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Carbon Tax Policy Analysis

By: Hung-Yeh Lee

Image Curtesy of Unsplash

In recent years several countries have taken steps to reduce carbon emissions to combat climate change. Options such as carbon tax have since been implemented by many countries and some of them implemented their carbon tax early enough to provide a case study for others to analyze. This report will use Sweden as a case study to review the effectiveness of its carbon tax policy on reducing carbon emission.

Sweden carried out its carbon tax in 1991, second only to Finland’s carbon tax which was implemented a year prior. As of 2022, Sweden currently holds the highest carbon tax rate at €117.30 (US$129.89) per ton of carbon emissions, followed by Switzerland and Liechtenstein (€117.27, $129.86) and Norway (€79.12, $87.61). As the carbon tax in Sweden has been in place for over 30 years it has gone through several reforms to meet the current environmental needs of the country. The carbon tax now mainly focuses on fossil fuels used for heating purposes and motor fuels. Overall the tax covers about 40 percent of all greenhouse gasses emitted nationally. It has made some progress as Sweden’s carbon emissions have been declining over the past years but it is far from perfect as studies have shown that the current carbon tax impact on carbon emission reduction has been below its potential. The following sections will discuss both the successes and criticisms of the Swedish carbon tax system.

One of the successes in Sweden’s carbon tax design is its efficiency in determining the point of taxation and calculating the emission amount for taxation. As Sweden effectively has no fossil fuel production, the Swedish government decided to collect carbon tax upon either consumption or delivery to a non-registered taxpayer, which are importers, distributors, and large consumers. This point of taxation puts a relatively low burden on administrative costs as it includes significantly lower numbers compared to taxing the final consumers. In other words, the consumers paying for their heating oils do not pay the tax directly as the tax will be paid by the importers or the distributors of said heating oils.

As for calculating the emission amount, Sweden uses a measure known as the carbon content: the estimated amount of CO2 emissions covered energy products emit upon combustion. Combusting one unit of a certain type of fossil fuels always emits the same amount of carbon. Thus the administration simply needs to calculate the carbon content of the fossil fuels without measuring the amount of carbon each individual emits, simplifying the calculation process and reducing the administration cost significantly.

With the tax being efficiently implemented, how effective is it in reducing carbon emission in Sweden? In fact, Sweden had successfully lowered its carbon emission while maintaining a steady economic growth. Between 1990 to 2018, Sweden effectively lowered 27 percent of its carbon emissions. The largest reduction in emissions comes from heating homes and industrial facilities. Recently, domestic transport in Sweden also lowered its carbon emission to contribute to the overall reduction in emissions. Although carbon tax alone is not the only environmental policy Sweden implemented, its significance should not be overlooked.

As Sweden implemented a high carbon tax to encourage businesses and individuals to lower the use of fossil fuels, the Swedish government is able to sustain economic growth. Studies suggest that Sweden is able to maintain economic growth partially due to the fact that revenue generated by the carbon tax has been allocated to lower other types of taxes that benefit individuals as well as businesses. However this economic growth is also partially due to the many tax exemptions that the Swedish government placed to prevent “carbon leakage”.

While the Swedish carbon tax has its successes, it does have its shortcomings. The carbon tax failed to reach its full potential in emission reduction because some top carbon emitting industries enjoy exemptions from the Swedish government. These industries, like the steel industry, are considered to be vital to the national interest and thus exempt from the high carbon tax. This explains why Sweden’s carbon tax only covers 40 percent of the nationally emitted greenhouse gasses. It has been suggested that instead of having a high carbon tax with large exemptions, it would be beneficial to place a lower tax rate which applies to all emitters to yield better carbon emission reduction results.

Sweden provides an interesting carbon tax case study for analysis due to its long history of implementation and successful outcomes. While its efficiency in administration and effectiveness in reducing emissions is evident to all, its shortcomings in equity as some large polluters continue to be unaffected by the tax policy remains a challenge for the Swedish government and a lesson for others to study.


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