Use of market-based instruments for restricting and controlling

air pollution- The case of Sweden -

Miriam Markus-Johansson

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Content:• Introduction and overview of MBI

• Pollution charges (Swedish NOx charge and SO2 tax)

• Pollution tax• CO2 and energy tax

• Environmental Tax Reform

• Emission Trading Systems

• MBIs applicable to the transport sector• Congestion charges• Environmental zones• Green car subsidies• Fuel and vehicle tax

• Recommendations

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Some thoughts…

not a question of "either the environment or the economy," but of

"both the environment and the economy.“

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Market-Based Instruments (MBI)The EU has increasingly favored economic or market-

based instruments in environmental protection:• indirect taxation, • targeted subsidies or • tradable emission rights

as they provide a flexible and cost-effective means for reaching given policy objectives.

Use of MBI is advocated in:

• the EU´s 6th Environment Action Programme

• renewed EU Sustainable Development Strategy

• Lisbon Strategy for Growth and Jobs

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Market Based Instruments:

• Improve price signals by giving a value to the external costs and benefits of economic activities, so that economic actors take them into account and change their behavior to reduce negative – and increase positive - environmental and other possible socio-economic impacts.

• Allow industry a greater flexibility in meeting objectives and thus lower overall compliance costs.

• Provides an incentive to companies, in the longer term, to pursue technological innovation (“dynamic efficiency”).

• Support employment when used in the context of environmental tax or fiscal

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Barriers to implementation of MBIs can be overcome by:

• progressive removal of subsidies and regulations that contribute to environmental damage

• use of ear marked revenues to provide incentives for eco-efficiency and eco-innovation;

• better design of instruments and mitigation measures to deal with inequities;

• progressive implementation supported by broad consultation and information so that people build up confidence in the measures

• integration of MBIs in environmental policy with those for economic and social policy so that revenues can be used to support broader tax reforms and contribute to win-win outcomes.

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EU legislation and measures promoting MBI• EU CO2 Emission trading scheme established

through Directive 2003/87/EC (amended through Directive 2004/101/EC and Directive 2008/101/EC)

• 2 supplementing Decisions on monitoring

• GREEN PAPER on market-based instruments for environment and related policy purposes {SEC(2007) 388}

• COMMISSION STAFF WORKING DOCUMENT Accompanying the GREEN PAPER {COM(2007) 140}

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Taxes vs Charges

To steer resource use in the desired direction

• Tax - general income for the national treasury/state (budget)

•only the legislature (Parliament) can impose or adjust taxes

• Charges - should be earmarked for a specific purpose and should be reimbursed to the payers

•environmental charges can be decided by the Government and by local authorities

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Pollution Charges

Builds on

The Polluter Pays Principle

Those who cause environmental damage should bear the costs of avoiding it or compensating

for it.

Public financing of environmental policy should in most cases be avoided, as it should be

financed by the polluters as far as they can be identified.

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Charge on Nitrogen Oxides Emissions from Energy Production (Sweden)• Problem: Acidification of soil and water due to NOx damaging

ecosystems - wiping out sensitive organisms in at lakes and forests

• Introduced in 1992 based on regulation SFS 1990:613 on charge on NOx

• Charged for NOx emissions from stationary combustion plants for energy production (heat/electricity)

• Charge calculated for each production unit (boiler, gas turbine, combustion engine)

• Levied at EUR 4.5/kg NOx for plants above a an output of 25 GWh. (before 1997 50 GWh)

• Objectives:• reduce NOx pollution • stimulate investment in advanced combustion and

pollution-abatement technologies • supplement existing regulatory measures

• .

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Net payers and receivers in relation to the refunded NOx charge - Production units in different industrial sectors

Boilers at power and heating plants and incineration plants are often "winners" (their refund is greater than the charge); industrial boilers and the pulp and paper are often "losers" (net payers into the system).

