Carbon tax

Putting a price on emissions through a carbon tax or through emissions trading is the simplest and economically optimal way to reduce the climate impact of carbon dioxide, the most important greenhouse gas. Svebio advocates for more countries to follow Sweden’s example and introduce a carbon tax.

This is how the carbon tax works.

The carbon tax is levied on all fossil fuels in relation to their carbon dioxide emissions during combustion. The emissions depend on the carbon content, and the tax is easy to calculate. The tax is highest on coal, followed by oil, and slightly lower on natural gas. The tax is collected from companies that supply fuels in the market. The administrative cost is very low since there are only a few, generally large companies that import fossil fuels. The cost is passed on to consumers through price increases.

An example:

• In one cubic meter of light heating oil, the total carbon tax and energy tax amounts to 4,072 SEK per cubic meter.
• In addition to the carbon dioxide and energy taxes, value-added tax (VAT) is added to the total price after tax.
• The high tax means that the price of heating oil is significantly higher than it would be without tax.

History

When the carbon dioxide tax was introduced in 1991, it was set at 25 öre/kg of carbon dioxide for all users. However, after just one year, the tax was changed so that the industry only had to pay one-fourth of what households and service industries paid, i.e., 8 öre/kg and 32 öre/kg of carbon dioxide. The low industry tax meant that there was no strong incentive to reduce the use of fossil fuels. The higher carbon dioxide tax for heating homes and buildings became a strong driving force. This provided heat companies and individual households with a strong motivation to switch fuels from heating oil to biofuels such as wood chips, pellets, or district heating. Over the following years, the carbon dioxide tax was gradually increased, and today it stands at around 115 öre/kg of carbon dioxide. From 2000 to 2004, a green tax shift was implemented, which involved significantly increasing the carbon dioxide tax while simultaneously reducing certain other taxes, such as income tax and employer contributions.

Carbon tax and emissions trading

In 2005, the EU’s emissions trading system (EU ETS) was initiated, which primarily covers heavy industry and power plants. For companies participating in the EU ETS, the carbon tax has been abolished.

In recent years, the carbon dioxide tax has been significantly increased for industries that are not part of the EU ETS, and since 2018, these companies have the same carbon tax rate as households and service companies. The intention is for all non-emissions trading activities to pay the full carbon tax. After 2018, there are still certain reductions in the tax, such as within the agricultural and mining industries.

As part of the EU’s climate reform Fit for 55, it has been decided to introduce an expanded emissions trading system that includes buildings, transportation, and other sectors (non-ETS industry and construction activities) starting from 2027.

Carbon tax in the transport sector

Carbon tax is also levied on transportation fossil fuels such as gasoline and diesel, along with energy tax. Biofuels are essentially tax-exempt, but Sweden has been forced to apply a portion of the energy tax to these fuels. The reason is a rule in the EU’s state aid regulations that states that “overcompensation” is not allowed. The tax exemption is considered a form of state aid. Therefore, Sweden is obliged to tax ethanol and biodiesel when they are cheaper than their fossil equivalents.

To enable a transition in the transportation sector, Sweden has implemented a system of biofuel blending quotas (the reduction quota mandate) instead of the previous system of taxing fossil fuels and providing tax exemptions for biofuels. The blending quotas apply to gasoline and diesel fuels. For pure and high-blend biofuels such as HVO100 and E85, the tax exemption system still applies.

No carbon tax on bioenergy?

The combustion of biofuels also results in carbon dioxide emissions, but they are part of the natural carbon cycle. Trees and energy crops absorb carbon dioxide, which is then released upon combustion. When trees are harvested, new trees are planted that absorb carbon dioxide. Therefore, the emissions from the combustion of biofuels are counted as zero in climate reporting. No emissions allowances are required for these emissions, and biofuels are not subject to carbon dioxide tax either.

A global movement for carbon taxes

The World Bank and the International Monetary Fund (IMF) have been conducting an international campaign for several years to persuade governments around the world to implement a price on carbon emissions, either through carbon taxes or emissions trading. Every year, the World Bank publishes a report of the countries who have implemented “carbon pricing” and the price levels of carbon taxes and emission allowances in different parts of the world. New countries are added each year.

There are also various political initiatives, such as the Global Carbon Pricing Coalition, which includes Sweden, as well as groups of business leaders and others working together to promote carbon pricing along with phasing out subsidies for fossil fuels.

Price on carbon emissions in the EU

he EU was the first in the world to introduce a system for trading emissions allowances in 2005. During the initial years, the price in this emissions trading system was low, around 5 euros per ton instead of the expected 25-30 euros per ton. The low price of emissions allowances led to demands for reforming the system. The implemented reforms have involved a faster reduction of emission levels and the establishment of a stability reserve for allowances. The free allocation of allowances to different sectors based on benchmarks has also gradually decreased and been replaced by auctioning. These measures have resulted in a significant increase in the price of emissions allowances, which is now around 80-100 euros per ton, exerting substantial pressure for transformation in the affected sectors.

