Climate change is one of the most pressing challenges facing the international community. A broad range of policy instruments can be used to curb carbon emissions, and economic instruments such as taxes and emissions trading are critical elements of any comprehensive mitigation strategy. Swedish experience shows that a carbon tax can be easy to implement and administer, at low costs to authorities and operators writes Susanne Åkerfeldt, Senior Adviser, Tax and Customs Department.
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Pricing carbon emissions is a way of applying the ‘polluter pays’ principle, in which the costs of pollution are borne by those who cause it. This ensures that emissions are reduced in the most cost-effective way while stimulating the development and deployment of new, clean technologies.
Energy sources were first taxed in Sweden in the 1920s. A carbon tax was instituted in 1991, alongside an already existing energy tax, and it remains a cornerstone of Swedish climate policy. Over time, the carbon tax has increased in importance, contributing to a broad range of environmental and climate objectives.
For example, the carbon tax provides incentives to reduce energy consumption, improve energy efficiency and increase the use of renewable energy alternatives.
Carbon tax easy to implement
Swedish experience shows that a carbon tax can be easy to implement and administer, at low costs to authorities and operators. This is particularly true if existing revenue-collecting systems, such as systems for levying other excise taxes on fuels, are already in place.
Another feature of the carbon tax that reduces costs associated with its administration is that tax rates in Swedish tax law are expressed in common trade units (volume or weight).
The carbon tax is levied on all fossil fuels in proportion to their carbon content, as carbon dioxide (CO2) emissions released in burning any fossil fuel are proportional to the carbon content of the fuel. It is therefore not necessary to measure actual emissions, which greatly simplifies the system.
The combustion of sustainable biofuels does not result in a net increase of carbon in the atmosphere and hence is not subject to carbon taxation.
Swedish carbon tax rates
The carbon tax was introduced in 1991 at a rate corresponding to SEK 250 (≈EUR 24) per tonne of fossil CO2 emitted and has gradually been increased to SEK 1 180 (≈ EUR 114) per tonne in 2019. By increasing the tax level gradually and in a stepwise manner, households and businesses have been given time to adapt, which has improved the political feasibility of tax increases.
A lower tax rate has historically been applied to industry outside the EU Emissions Trading System (EU ETS), while industry covered by the system is entirely exempt from the carbon tax. As of 2018, however, the industry rate outside the EU ETS is the same as the general rate.
Sweden’s carbon tax generates considerable revenues for the general budget – there is no ‘earmarking’ of tax revenues in Sweden. General budget funds may, however, be used for specific purposes linked to the carbon tax, such as addressing undesirable distributional consequences of taxation or financing other climate-related measures.