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Carbon Pricing and Carbon Tax in Sweden

by Jordan Cheung Europe Mar 4th 20223 mins
Carbon Pricing and Carbon Tax in Sweden

In preserving our climate and reducing carbon emissions, countries around the world are devising different strategies and reaching new deals. Not only is the carbon tax in Sweden one of the highest carbon taxes in the world, it is also one of the country’s most efficient policies, making it a leading example in combating climate change.

Carbon dioxide is the compound primarily responsible for the greenhouse effect of trapping heat within the Earth’s atmosphere and is therefore one of the primary causes of global warming. To reduce emission levels, more and more countries around the world have started introducing carbon pricing, or a tax designed to mitigate or remove the negative externalities of carbon emissions, known as a carbon tax. As of August 2021, 27 countries have implemented some form of carbon tax, which in total, covers 5.5% of global greenhouse gas emissions. This carbon price will encourage consumers and businesses to not only reduce carbon emissions and energy consumptions, but also improve energy efficiency and increase the use of renewable energy alternatives. Sweden is one of the first countries to implement such carbon taxes.

In 1896, Swedish scientist Svante Arrhenius was the first to calculate how the increase in carbon dioxide in the atmosphere, through greenhouse effect, could raise Earth’s surface temperature. Two decades later, Sweden started its long history of levying energy taxes on energy products. Petrol has been taxed since 1924 whereas diesel has been taxed since 1937, and a tax charge has been imposed on coal, oil, and electricity for heating purposes since the 1950s. The levy on all of these products was a single tax known as the “energy tax”. When implemented at the time, it was interestingly not considered an environmental measure, but rather a fiscal tool purely for raising tax revenues. A carbon tax was then instituted in 1991 alongside the already existing energy tax. It has remained a cornerstone in Swedish climate policy. 

Some critics describe carbon tax in Sweden as a relatively narrow one, as only 40% of its greenhouse gases are covered. In fact, large pollution sectors responsible for 70-75% of Sweden’s emissions did not cut their emissions, but contributed even more greenhouse gases. The country’s largest polluters are mainly companies that manufacture construction materials such as steel and concrete. Due to exemptions and carve-outs, big emitters and exempted industries had no reason or incentive to cut down their emissions, leaving the Swedish carbon tax below its emission reduction potential. 

Currently, Sweden levies the highest carbon tax rate in the world at USD$126 per metric tonne of carbon dioxide. The tax is primarily levied on fossil fuels used for heating purposes and motor fuels. The country also has one of the highest levels of energy consumption worldwide while producing one of the lowest levels of carbon emissions in the developed world. Since implementing its carbon tax about 30 years ago, Sweden has not only been able to reduce its national carbon emissions, but also maintained solid Gross Domestic Product (GDP) growth. 

A study in 2019 by economist Gilbert Metcalf found no adverse impact on the region’s GDP since the adoption of the carbon tax. In fact, the tax may even have had a slightly positive impact on GDP. Sweden’s GDP per capita increased by more than 50% between 1990 and 2019 in real terms (adjusted for inflation). The country was able to strip back its fossil fuels to below 2% of its electricity generation while its GDP has grown at approximately the same rate as Germany’s. Metcalf suggested that this positive effect may be partially due to carbon tax revenues being used to lower other types of taxes.

With the right policies, reducing emissions and growing economically simultaneously can be done. In the case of Sweden, the country’s carbon tax has successfully made companies more competitive by reducing their climate-related risks and expediting the developments of greener alternatives. In pursuit of preserving our global climate, Sweden would be the prime example and a useful case study for other countries to follow suit. Waiting for international agreement is no excuse for inaction.

You might also like: Carbon Tax Pros and Cons: Is Carbon Pricing the Right Policy to Implement?


About the Author

Jordan Cheung

Jordan is a Volunteer Research Writer who finds much joy in writing articles on the latest business trends and topics ranging from environmental preservation, climate change, to business ethics and government policymaking. One of his major hobbies is reading The Economist on the train while he commutes between home and work. He is also one of the founding members of Calcium, a start-up charity foundation in Hong Kong.

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