The Swedish manufacturing sector has reduced its carbon dioxide emissions by 31 percent since 1990. About two-thirds of this reduction is the result of technical change and one-third is due to an increase in the share of less carbon dioxide emitting segments of the sector. This is shown in a new SNS report by economists Gustav Martinsson and Per Strömberg. According to their analyses, it is the marginal cost of carbon dioxide emissions that determines whether it is profitable for firms to invest in climate change adaptation, not the size of the tax payments.
Martinsson and Strömberg have compiled a unique database on carbon dioxide emissions at the establishment level for the Swedish manufacturing sector since 1990, in addition to calculating the marginal cost for every firm and year. They show that a 1-percent increase in the marginal cost of carbon dioxide emissions results in a 3.4 percent reduction in emissions per SEK in sales.
The carbon dioxide tax was introduced in Sweden in 1991, whereas the EU Emission Trading System was launched in 2005. Swedish taxation has been altered a number of times, as have the rules concerning which firms and facilities are included in the EU system. During the period prior to the EU ETS, the design of the Swedish tax resulted in firms with the highest carbon dioxide emissions facing the lowest marginal cost for emitting.
“There were limited incentives for these firms to invest in climate change adaptation, despite paying significant amounts of carbon dioxide tax due to their high emissions”, says Per Strömberg, professor of financial economics at the Stockholm School of Economics.
This report offers important lessons on how an effective carbon tax should be designed – in Sweden as well as globally. A crucial conclusion is that what matters is not the size of the tax payments. They have a limited impact on the incentives for firms to reduce their emissions, while, at the same time, resulting in a significant cost increase and a competitive disadvantage for the largest emitters.
“It is the marginal tax that determines whether an investment in climate change adaptation is profitable for firms, thus having a major impact on whether they will choose to do so”, says Gustav Martinsson, associate professor of financial economics at the Royal Institute of Technology.
This report is published within the framework of the SNS research project Taxes in a Globalised World.
Gustav Martinsson, associate professor of financial economics at the Royal Institute of Technology (KTH)
Per Strömberg, professor of financial economics at the Stockholm School of Economics