carbon tax - economic instruments in environmental policy (sweden)

8/13/2019 CARBON TAX - Economic Instruments in Environmental Policy (Sweden)

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Economic Instruments inEnvironmental Policy

A report by the Swedish Environmental Protection Agency and

the Swedish Energy Agency

SWEDISH ENVIRONMENTAL

PROTECTION AGENCY



Orders

Phone: + 46 (0)8-505 933 40

Fax: + 46 (0)8-505 933 99

E-mail: [email protected]

Address: CM-Gruppen, Box 110 93, SE-161 11 Bromma, Sweden

Internet: www.naturvardsverket.se/bokhandeln

The Swedish Environmental Protection AgencyPhone: + 46 (0)8-698 10 00, Fax: + 46 (0)8-20 29 25

E-mail: [email protected]

Address: Naturvårdsverket, SE-106 48 Stockholm, Sweden

Internet: www.naturvardsverket.se

ISBN 91-620-5678-6.pdf

ISSN 0282-7298

© Naturvårdsverket 2007

Digital publication

Cover photos: Helt Enkelt/Johnér BildbyråTranslation: Maxwell Arding



S W E D I S H E N V I R O N M E N T A L P R O T E C T I O N A G E N C YE c o n o m i c I n s t r u m e n t s i n E n v i r o n m e n t a l P o l i c y

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Preface

This report reviews existing economic instruments in the environmental field inSweden. Evaluations of the various economic instruments have been summarised.

Particular emphasis has been given to four of the16 environmental objectives in

Swedish environmental policy and protection. These are Reduced Climate Impact,

A Non-Toxic Environment, Sustainable Forests and Zero Eutrophication. A prob-

lem common to these objectives is that they are considered to be very difficult toachieve within the stated deadline. The analysis made is also linked to the three

action strategies: (i) More efficient energy use and transport; (ii) Non-toxic and

resource-efficient cyclical systems; and (iii) Management of land, water and the

built environment.

Our approach is based on the long-term socio-economically efficient use of in-struments to achieve environmental objectives. Since only a few evaluations in-clude socio-economic evaluation methods, we have defined three criteria for de-

termining whether a given instrument is an effective long-term aid to achievement

of the environmental objectives. Market-based systems, i.e. the electricity certifi-

cate scheme and the EU emissions trading scheme, are not described separately;

they are described to the extent the systems act in conjunction with other economic

instruments. The economic instruments covered can be divided into groups: taxes,charges, tax relief and grants.

This project has been carried out over a fairly short space of time, and we have

therefore been unable to fully review the literature. Nonetheless, our survey in-

cludes nearly two hundred evaluations.

The project has been carried out by the Swedish EPA and the Swedish Energy

Agency as directed by the Ministry of the Environment. There has also been con-sultation with the National Institute of Economic Research and the Swedish Tax

Agency and other agencies responsible for environmental objectives or sectors.

The study is a preliminary study in preparation for a government report on eco-

nomic instruments and also forms part of the in-depth review of environmental

objectives to be performed in 2008.

The following people have been involved in preparation of this report: ReinoAbrahamsson (Swedish EPA), Johanna Andréasson (Swedish Energy Agency),

Mats Björsell (Swedish EPA), Johanna Jussila Hammes (Swedish Energy Agency),Therese Karlsson (Swedish Energy Agency), Henrik Scharin (Swedish EPA), Ul-

rika Lindstedt (Swedish EPA) and Pelle Magdalinski (Swedish EPA).

Project leaders were Marcus Carlsson Reich, Swedish EPA and Karin Sahlin,

Swedish Energy Agency. English translation by Maxwell Arding.

