Carbon pricing works in Sweden
Governments around the world are embracing carbon pricing as a central component of their strategies to reduce GHG emissions. Ecofiscal’s latest report highlights why and how carbon pricing works, with case studies from British Columbia, California and the UK. Today, we’ll build on those three and dust off a case study on Sweden, which has the world’s highest carbon tax.
First out of the gate
Sweden introduced the one of the world’s first carbon taxes as part of a larger environmental reform in 1991. They started small – about €33 per tonne ($52 CDN) – and worked their way up to €120 per tonne ($188 CDN), which is the highest rate in the world.
It’s important to note that the introduction of Sweden’s carbon tax was part of a larger policy package to reduce emissions. They also use energy taxes (on electricity, for example), efficiency standards, congestion pricing, and have invested heavily in renewable energy and public transit. So how do we untangle the impact of carbon pricing on Sweden’s emissions? Several economic studies have taken that on, and the results show carbon pricing was a major contributor to emissions reductions.
Sweden’s carbon tax reduced GHG emissions
The impacts of Sweden’s carbon tax have grown over time. By 1995, emissions were 15% lower than they would have been without the carbon tax. By 2000, emissions were as much as 25% lower than they would have been without the carbon tax.
We should note that Sweden’s emissions actually rose for the first half of the 1990s. But that doesn’t mean the carbon tax wasn’t working. This is a really important distinction. We need to measure where emissions would be without the tax, not just if they’re lower overall. Even when emissions were rising, Sweden’s carbon tax was changing behaviour.
The good news is that Sweden’s emissions did begin to fall overall after 1996. And aside from a few hiccups, it’s been a fairly steady decline.
Source: Eurostat, 2018a
In terms of emissions reductions, Sweden has performed well relative to other comparable countries, and it hasn’t come at the expense of economic growth.
Sweden reduced emissions while growing its economy
While Sweden’s emissions curve has bent downward, their economy has performed well. The numbers and the evidence show that the carbon tax hasn’t been a barrier to a strong economy. In fact, Sweden’s GDP growth has outpaced the European average by a significant margin.
Source: Eurostat, 2018b
It’s not perfect, but it’s working
Despite this success, Sweden’s carbon tax comes with some exceptions and caveats, namely that it doesn’t apply equally to polluters across different sectors. Manufacturing, agriculture and forestry, for instance, pay a lower rate. And industries that are covered by the European Union’s cap-and-trade system are exempt. As of 2018, both households and businesses finally pay the same rate: €120 per tonne ($188 CDN).
Despite these irregularities, Sweden’s carbon tax is working, and changes in emissions are particularly noticeable in specific parts of the economy. Energy intensity has dropped off dramatically. Biofuels (instead of fossil fuels) now provide 60% of heat to buildings, a figure which doubled during the first 10 years of the carbon tax.
On the other hand, industries that received partial exemptions from the carbon tax didn’t fall as much. Emissions from industrial processes, for example, rose by 8% between 1990 and 2010. Sweden had to tweak their carbon tax in the early years to get it right, but over time, people and businesses adjusted their behaviours, and emissions began to fall overall.
Looking ahead to carbon-neutrality
So what does all of this mean? Well, to start, Sweden is set to hit its 2020 emissions target. Even more impressively, they’ve pledged to go carbon-neutral by 2045.
There are some lessons as well. Sweden’s carbon tax would have been more cost-effective as a single, economy-wide rate, rather than a sector-by-sector approach combined other tax instruments. The early years of Sweden’s carbon tax were a learning process, and their policies required tweaks and adjustments. By 1995, their system took the form we know today, and has functioned well ever since.
Like the case studies in our report, Sweden’s system isn’t perfect; but it’s working, and other jurisdictions have had the benefit of learning from Sweden’s experience. Well-designed carbon pricing should be the centre plank in any serious plan to fight climate change. Sweden is just one of dozens examples that demonstrate why. To learn more about how and why carbon pricing works, check out our report.