Boilers with end-of-pipe treatment and improved efficiency made a net gain

•The revenues from the charge are distributed through refund payments to the most energy efficient units .

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•The charge is very high (4.4 EUR per kg NOx emitted ) and has therefore strong environmental effectiveness

•provides an impetus for technological development

•increase the incentives for accurate monitoring of emissions.

• Has led to more efficient reduction of NOX emissions than with policy instruments such as emission guidelines and environmental permits

NOx charge - Why does it work? Specific emissions (kg NOX

per MWh) for all boilers 1992-2001

Emissions per unit of energy produced by the plants are now less than 50% of 1992 levels

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Product Charge - Sulphur “Tax” in Sweden• Introduced 1991 aiming to decrease sulphur emissions,

promote use of clean fuels and the cleaning of flue gases • Regulated by the Energy Tax Act (SFS 1994:1776) • Levied with 3 EUR on the sulphur content of fuels and

heating oil that exceeds a threshold of 0.05 %. • The tax rate for oils, 27 SEK per m3 for every tenth per cent

sulphur content by weigh • The tax is in the form of a product charge • Refund is given if a taxpayer can demonstrate reduction of

emissions of sulphur oxides, through treatment or absorption in any product or in ash.

• The refund for certain industrial processes concern only some dozens of companies. About 100 companies benefit from tax refunds due to achieved emission reductions.

• Exemptions: households, commercial shipping, rail and aviation transport. Fuels with lower sulphur content that 0.05%

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Sulphur “Tax” in Sweden

• The tax contributed to the 30 % of the total reduction of sulphur emission in Sweden which was over 80% 1989-1995. Emissions from burning coal and peat has considerably decreased.

• Tax worked through 3 main channels:1) Increasing efficiency- technological progress - in industries. 2) Reduce sulphur content in fuels3) Substitution between heavy and light fuel oil,

• Introduced in parallel with the CO2 tax which provides for an additional incentive for substitution to e.g. renewable energy sources.

• Administrative costs are less than 1% of revenue.

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Sulphur “Tax” in Sweden

Why does it work?• High tax level (compared to other countries)

• A transparent rebate scheme strengthens the incentive effect of the tax.

• Large incentive for taking mitigating measures which costs approx. 1 EUR/kg compared to 3 EUR/kg tax rate

• The design of the program provides for easy implementation and low public administrative costs.

• The burden of proving the actual emissions level is imposed on polluters.

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Swedish Sulphur taxCombination of regulation and tax• Since its peak in 1970, SO2 emission has

decreased by more than 95 %.

• Sweden long used a command and control approach to regulate sulphur emissions. Based on permits.

• 1991 SO2 tax introduced as additional measure.

• Implementation has been related to a green tax shift. Energy taxes were raised and income taxes lowered

• In addition, government gave financial support to stimulate innovation to address emissions

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Use of instrument MixWhy?• Environmental problems are usually multi-faceted• Instruments strengthen each other, increases environmental

effectiveness – synergies, spin-offs• Reduce or reallocate administrative costs• Combination with voluntary mechanisms can improve

political acceptability

How?• Combining with information instruments. • Instrument should address problems as broadly as possible.

How many instruments?• Lack of instrument can jeopardise the environmental effect.• Too many instruments can reduce the flexibility • Overlapping reduces the economical cost effectiveness

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Swedish CO2 and Energy taxes• The energy tax on fossil fuels part of the Swedish tax system

since 1950s. • The energy tax system was reformed in 1991 to be based on a

CO2 tax and an energy tax on fuels • The aim of the tax is to reduce CO2 emissions and to spur

innovation of industry.• It is levied as a specific tax on oil, coal, natural gas, bottled

gas and petrol• As the carbon tax was introduced, the general energy taxes

were reduced by 50%. • Until 1993, industry and households were charged with the

same energy and CO2 taxes, but competitive concerns led to these taxes being lowered for industry.

