.1. The Kyoto Protocol also introduced some innovative
international economic mechanisms to reduce emissions—namely, international
emissions trading, joint implementation, and the clean development mechanism.
As these mechanisms are supplemental to domestic actions, the advantages and
disadvantages of carbon energy taxes have to be compared to command and
control measures and other economic instruments [30].
An emissions tax, i.e. a Carbon Tax, is a marked-based instrument which acts on
the quantity side. Under a Carbon Tax regime, the charge is paid on each fossil
fuel proportional to the tonne of carbon emitted (e.g. a tonne of carbon
corresponds to 3.76 tonnes of CO
2
). Consequently, all types of emissions-
intensive goods will have a higher market price and/or lower profits [20]. As the
same effect of a trading system, the market forces will work in a cost-effective
way reducing the quantity of emissions. A tax could achieve an “optimal” level of
pollution because it possesses direct as well indirect incentive effects. Direct,
because the increases in the price of emissions-intensive goods will stimulate
energy-saving actions, such as more energy efficient investment or simply
change in the production and consumption structure. An emission tax would lead
to an indirect effect by increasing the public financial revenue available for future
investment in technologies more energy-saving or in other redistributing income
policies [20].
Concerning the environmental impact, as a Carbon Tax reduces the CO
2
emissions and at the same time increases the economic efficiency [21]. In
addition, since a reduction in CO
2
emissions is closely associated with a
decrease in fossil fuel consumption, local air quality may be improved. By the
beginning of 1990s only five European countries had introduced a Carbon Tax:
Denmark, Finland, the Netherlands, Norway and Sweden [21]. An evaluation
study of the Swedish Carbon Tax carried out by the Swedish Environmental
Protection Agency (SEPA) concludes that the CO
2
tax ‘‘[…] has helped to reduce
emissions of carbon dioxide in line with Swedish environmental policy’’ [57].
3
In particular, a Swedish Green Tax Commission was set in 1992 in order to
assess whether environmentally related taxes have been efficient or not. They
estimated the effects of the Carbon Tax, deriving the price elasticity: i.e. if a tax
increases on fossil fuel leads to an increase in the consumer price in the same
amount [10]. Nevertheless, to analyse the sensitivity to price change, they
analysed two partial equilibrium models.
The first model is related to the industry, 16 manufacturing sectors are
disaggregated and each sector is assumed to produce one output using labour,
fossil fuel, electricity and capital as inputs
1
. The elasticity obtained must be
interpreted as short run impacts since the capital stock is treated as fixed.
According to the results, the authors [10] concluded that higher prices on fossil
fuel due to higher CO
2
or SO
2
tax have a negative small effect on the demand for
fossil fuel in the short run. An increase in CO
2
tax is expected to result in no large
environmental effect. [10].The second partial equilibrium model is for the
household sector where the biggest sources of consumption come from
transports and heating. Household behaviour has been analysed through a
system of demand functions in which it is calculated the change in the demand,
for a specific goods, after a change in the price of some goods or income. The
results obtained showed that all own-price elastic ties have a negative sign: e.g.
if the price on gasoline increases by 10%, ceteris paribus, gasoline consumption
decreases around 1.5% [10]. A 100% increase of the Swedish CO
2
tax, from
0.37 to 0.74 SEK/kg implies that the consumer price on gasoline increases
approximately by 13% while the oil price for heating increases by 31%. The
direct effect on gasoline and oil consumption is approximately 1.6% and 6%
reduction, respectively [10]. While I did not investigate on economic efficiency, I
found these studies on eco-taxes, very significant because they show the
existent of reduced emissions in the short run. In fact, from the several actions
taken from 1991, i.e. introduction of Carbon Tax, Nitrogen Tax and Sulphur Tax,
the use of fossil fuels in Sweden have been considerably reduced over the last
twenty years [57].
1.1.2 The European Experience
Other European countries have introduced a Carbon Tax. Denmark introduced a
Carbon Tax in 1992, with charges twice as high for household, (i.e. around 14.30
USD per tonne of carbons against 7.15 USD for the business sector). For the
business sector, which is engaged in export, it is provided a refund scheme
according the ratio of the tax relative to the value added in production.
Nevertheless, such refund is allowed only if “reasonable" energy efficiency
investments are undertaken [43].
The Finish government has introduced a Carbon Tax on CO
2
emissions in the
same period. The tax is levied on different fuels such as leaded and unleaded
petrol, diesel oil, heavy and light fuel, coal, natural gas, peat and electricity. The
1
The data covered the period 1974-1993
4
fuels are taxed dependent on a basic tax rate and an additional tax, e.g. the tax
on leaded petrol is almost 50 per litre higher than a tax on unleaded petrol.
