Topic Area: Air Pollution
Geographic Area: Sweden
Focal Question: Can eco-taxation be effective in reducing carbon emissions?
(1) Brannlund, Runar. (1999) The Swedish Green Tax Commission. Green Taxes: Economic Theory and Empirical Evidence from Scandanavia. New Horizons in Environmental Economics, Edward Elgar Publishing Limited 23-32
(2) Brannlund, Runar and Ing-Marie Gren (1999) Green Taxes in Sweden: A Partial Equillibrium Analysis of the Carbon Tax and the Tax on Nitrogen and Fertilizers. Green Taxes: Economic Theory and Empirical Evidence from Scandanavia. New Horizons in Environmental Economics, Edward Elgar Publishing Limited 109-136
(3) Ekins, Paul (1996) Environmental Taxes & Charges : National Experiences & Plans : Report of the European Workshop held at the Foundation, Dublin, on 7-8 February 1996, Loughlinstown, Co., Dublin, Ireland, 1996
(4) O'Riordan, Tim ed. (1997) Ecotaxation, New York : St. Martin's Press
(5) Internet:

Reviewer: Gareth W. Osborn, Colby College '01

In 1997, the United States emitted 1,488 million metric tons of carbon dioxide. In the same year, the nation of Sweden emitted 60 million tons, just less than .4 percent of total global emissions. Yet, despite these relatively low emission levels the government of Sweden is committed to reducing its nation's level of carbon dioxide emissions to 58 million metric tons by the year 2010. In order to reach this goal, Sweden has introduced a system of eco-taxation. While many economists have long promoted eco-taxation as a possible solution to many environmental problems, Sweden's Carbon Tax is one of the only a few examples of such a taxation scheme in actual use.

Over the past thirty years carbon dioxide pollution has become an increasing concern to the international community. Being a known greenhouse gas, excessive quantities of carbon dioxide have been shown to cause a warming of the earth's surface by trapping solar heat within the earth's atmosphere. This global warming, which has slowly raised the earth's temperature somewhere between three and five degrees over the past one hundred years, may have dire effects. As a result of higher temperatures, the ocean levels will rise, global weather patterns will be permanently altered, and ecosystems around the world will be greatly affected.

In response to this threat, Sweden signed the Rio Declaration. This declaration committed Sweden to stabilizing its carbon dioxide emissions at its 1990 level. In order to achieve this level of emissions, Sweden had to significantly reduce its current emission levels. However, unlike many other nations, this reduction posed a serious problem to Sweden due to its extensive use of non-carbon energy sources. Twelve percent of Sweden's electricity was generated by hydro-electric sources and another 33% was generated by nuclear power. Increases in the use of either source were not seen as feasible. Therefore, Sweden was forced to find a way to decrease its overall energy use.

At this same time that Sweden was trying to determine the optimal way to reduce its carbon emission levels, it found itself in the middle of an economic slowdown. Government officials were looking for ways to increase employment levels and global competitiveness. The idea of implementing additional environmental regulations was not favorably viewed by many segments of the Swedish population. Industrialists feared that increasing environmental regulation would drive them out of business and many federal and local officials feared that additional regulations would drive many firms into neighboring European countries. What resulted from this political environment was the Swedish Carbon Tax.

Previous to the carbon tax, Sweden had attempted to limit energy use, and therefore carbon emissions, by directly taxing the sale of oil and electricity. Sweden's energy taxes were already some of the highest in Europe. For example, gasoline taxes comprised 68.5% of the price of gasoline. Yet, the government had no desire to lower the overall taxation level.

When designing the new tax system, officials recognized two distinct classes of energy users: industry and consumers. Both of these user classes were considered unique in the ways in which they used fossil fuels and in their reaction to increased environmental regulation and taxation. As a result, these two groups were given separate provisions within the new tax regime. It was noted that a large percentage of fossil fuels consumed by consumers were used for home heating and transportation. In addition, policy makers noted that most consumers positively viewed environmental regulation and recognized the need for high tax levels. Industry energy users were much different.

Industry users were much more likely to use fossil fuels for the production of goods. As a result, policy makers were unwilling to greatly increase their taxes. Industry users were also much more opposed to increased government regulation and increased tax levels. They stated that additional regulations and taxes would hurt their competitiveness abroad. Many policy makers noted the growth of the European Union and believed that Swedish regulations on industry should mimic those regulations found abroad.

