Economists believe that a well-designed carbon tax is the most economically efficient policy to incentivize carbon reductions. A well-designed carbon price will encourage businesses and consumers to reduce carbon emissions. As of August 2020, 25 countries have implemented a national-level carbon tax, covering 5.5 percent of global GHG emissions. Sweden is one of the countries that first implemented a carbon tax. How is it working in practice?
The Tax Foundation released a new study providing an overview of Sweden’s carbon tax over the last 30 years. Sweden’s carbon tax is distinct, with “a high tax rate that is predominantly levied on fossil fuels used as motor fuels and for heating purposes.” Due to the exemptions applied to various sectors such as the industrial sector, the carbon tax covers about 40 percent of the country’s greenhouse gases. Sweden’s carbon tax rate is highest globally at €110 per metric ton of carbon in 2020.
With minimal fossil fuel resources, Sweden relies on imported fossil energy and domestic supplies of renewable energy. Therefore, taxpayers of the carbon tax in Sweden are importers, distributors, and large consumers as the tax is “collected upon either consumption or delivery to a non-registered taxpayer.”
Critics of carbon prices often claim that the emissions reductions achieved by a carbon tax will be detrimental to the economy, but this has not been the case in Sweden. With the carbon tax in place over the last three decades, the study finds that Sweden has maintained robust economic growth, with its real GDP per capita increased by more than 50 percent from 1990 to 2019. Meanwhile, GHG emissions have declined by 27 percent between 1990 and 2018, with the largest emissions reductions in heating homes and industrial facilities. In their study, Metcalf and Stock find no evidence to support the claim that a carbon tax would “adversely impact employment or GDP growth” by examining 15 countries that are in the EU emissions trading system, but also have their own domestic carbon taxes. They also find modest evidence for emissions reductions associated with a carbon tax.
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