So far, Swedish environmental requirements have not resulted in Swedish industries to a great extent moving their production and emissions abroad. This is partly due to the low cost of CO2 emissions for companies and the availability of clean and cheap electricity. However, the situation may change as prices are now increasing, which has an impact on future climate and industrial policies, according to researchers Shon Ferguson, Rikard Forslid and Mark Sanctuary in a new SNS report.
According to a decision made in the Swedish parliament, Sweden’s net greenhouse gas emissions are to be zero by 2045. To achieve this, the price on greenhouse gas emissions may need to be increased, which increases the risk of industrial production moving to countries where emissions are cheaper. This effect is referred to as carbon leakage and may render an individual country’s climate policy ineffective. In the report Carbon Leakage or Competitive Advantage? On the Balance between Industrial and Climate Policies, economists Shon Ferguson, Rikard Forslid and Mark Sanctuary study the extent of this risk of leakage when it comes to Sweden.
“Currently, there is only a small risk that Swedish climate policies will lead to carbon leakage. However, since the price on emissions has increased significantly in recent times, leakage may become a problem in the future. For example, we see a sensitivity to emission fees in the steel and paper industries,” says Shon Ferguson, associate professor at the Department of Economics at the Swedish University of Agricultural Sciences (SLU).
The report recommends a combination of taxes and subsidies to avoid carbon leakage in the future. The researchers also highlight a Swedish competitive advantage as emissions become more expensive: Sweden has good access to clean and relatively cheap electricity. When it comes to the climate, it does not really matter whether or not this clean electricity is exported. The researchers argue that for Sweden, however, it is probably better if it is consumed in Sweden – provided that it is used correctly.
“Clean electricity should be used in industries where knowledge and technologies are transferred between individuals and companies, otherwise it can just as well be exported. From a national perspective, it is thus difficult to justify the current tax discount on electricity for data centers and so-called bitcoin mines,” says Rikard Forslid, professor of economics at Stockholm University.
The report also questions the reasoning behind the fact that all biofuels are exempt from carbon taxation as they are seen as renewable.
“Wood chips from spruce and pine trees are renewable in a time frame of 70–120 years. That is a long time in relation to the ongoing global warming. Not to mention peat, which has a renewal period of perhaps thousands of years,” says Mark Sanctuary, researcher at the Swedish Environmental Research Institute (IVL).
about the authors
Shon Ferguson is an associate professor at the Department of Economics at the Swedish University of Agricultural Sciences and an affiliated researcher at the Research Institute of Industrial Economics (IFN).
Rikard Forslid is a professor of economics at Stockholm University.
Mark Sanctuary is a researcher at the Swedish Environmental Research Institute (IVL).