Background

Sweden is an EU member state with a population of approximately 9.5 million people. Sweden has a well-developed industrial base, which accounts for about 26.5 per cent of GDP, and services represent around 72 per cent of GDP (2013 figures). Sweden is heavily dependent on imports of fossil fuels for domestic consumption, however the share of fossil fuels in energy supply is 30 per cent which is lower than most developed countries (IEA, 2013). In 2012, renewable energy sources accounted for 37 per cent of total energy supply (OECD, 2015b) and total renewable energy production was the third highest among EU Member States (EurObservER, 2015). Overall, Sweden is characterised by high environmental quality. Approximately 14 per cent of land areas and freshwaters, 5 per cent of forest areas and 6 per cent of marine waters are under some form of nature protection. More than 60 per cent of forest areas are certified (OECD, 2014). Environmental challenges remain in the forestry sector as well as the pulp and paper industry, which has led to inter alia acidification of lakes and watercourses, eutrophication and depletion of oxygen in the Baltic Sea (SEPA, 2011). Addressing chemicals and toxic substances has historically been a key priority for Sweden and exposure to hazardous chemicals, persistent organic pollutants and potentially harmful metals (e.g., lead, mercury, hydrocarbons) is now significantly lower than in the past (OECD, 2014).

Overall Fiscal Profile

After a deep recession in the early 1990s, the Swedish economy experienced significant growth, achieving levels that exceeded those of other developed economies. Through a series of innovative regulations in the early 2000s, the country’s GDP growth reached 4 per cent in both 2004 and 2006, largely led by increasing foreign demand. A strong macroeconomic framework and large surpluses in public finances helped Sweden perform better than other developed economies during the global financial crisis in 2008-09 and the EU debt crisis in early 2010 (Fiscal Policy Council, 2015; OECD, 2015). Sweden has maintained a sustainable and strong fiscal position over time. In 2014, the general government deficit was around 2 per cent of GDP and gross debt around 40 per cent of GDP (OECD, 2015). Sweden’s GDP per capita is currently higher than the pre-crisis level and is among the top 10 of OECD countries (US$ 43,834 PPP in 2013). GDP is expected to rise from 2.1 per cent in 2014 to 2.6 per cent in 2016. The unemployment rate is relatively low (8 per cent in 2013). Following a peak in 2011 (3 per cent), inflation was 0.4 per cent in 2013 and 0.2 per cent in 2014 (EC, 2015).

Policy and Legal Framework for a Green Economy

Sweden has had a long, proactive attitude towards environmental protection. Sweden’s first National Sustainable Development Strategy (NSDS) was published in 1994 to implement commitments adopted at the 1992 UN Conference on Environment and Development (IISD, 2004). A revised NSDS was adopted in 2004 and amended in 2006. Environmental policy is shaped by the Swedish Environmental Code which is a package of environmental laws aimed at ensuring that the use of natural resources (land, water, and physical environment) is managed in ecological, social, cultural and economic terms. In addition, 15 ambitious national environmental objectives cover all policy areas and government bodies (SEPA, 2011) and take into account measures and commitments agreed in the framework of the EU and Nordic Cooperation.

As an EU member state, Sweden has implemented the EU’s environmental acquis and adopted environmental objectives and related measures in various areas. The Integrated Climate and Energy Policy approved in 2009 and amended in 2013 sets ambitious climate change mitigation targets of reducing GHGs emissions by 40 per cent (about 20 million tonnes) by 2020 compared with 1990 levels. This target applies to operations not covered by the EU emission trading system (EU ETS). Two thirds of the target is to be achieved through national measures and one third either through projects in other EU countries or through flexible mechanisms such as the Clean Development Mechanism (CDM). Sweden has also committed to increase the share of renewable energy sources in total energy use to 49 per cent by 2020. These targets are consistent with Sweden’s long-term ambitions, most notably the Climate Roadmap and its objective of a sustainable and resource-efficient energy supply with zero net emissions of GHGs by 2050 (IEA, 2013). This has been supported by increased investment in research and innovation in the energy sector, in particular on second-generation biofuels, smart grids and carbon capture and storage. In the Budget Bill for 2016, about SEK 9.9 billion in expenditure is secured for climate change mitigation, to increase the share of renewable energy and stimulate development of innovative, environmentally-friendly solutions (e.g., investments in solar cells and green cars, climate-resilient funding in developing countries) (Bloomberg, 2015).