• Industry, agriculture, forestry and fisheries are entirely exempt from the energy tax and pay only 21% of the CO2 tax

• Exemptions: • Bio fuels• Industry is exempt from energy tax and subject to only 50% of

the CO2 tax. • Plans to reduce CO2 tax on fuels for industries covered by the EU

ETS

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CO2 and Energy Tax• Emissions are now 20-25 % lower than it would have

been without a tax. • Emissions from road transport has been reduced with

1.5-3.2 tons CO2/year since the introduction of the tax. The main reduction has been with private cars.

• Lowered emissions from heating, both district and individual.

• Energy production plants have shifted fuels, increased use of bio-fuels, increased use of wood/bio fuel in district heating, and ‘combined heat and power production has become more competitive.

• Drawback: Low taxation on industry has resulted in small improvements in energy efficiency in this area.

• The government plans to reduce the CO2 tax on fuels used by factories and cogeneration plants covered by the EU's carbon emission trading system

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• The Swedish government launched a 10-year programme (2001–2010) for tax reform with a total of EUR 3.3 billion being shifted from personal income tax and social security contributions to environmental and energy taxes, including on CO2 and SO2.

• Nordic countries were first to embrace the concept and strategy of ETR, launch new taxes or strengthen existing (energy) taxes:

• Finland (1990), Sweden (1991) and Denmark (1993)

• The Nordic examples have been followed by developments in other European countries, such as the Netherlands (1996, 2001), Germany (1999) and the United Kingdom (1996, 2001 and 2002).

Environmental Tax Reform (ETR)

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Environmental Tax Reform (ETR)

New measures including:• Environmental taxes• Environmental charges (SO2, NOx)• Tradable permits (e.g. CO2)

Offsetting reductions in:•taxes on labour •taxes on capital

•shift of the tax base away from taxing 'good' activities (such as investment and labour), towards taxing 'bad' activities (such as pollution and inefficient use of resources).

•provide signals to consumers and producers towards a more sustainable development as well as it lead to a better functioning of markets and increased welfare

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Developments of the effective tax rates on labour and energy at the EU-15 level, 1995–2002

• Energy tax revenues have risen and the average effective tax rate on labour has dropped,

• Overall energy efficiency in the EU has improved, in parallel with increased energy taxation.

• Energy taxes make the largest contribution to total revenues (5%).

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MBIs applicable to the transport sector•Congestion charges

•Green car rebate

•Environmental zones

•Vehicle tax

•Fuel tax

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EXAMPLES: Congestion Tax, Stockholm, Sweden•Since 2006, all vehicles, with a few exceptions (e.g emergency vehicles, buses, taxis), that enter or exit the inner area of Stockholm daytime on weekdays are charged

•The aim of the tax was to reduce traffic volume by 10-15%

•The charge is between 1-2 EUR depending on the time of day, The upper limit is 6 EUR/day.

•The fee is in the form of a tax and is thus not earmarked. Goes to the national budget.

•Results:- Traffic decreased with 22 % in central areas. - Less time in traffic jams and reduced travelling time

-Increased use of public transportation: 4.5 %

•To meet the expected increase in commuting by bus and tube, public transport was been extended new buses and new bus lines.

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Congestion Tax, Stockholm, Sweden•A referendum was held in the city of Stockholm and neighbouring municipalities, after a 6 month trial period.

•51,5% voted in favour for the charge and 45,8 % opposed. The level of participation was 74,7%.

•As the second city, after London, Stockholm introduced the charge.

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London Congestion Charge

• Revenues is used to improve transport and road network in London.

• Vehicles entering central London, or those parked in the streets during daytime, weekdays are subject to a GBP 8 daily charge

• Traffic entering the charging zone has reduced by 21% (70 000 fewer cars.

• £137m being raised, in the year 2007/08 • Bus services in the zone have improved

• The evidence suggests that the charge has had little direct negative impact on business

• Now ongoing consultation whether to double the area of the zone subject to congestion charge

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EXAMPLE:Green car discount• Green Car Premium (Sweden) –

Governmental subsidy introduced in April 2007 to allow rebates of €1,000 to consumers who purchased a environmentally-friendly car.