Taxes on diesel fuel oil are also differentiated: lower rates are applied on diesel
fuel oil with low sulphur content. Natural gas gets a discount of 50 per cent of the
additional tax. Electricity taxation is divided into two groups: class 1 (households,
service branches, public sector and agriculture) and class 2 (industry,
greenhouse farming). The former has a higher tax rate [43].
Regarding Norway, this country exports more energy it produces in terms of oil,
gas, and hydro resources. Compared to many OECD countries, Norway has
relatively high energy intensity; nevertheless the carbon intensity is
comparatively lower. This is explained by a high percentage of hydropower
sources. By the beginning of 1991, the Norwegian government encouraged less
carbon-intensive energy use by the introduction of the Carbon Tax. The tax
levied around 60% of carbon dioxide emissions, excluding civil aviation and
domestic sea freight at the first period. The ratio and implementation of a carbon
tax is similar to the other countries. The only peculiar aspect is that Norway is
the only country that has introduced this tax on oil extraction [43].
Finally, in the Netherlands, the Carbon Tax was approved by the Parliament in
1990 but it came into force the 1
st
January 1996. The tax is levied both for
companies and households, on the use of electricity, natural gas, kerosene, LPG,
propane and butane. Concerning the household, in order to avoid extra
considerable costs, some compensation was applied. There was a reduction of
the basic tax rate by 0.3 per cent in 1996 0.45 per cent in 1997, and 0.6 per cent
in 1998, an additional allowed reduction for senior citizens [43].
1.1.3 The Swedish Climate Mitigation Policies
According to the Sweden’s fifteen environmental quality objectives, the strategy
to reduce air pollution is targeted towards more efficient energy and transport
means, to reduce the risk on human health, on animals, on plants and on cultural
assets
2
. Economic instruments in environmental policy have been introduced
since 1970. Large subsidies were given to firm and local government to facilitate
and speed up environmental protection measures [10]. Nevertheless, major
actions were taken in 1991 when the Parliament accepted some of the proposals
from the Commission of Environmental Charges.
The tax on CO
2
was introduced on the 1
st
January 1991 levied on oil, coal,
natural gas, and liquefied petroleum gas, petrol and aviation fuel in domestic
traffic. Roughly, the CO
2
tax corresponds to around 200 USD/tonne carbons and
2
For example, in Stockholm an estimated 200 deaths per year may be connected with particulates in air, in
addition to an increase in cancer mortality due to other air pollutants [57].
5
according to the Commission of Environmental Charges, 200 USD is the
marginal costs to achieve stabilisation of CO
2
emissions at the 1988 level.
At the same time a tax on sulphur emissions has been set to reduce the
emissions by 80% using 1980 as the baseline. According to the Commission of
Environmental Charges, in 1995 the goal was nearly met. Moreover, the year
after, 1992, an additional charge on NO
x
emissions was introduced in order to
reduce the emissions by 30% using 1985 as base year. This latest tax has two
interesting features; first, this is the only emission charge levied in Europe and
second, because it is monitored at the large plants, such as expensive measures
provides a tax revenue refund. In fact, the tax revenue is returned to the liable
plants as a group, in order to avoid unfair competition between small and large
plants [10].
Nevertheless, among the “pure” environmental taxes, the Carbon Tax is the most
important and according to the results on emissions from 1970 to 1995 published
by the Statistic of Sweden
3
, most of the many dangerous substances have
decreased in a dramatic way over the last twenty years. Significant reduction in
SO
2
was achieved mainly by the conversion to electricity and bio fuel for
domestic heating and energy conservation measures.
A study from the Swedish Environmental Research Institute, reported a long-term
change in the air quality in several Swedish towns to determine the contribution
from local and regional sources and from long-range transport from 1986 to 1995
[56]. Concerning SO
2
the authors found that more than 90% of the
concentrations emissions measured in the south were caused by long range
transport. The annual average urban centre concentration was (2.4 μgm
3
), while
the annual average concentrations from south to north were 2.8 and 1.7 μgm
3
,
respectively [56].
On the contrary, NO
2
showed relatively small and unclear gradient over the
country. For example, the annual average concentrations in the south were 16.2
against 16.3 μgm
3
in the North. The main origin of NO
2
emissions is attributed to
local sources. Regarding the trends, the study reported a progressive reduction
in SO
2
winter mean, especially at the beginning of the period analysed, i.e. 1986-
1987 and a gradual decrease in NO
2
emissions were more evident in the last
couple of years, i.e. 1994-1995. Results from the regional measurement showed
the same trend [56].
3
SOU 1997:11 Skatter miljo och sysselsattning, Stockholm 1997.
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