In the context of Nordic cooperation, the Nordic Prime Ministers’ Green Growth Initiative supports joint efforts to tackle environmental challenges and bolster the market position of Nordic countries. Targeted areas are education and research, the electricity market, the construction sector, eco-design and energy efficiency, waste management, test centres for green solutions and training programmes, green funding for companies, and development aid. For example, the Norwegian-Swedish Electricity Certificate Market established in 2012 aims to increase renewable power production by a total of 26.4 TWh in both countries between 2012-2020, and to reduce energy intensity by 20 per cent by 2020 compared with 2008 (NVE, 2013).

Fiscal Measures for a Green Economy

Sweden’s environmental policy has relied on fiscal instruments since the early 1990s to promote sustainable development and green growth. Sweden was among the pioneers of carbon taxation with the adoption of a CO2, SO2 tax and a NOx tax in the early 1990s. These taxes were designed as part of a wider fiscal reform package, including reductions to personal income taxes accounting for SEK 71 billion (EUR 9.5 billion). In 2001, an updated ten-year green tax shift programme delivered a EUR 1.6 billion tax shift in the first four years and additional reductions on labour taxes between 2005-2010 amounting to a reduction in tax revenues of EUR 1.3 billion. The programme included increases to several environmental taxes which generated additional revenue of EUR 0.5 billion (IEEP, 2014).

The Swedish CO2 tax was introduced at a rate of SEK 25/t CO2 (EUR 27/t CO2) in 1991 and has gradually increased over the years (IEEP, 2013). In order to limit carbon leakage in sectors exposed to international competition, a lower tax was applied to industry and a higher level for households and services, with the latter being charged EUR 125/t CO2 in 2014 (Grantham Institute, 2015). When the CO2 tax was introduced, exemptions and lower rates were applied to energy intensive industries and non-ETS sectors, such as agriculture and forestry. However, in 2009 the carbon tax was reformed to reduce the number of exemptions to domestic industries and increase taxes for non-ETS sectors (IEA, 2013). For instance, previously exempted emissions from combined heat and power plants also covered by the EU ETS are taxed at 11 percent of the full carbon tax rate in 2018. The tax rate for other heat production covered by the EU ETS increased from 80 percent to 91 percent of the full rate. Furthermore, since January 2018, the carbon tax rate on industrial facilities not covered by the EU ETS became aligned with the general tax rate, which implies an increase of the previously lower tax rate.

With the highest level of CO2 tax worldwide, Sweden provides an example of how carbon pricing can be a cost-effective tool to reach absolute decoupling between GDP growth and CO2 emissions (World Bank, 2015). Indeed, between 1990 and 2006, Sweden cut its carbon emissions by 9 per cent while experiencing economic growth (Grantham Institute Data).

Other notable environmental taxes include a tax on emissions of nitrogen oxide (NOx) from energy generation at stationary combustion plants. Most of the revenues raised from this tax are returned to regulated plants in proportion to their production of useful energy. Thus firms emitting low volumes of NOx per unit of energy produced are net beneficiaries of the scheme. This innovative feature has provided a strong incentive for participating firms to reduce NOx emissions per unit of energy produced and has stimulated significant innovation and investment in combustion and pollution abatement technologies. It has also helped reduce concerns of negative competitiveness and distribution impacts of the tax and thus increased the political acceptability of the measure (OECD, 2012).

A series of taxes applied in the transport sector form part of a wider plan aimed at encouraging more fuel efficient vehicles and include a CO2-based annual vehicle tax, differentiated taxes applied on oil-based fuels and a congestion charge in Stockholm and Gothenburg. In addition, biofuels are exempt from carbon and energy taxes, and tax exemptions and subsidies are provided for green cars. From July 2018, Sweden introduced an emission reduction obligation scheme for petrol and diesel to promote low blending of biofuels. At the same time, the carbon tax for petrol and diesel with low blending of biofuels will be reduced, since the carbon tax rate is calculated on the basis of the fossil-based carbon content of the fuel. Moreover, there is significant investment in R&D to promote the diffusion of low-carbon vehicles (EC, 2010). Sweden aims to achieve a fossil fuel independent vehicle fleet by 2030. A bonus-malus system will be launched in early 2017 (Swedish Government, 2015).