On January 1, 1991, the Swedish Carbon Tax was enacted. This new tax regime placed a tax of .25 SEK/kg ($100 per ton) on the use of oil, coal, natural gas, liquefied petroleum gas, petrol, and aviation fuel used in domestic travel. Excepted from these new taxes were ethanol/methane/biofueles, peat, and waste. But this tax was not uniform. For while consumer users were responsible for paying the full tax, industry users were only required to pay 50% of the tax due to "competitive reasons." In 1993, due to protest by many Swedish industries, industrial users were granted further relief. The industry taxation rate was lowered to just 25% of the normal rate. Additionally, certain high energy using industries such as commercial horticulture, mining, manufacturing and the pulp and paper industry were fully exempted from these new taxes. In 1997 the tax code was revised again and the industry rate was returned to 50% and the overall tax on carbon emissions was raised to .365 SEK/kg ($150 per ton) of CO2 released. Yet, the practice of exempting certain industries from the tax was continued.

Since the imposition of the carbon tax ten years ago, carbon emissions in Sweden have been further reduced. Between the years 1987 and 1994 carbon emissions decreased between 6 and 8 million metric tons, a 13% decrease in emission levels. Additionally, since these results coincided with the low 25% industry tax rate it can be hypothesized that emission levels will continue to drop as a result of the increase in the overall tax rate and the reintroduction of the 50% industry rate. A 1997 report by the Swedish Ministry of Environment estimated that by the year 2000, the carbon tax would have removed 20-25% more carbon emissions than the older tax regime.

The carbon tax has also increased the use of biomass by local heating districts and energy producers. Since 1994, the use of biomass in energy production increased from 45 TWh/yr to 54 TWh/yr while fossil fuel use has decreased. This shift in fuel use is mainly attributed to the change in relative input prices following the implementation of the carbon tax. As a result of greater demand for biomass products, a large number of advances have been made in this field. These new innovations have allowed greater biomass to be extracted from the same amount of timber while at the same time reducing the amount of machinery necessary by 40%. In addition to innovations in the forestry sector, the carbon tax has resulted in many innovations in the home-heating industry. Advances in flue gas condensation technology alone have increased heating efficiencies by 20-25%.

Yet, compared to the original goals of Swedish policy makers, the overall results of the carbon tax were mixed. Despite the lower emission levels, many policy makers had been looking for more dramatic reductions. Subsequent studies by both the Swedish government and independent economists have identified three major reasons why the Swedish carbon tax resulted in only small gains. These include the fact that the overall tax level for industry users of fossil fuels was reduced as a result of the 1991 carbon tax. They also have noted that since energy costs represented only a relatively small percentage of a firms' total costs, many industrialists were slow to modify or upgrade their existing plants as a result of the new taxes. Economists also found that since only a small percentage (33%) of the energy supplied to industry was generated by fossil fuels, the potential reductions in carbon emissions resulting from the tax were limited. Swedish policymakers were also disappointed by the lack of industrial innovation resulting from the carbon tax. Many had believed that numerous carbon-reducing innovations would result from this new tax, but no major innovations were witnessed.

One of the greatest failures of the carbon tax resulted from the tax exemption on the use of waste fuels. Previous to the carbon tax, most industrial waste byproducts were sent to hazardous waste dumps or recycled. However, as a result of the carbon tax and its tax exemption on the use of waste fuels, many oil-based byproducts began to be used by local heating districts for heating purposes. This resulted in large amounts of pollution. Only in 1997 was this practice halted by the revision of the tax code.

Another failure of the new Swedish tax code was its inability to truly tax carbon emissions. For while most fuels containing carbon were taxed, this tax did not reflect the actual level of carbon emitted from these fuels. For example, low emission diesel fuel and high-emission diesel fuel were both taxed at the same level despite causing different levels of environment damage. Many have criticized the Swedish carbon tax for failing to distinguish between the different fuels and their different environmental effects. One can only wonder about the effects if such a provision had been built into the tax code.

Overall, the Swedish carbon tax demonstrates the ability of an eco-taxation system to reduce air pollution. However, we shall never know the true effectiveness of such a taxation scheme due to the many policy and political issues which limited the implementation of this program.