Lars-Erik Liljelund Thomas Korsfeldt




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Contents

PREFACE 3

CONTENTS 5

1 SUMMARY AND CONCLUSIONS 9

Summary of the need to evaluate economic instruments 21

2 BACKGROUND 25

3 INTRODUCTION 27

3.1 Purpose, method and scope 27

3.2 Structure of the report 28

3.3 Environmental objectives and other societal goals 28

3.4 Instruments to achieve the objectives 31

3.5 Socio-economically efficient use of instruments 32

3.5.1 Introduction 32

3.5.2 Theoretical considerations 33

3.5.3 Criteria for evaluating the effectiveness of instruments 35

3.5.4 Outline description of instruments and their effectiveness 39

4 ENVIRONMENTAL OBJECTIVES, STRATEGIES AND ECONOMIC

INSTRUMENTS USED 43

4.1 Reduced Climate Impact 43

4.1.1 Problems 45

4.1.2 Available instruments 47

4.1.3 Development potential 50

4.2 A Non-Toxic Environment 53



4.3 Sustainable Forests 57

4.3.1 Economic instruments 60


4.4 Zero Eutrophication 63



4.5 Three action strategies and economic instruments used 70

4.5.1 More efficient energy use and transport 73

4.5.2 Non-toxic and resource-efficient cyclical systems 80




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4.5.3 Management of land, water and the built environment 82

5 SURVEY OF INSTRUMENTS 85

5.1 Multi-sectoral 85

5.1.1 Energy and carbon dioxide taxes in outline 85

5.1.2 Sulphur tax 98

5.1.3 Klimp (local climate investment programmes) 99

5.1.4 Grants for market launch of energy-efficient technology 103

5.1.5 Relationship between instruments and environmental objectives and

strategies 105

5.2 Manufacturing industry and energy production 107

5.2.1 Energy and carbon dioxide tax and their lower rates 109

5.2.2 Financial support for wind power, including the environmental bonus 116

5.2.3 Programme for improved energy efficiency (PFE) 117

5.2.4 Property tax on hydropower and wind power 123

5.2.5 Tax on nuclear power output 125

5.2.6 The NOX charge 126


strategies 128

5.2.8 Combined effects of instruments in industry 130

5.2.9 Company interviews 1345.3 Housing and services etc 137

5.3.1 The energy and carbon dioxide tax in the housing and services sector138

5.3.2 Tax relief for installation of biofuel units as the main heating source in

new houses, and for installation of energy-efficient windows in houses 140

5.3.3 Tax relief for improved energy efficiency and conversion in

public buildings 142

5.3.4 Grants for conversion in residential buildings and related premises 145

5.3.5 Property taxation 147

5.3.6 Solar heating and solar cell grants 149


strategies 153

5.3.8 Interaction between instruments in the housing sector and their effects

in combination with the EU emissions trading scheme 154

5.4 The transport sector 155

5.4.1 Energy and carbon dioxide tax on motor fuels 157

5.4.2 Tax exemption of biofuels for motor vehicles 162

5.4.3 Vehicle tax 164

5.4.4 Environmental classification of motor fuels and tax differentiation 168




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5.4.5 Taxation of company cars and free motor fuel 170