A pay-as-you-throw charging system is in place for municipal waste, and landfill bans along with tax and producer responsibility schemes for industrial waste are applied. These fiscal measures cover service costs and waste recovery. Water charges are extensively applied, covering almost all financial costs related to service provision. The charge consists of a fixed element and a part calculated according to water consumption with rates varying by municipality. Other environmental taxes include a tax on commercial fertilizers payable by all manufacturers and importers of pesticides and a tax on natural gravel payable by all natural or legal persons who exploit a gravel pit (Eunomia & IEEP, 2014).

Renewable energy is supported through various tax incentives and subsidies. For example, heating from renewable energy is supported through tax exemptions for investments in renewable energy heating installations that replace fossil fuel-alimented heating systems and exemptions from the CO2 tax (see EurObservER, 2015).

A Committee to investigate the need for new economic instruments in the area of chemicals set up by the Government in 2013 has focused on flame retardants in electronic products and phthalates in flooring and other building materials containing polymers of vinyl chloride. The work of the Committee has led to current discussions on the introduction of an excise duty on certain electronic products and an excise duty on PVC floor, wall and ceiling coverings (PINFA, 2015).

Fossil Fuel Subsidy Reform

According to estimates provided by the Swedish Environmental Protection Agency, potential environmentally harmful subsidies, in the form of direct support and tax expenditure, amounted to about SEK 48 billion (i.e. 1.4 per cent of the country’s GDP) in 2010 (Swedish Environmental Protection Agency Data). In 2008-10 roughly three-quarters of Sweden’s subsidies to fossil fuel consumption were channelled towards coal, especially in the form of CO2 tax exemptions for peat and reduced CO2 tax rates for industrial consumers outside the EU-ETS. Fossil fuel subsidies to petroleum are mainly directed to diesel used in transport, agriculture and forestry sectors in the form of reduced energy tax rates. From 2011, energy tax exemptions in the industrial and agricultural sectors were replaced by a 30 per cent reduction in the standard energy tax rate (OECD, 2011). According to latest estimates provided by the OECD, Sweden’s fossil fuel consumption subsidies amounted to almost SEK 13 billion in 2014 (OECD Data).

Along with Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, and Switzerland, Sweden is a member of the Friends of Fossil Fuel Subsidy Reform (FFFSR). This is an informal group that was set up in June 2010 to support the commitments of G-20 and Asia-Pacific Economic Cooperation leaders to phase-out harmful and inefficient fossil fuel subsidies, and to foster political consensus and support on the role of fossil fuel subsidy reform at the international level. The FFFSR group launched a Communiqué calling for action on fossil fuel subsidy reform as part of international efforts towards a sustainable, low-carbon economy in the lead up to the UNFCCC COP21 in Paris, in December 2015 (FFFSR, 2015).

References and additional reading

EC (2010). Europe 2020. A European Strategy for Smart, Sustainable and Inclusive Growth. European Commission. http://ec.europa.eu/eu2020/pdf/COMPLET per cent20EN per cent20BARROSO per cent20 per cent20 per cent20007 per cent20- per cent20Europe per cent202020 per cent20- per cent20EN per cent20version.pdf

EC (2015). European Economic Forecast – Winter 2015. European Commission. http://ec.europa.eu/economy_finance/publications/european_economy/2015/pdf/ee1_en.pdf

EC (2010). Research of the EU automotive industry into low-carbon vehicles and the role of public intervention. European Commission. http://ftp.jrc.es/EURdoc/JRC58727_TN.pdf

Eunomia & IEEP (2014). Study on Environmental Fiscal Reform Potential in 14 EU Member States: Main Report. No 07.0201/2014/685390/ENV.D.2. Final Report to DG Environment of the European Commission. http://www.ieep.eu/assets/1722/Eunomia_EFR_Final_Report_MAIN_REPORT_V0.1.pdf

EurOberservER (2015). The State of Renewable Energies in Europe. Edition 2014 – 14th EurObserver Report. http://www.energies-renouvelables.org/observ-er/stat_baro/barobilan/barobilan14_EN.pdf

FFFsR (2015). Fossil Fuel Subsidy Reform and the Communiqué. Briefing Note – July 2015. The Friends of Fossil Fuel Subsidy Reform. http://fffsr.org/wp-content/uploads/2015/07/ffrs-communique-briefing-note.pdf