•1/3 of cars sold in Sweden is “green”

• Either fulfilling conditions in Env Class 2005 (small C02 or PM emissions and energy efficient) or hybrid

• Green car exempt from vehicle taxes the first 5 years.

• Too popular – now has to end

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EXAMPLE:Environmental zones, Sweden• Used in 4 cities in Sweden: Stockholm, Göteborg, Malmö and Lund.

•The zones aims at improving the environment locally in populated areas and to guarantee a certain level of air quality.

• Applies to trucks and diesel-busses categorized according to EU standardisation. To enter the environmental zone the vehicles have to meet certain environmental standards.

• All heavy diesel vehicles are allowed to enter the zone for 6 years from registration. Euro class 2 and 3 for 8 years. Euro class 4 until 2016 and Euro class 5 until 2020.

•Purpose is to stimulate early purchases of new vehicles with better environmental standards.

•Stockholm’s zone was implemented in 1996 – local regulation of municipalities.

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Environmental zone in Stockholm

During 2007, the zone in Stockholm is estimated to have reduced emissions with:

•3-4 % NOx

•16- 21 % Hydro Carbons

•13-19 % particular matter

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EXAMPLE:Motor Vehicle Tax, Denmark• Introduced in 1997 and applied to new vehicles

registered after 1997. Two types:• Registration tax paid when the vehicle is purchased

(trucks excluded) • Annual “green owners tax” based on the fuel

economy (consumption) of the vehicle (not based on the weight)

• Objectives:• Reduce the number of vehicles, • Provide an incentive for smaller vehicles with better

fuel economy Ensure that vehicle owners cover part of road maintenance and construction costs

• The taxation of motor vehicles is being shifted gradually from the registration tax to annual taxation, which should influence the fuel economy of vehicles purchased

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EXAMPLE:Vehicle Fuel Tax, Denmark

• Started in 1986 when unleaded petrol was taxed at a lower rate than leaded.

• Households and VAT-registered entities are liable to the vehicle fuel taxes, whereas public transport receives a 100% refund.

• The revenue enters into the overall government budget.

• A tax differentiation in favour of petrol with low content of benzene entered into force 1998.

• This scheme was supported by other measures including lowering the content of lead in unleaded petrol, stringent emission limits promoting use of catalytic converters and awareness building.

• For consumers, the tax constitutes about two-thirds of the price of petrol and one third of the price of diesel.

• The tax creates an incentive to purchase vehicles with good-fuel economy and the fuel economy in Danish vehicles is generally high compared to other European countries

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Recommendations for using MBI in combating air pollution - 1

• Take advantage of opportunities for introducing new economic instruments

• Make an assessment of the current air pollution in general (polluting sources, geographic dispersion, problematic zones)

• Integrate the use of MBI in strategic documents such as programmes, action plans required under EC ambient air legislation

• Try to quantify the gains and burden for some of the MBIs (NOx, SO2 tax, vehicle taxes etc.) and prioritise an MBI which has good chances for success (introduction, implementation and enforcement)

• Ensure that objectives are clearly specified and achievable

• Systematic monitoring and evaluation of currently used instruments

• Strengthen existing instruments (could be more efficient than introducing new ones)

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Recommendations for using MBI in combating air pollution - 2

• Involve key stakeholders (including industry and other direct stakeholders) early in the process in the design and implementation

• Early announcement facilitate implementation and enforcement

• Combine the MBI with regulatory measure or as one component of a policy package to increase efficiency

• Gradual introduction e.g. phased in charge/tax rate to allow adaptation and innovative steps from industry

• Establish “green budget” commission to spearhead more environmentally sustainable economic and fiscal reform.

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Thank You For Your Attention!

Miriam Markus-Johanssonmmjohansson@rec.org