The latest reform of the EU Emissions Trading System (EU-ETS) entails the phase-out of all free allocation of allowances by 2034. Simultaneously, a Carbon Border Adjustment Mechanism (CBAM) is being introduced for steel, aluminum, cement, fertilizers, hydrogen, and electricity. The fee must be paid if the exporting country lacks equivalent carbon emission control measures as the EU.

There have also been proposals to introduce a common minimum carbon tax in the EU through a revision of the Energy Tax Directive. Instead of a unified carbon tax, an expanded emissions trading system has been agreed upon, covering building heating, transportation, and certain other activities. According to Svebio’s perception, a common minimum level of carbon tax would have been a more effective policy instrument than an expanded emissions trading system, as it would provide better predictability than a variable price for emissions allowances.

Heating production accounts for 50 percent of all energy consumption in the EU, and 75 percent of the heat is derived from fossil fuels, of which 90 percent are imported to the EU. There are strong incentives to introduce a price on carbon emissions in all EU member states, both for the climate and for increased energy self-sufficiency.

Examples of the impact of the Swedish carbon tax

Residential heating

Emissions of greenhouse gases from heating of residential and commercial buildings have decreased from 9.24 million tons of carbon dioxide in 1990 to 0.75 tons of carbon dioxide in 2021, a reduction of 92 percent. The use of heating oil for residential and commercial heating has decreased from 30.9 TWh in 1990 to 0.8 TWh in 2021, a decline of a staggering 97.4 percent! Oil-fired boilers have nearly disappeared in Swedish buildings.

NOTE: These figures refer to the direct use of fuels for heating. Many of the boilers have been replaced with district heating, and district heating plants have reduced their reliance on fossil fuels while increasing the use of biofuels, peat, and waste (see below).

The fuel transition in heating is primarily a result of the carbon tax but also other measures, such as direct support for replacing oil-fired boilers.

Fuel change in district heating

District heating currently accounts for more than half of all heating in Sweden. Over 90 percent of multi-family buildings and around 80 percent of commercial premises (such as shops and offices) receive their heat through district heating. Almost one-fifth of single-family homes also have district heating.

During the first oil crisis in 1973, oil accounted for 95 percent of the fuel used in district heating. By 1991, when the carbon tax was introduced, oil represented just over ten percent of district heating fuel, but at the same time, the use of coal and natural gas had increased. Since then, the share of biofuels has grown significantly as district heating has expanded. Today, approximately 75 percent of the fuel used in heat plants consists of biofuels, peat, and waste, mainly derived from tree-based fuels and biobased waste.

Currently, there are around 550 heat plants (providing over 2 GWh of heat) in Sweden that use biofuels, with 90 of them also producing electricity: bioenergy.

Swedish greenhouses

The use of fossil fuels in Swedish greenhouses decreased by 83 percent between 2002 and 2014, according to statistics from the Swedish Board of Agriculture. At the same time, the use of biofuels quintupled. Wood chips are primarily used, but pellets, bark, and other biofuels are also utilized. Sweden’s largest tomato cultivation utilizes waste heat from a pulp industry.

The greenhouse industry previously had significant exemptions from carbon dioxide and energy taxation, but these exemptions have gradually been reduced.

Today, it can be assumed that products from Swedish greenhouses are produced with very low climate impact.

(Link: Swedish Board of Agriculture’s greenhouse statistics)

Fuel change in industry

The significant increase in carbon dioxide tax for companies without emission allowances makes it highly profitable to replace oil, LPG, and natural gas boilers with biofuels or district heating. The magazine “Bioenergi” has been publishing maps for several years showing which companies use a significant amount of fossil fuels and are affected by the tax increase.

Investments are now being made in many of the affected companies. There are various technical solutions and fuel options available, such as wood chips, pellets, bio-oil, and biogas. Some companies can utilize their own by-products. Here are some examples:

• Several leading brewery companies, such as Spendrups, Åbro, and Kopparbergs, have already made significant reductions or plans to stop using fossil fuels.
• Many dairies and slaughterhouses have switched from oil and LPG to biofuels like pellets and wood chips or district heating.
• The leading asphalt manufacturers, Peab and Skanska, have replaced fossil fuels in asphalt production. They use both bio-oil and pellets.
• In addition, companies in the engineering, chemical, and mining industries have invested in bioenergy solutions, such as Volvo in Braås, Liljeholmens stearin factory, and Zinkgruvan. With the tax increase, it is expected that fossil fuels will largely disappear in the affected industries, similar to what has happened in residential heating.

Sectors that are not subject to full carbon tax

Unfortunately, carbon tax does not have full effectiveness in these sectors:

• Heavy industry and electricity production, due to the lower emission price in the EU Emissions Trading System (ETS). However, this has been largely addressed by the significant increase in the price of emission allowances in recent years.
• The transportation sector, as Sweden is not allowed to fully apply the taxation due to EU state aid rules.
• Agriculture, primarily due to competitive conditions within the EU’s common agricultural market.