Grantham Institute (2015). Climate Change Legislation in Sweden. An Excerpt From: The 2015 Global Climate Legislation Study. A Review Of Climate Change Legislation In 99 Countries. The Grantham Research Institute on Climate Change and the Environment. http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/05/SWEDEN.pdf

IEA (2013). Energy Policies of IEA Countries – Sweden 2013 Review. International Energy Agency. http://www.iea.org/publications/freepublications/publication/Sweden2013_free.pdf

IEEP (2013). Evaluation Of Environmental Tax Reforms: International Experiences. Institute for European Environmental Policy. http://www.efv.admin.ch/e/downloads/finanzpolitik_grundlagen/els/IEEP_2013_e.pdf

IEEP (2014). Environmental Tax Reform in Europe: Opportunities for the future. Institute for European Environmental Policy. http://www.ieep.eu/assets/1397/ETR_in_Europe_-_Final_report_of_IEEP_study_-_30_May_2014.pdf

IISD (2004). Sweden Case Study. Analysis of National Strategies for Sustainable Development. International Institute for Sustainable Development. https://www.iisd.org/pdf/2004/measure_sdsip_sweden.pdf

NVE (2013). The Norwegian-Swedish Electricity Certificate Market- Annual Report 2013. Norwegian water resources and energy directorate. http://www.nve.no/Global/Elsertifikater/ per centC3 per centA5rsrapport/Elsertifikat per cent20 per centC3 per cent85rsrapport per cent202013_publisering.pdf

OECD (2014). Environmental Performance Reviews – Sweden 2014. Organization for the Economic Co-operation and Development. http://www.keepeek.com/Digital-Asset-Management/oecd/environment/oecd-environmental-performance-reviews-sweden-2014_9789264213715-en#page36

OECD (2011). Inventory of estimated budgetary support and tax expenditures for fossil fuels. Organisation for Economic Co-operation and Development. http://www.oecd.org/site/tadffss/48805150.pdf

OECD (2012). Lessons in Environmental Policy Reform: The Swedish Tax on NOx Emissions. Organization for the Economic Co-operation and Development. http://www.oecd.org/env/tools-evaluation/Lessons per cent20in per cent20Environmental per cent20Policy per cent20Reform-The per cent20Swedish per cent20tax per cent20on per cent20NOx per cent20Emissions per cent20eng.pdf

OECD (2015). OECD Economic Surveys – Sweden. Organization for the Economic Co-operation and Development. http://www.oecd.org/eco/surveys/Sweden-2015-overview.pdf

PINFA (2015). Newsletter May 2015 – Issue N. 52. Phosphorus, Inorganic and Nitrogen Flame Retardants Association. http://pinfa.org/images/newsletters/Pinfa_Newsletter_Issue_no52_May-2015.pdf

SCB (2014). Total Environmental Taxes in Sweden 2004-2014. Sveriges Officiella Statistik. http://www.scb.se/en_/Finding-statistics/Statistics-by-subject-area/Environment/Environmental-accounts-and-sustainable-development/System-of-Environmental-and-Economic-Accounts/Aktuell-Pong/38171/Environmental-taxes/271568/

SEPA (2011). Sweden Environmental Objectives – An Introduction. Swedish Environmental Protection Agency. http://www.swedishepa.se/Documents/publikationer6400/978-91-620-8620-6.pdf

Swedish Government (2013) ‘Budget Statement’ URL: http://www.government.se/content/1/c6/22/37/15/adf87802.pdf

Swedish Government (2015). Sweden’s Convergence Programme 2015. http://ec.europa.eu/europe2020/pdf/csr2015/cp2015_sweden_en.pdf

World Bank (2018). State and Trends of Carbon Pricing 2018. https://openknowledge.worldbank.org/bitstream/handle/10986/29687/9781464812927.pdf?sequence=5&isAllowed=y

http://stats.oecd.org/Index.aspx?DataSetCode=FFS_AUS

http://blogs.worldbank.org/climatechange/sweden-decoupling-gdp-growth-co2-emissions-possible

http://www.bloomberg.com/news/articles/2015-09-16/sweden-boosts-renewables-to-become-first-fossil-fuel-free-nation

http://www.lse.ac.uk/GranthamInstitute/legislation/countries/sweden/

http://www.norden.org/en/theme/green-growth

http://www.ekopolitan.com/swedes-pay-most-fossil-fuel-subsidies-capita-oecd