5.4.6 Road charges for certain heavy-duty vehicles 173

5.4.7 Subsidised public transport. 173

5.4.8 Car tyre charges 175

5.4.9 The car scrapping premium 176

5.4.10 Congestion tax 177

5.4.11 Transport support 178

5.4.12 Tax reduction for alkylate petrol 179

5.4.13 Aviation tax 180

5.4.14 Environmental shipping lane dues 181

5.4.15 Grants for disposal of oil waste from ships 183

5.4.16 Environmental landing charges 184

5.4.17 Relationship between instruments and environmental objectives

and strategies 186

5.4.18 Combined effects of instruments 188

5.5 Agriculture and fisheries 189

5.5.1 Support for creation of energy forest and for cultivation

of energy crops 189

5.5.2 Grants for conservation of nature and cultural heritage, and

deciduous forestry 193

5.5.3 Nature reserves 195

5.5.4 Nature conservation agreements and biotope protection areas 198

5.5.5 Tax incentives in the forest sector 200

5.5.6 Tax on cadmium in artificial fertiliser 203

5.5.7 Tax on nitrogen in artificial fertiliser 204

5.5.8 Pesticide tax 206

5.5.9 Agriculturally-related environmental support 209

5.5.10 Energy and carbon dioxide tax 213

5.5.11 Tax relief for light heating oil ( EO1) used in agriculture and fisheries for

purposes other than to operate motor vehicles in commercial operations 214

5.5.12 Tax relief on diesel use in agriculture and fisheries 215


strategies 216

5.5.14 Combined effects of instruments on agriculture and fisheries 218

5.6 Other economic instruments 220

5.6.1 Environmental penalty 220

5.6.2 Landfill tax 222

5.6.3 Funding of site remediation 225




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5.6.4 Tax on natural gravel 227

5.6.5 Water pollution charge 229

5.6.6 Batteries charge 230

5.6.7 Radon grants 233

5.6.8 Government lake liming grants 235

5.6.9 Government funding of fisheries conservation 238

5.6.10 Relationship between the instruments and environmental objectives and

strategies 240

6 LIST OF EVALUATION REQUIREMENTS 243

General 243

Industry 243

Transport 243

Agriculture and fisheries 244

Other sectors 244

Appendix 1: Tax Agency Memorandum 5 June 2006 247

Facts 247

Time expended 247

Number of matters 248

REFERENCES 255




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1 Summary and conclusionsThe contents of this report are based on a review of evaluations of economic in-

struments in the environmental field. Particular focus has been placed on instru-ments relating to the following Swedish environmental objectives: Reduced Cli-

mate Impact, Zero Eutrophication, A Non-Toxic Environment and Sustainable

Forests. It is considered that these objectives will be particularly difficult to

achieve within the set time limit. The analysis made is also linked to the three ac-tion strategies: (i) More efficient energy use and transport; (ii) Non-toxic and re-

source-efficient cyclical systems; and (iii) Management of land, water and the built

environment. The term "economic instruments" mainly refers to taxes, tax allow-

ances and relief, grants and charges. Electricity certificates and the EU emissions

trading scheme, which are market-based systems, are described insofar as they

interact with other economic instruments. This project has been carried out over afairly short period, and is intended to provide background material for a forthcom-

ing government report on economic instruments. At the same time, instruments are

also being analysed as part of the in-depth environmental objectives evaluation.

Further analysis of instruments will be initiated during the forthcoming "check-

point" review of Sweden's climate strategy. These projects also involve non-

economic instruments, however.The project has been carried out by the Swedish Environmental Protection

Agency and the Swedish Energy Agency in consultation with the National Institute

of Economic Research and the Swedish Tax Agency, following consultation with

other agencies concerned with the environmental objectives, and sectoral agencies.The agencies involved have summarised the results of evaluations performed and

also present their views on additional evaluations that may be necessary. We havealso used existing evaluations and economic theory as a basis for drawing some

general conclusions that may serve as guidance in future efforts to identify sustain-

able and effective socio-economic instruments to achieve our environmental objec-

tives.

Summary conclusions

We refer to almost 200 evaluations/follow-up studies on economic in-

struments in the environmental field. We have not made a comprehensivereview of academic studies, however.

Our review shows that the aim of most studies has been to monitor

achievement or evaluate the effects of a given instrument, particularly in

relation to its main objective, and that further consequences are some-

times analysed. Comprehensive socio-economic analyses are very rare.

Many economic instruments aimed at helping to achieve the Reduced

Climate Impact objective are used. Generally speaking, multi-sectoral

taxes, such as the carbon dioxide tax, are the instruments with the great-

est socio-economic potential for influencing behaviour in the interests of




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sustainability. However, the agencies consider that the potential for fu-

ture deployment of taxes is limited to some extent. (See explanation later

in this summary). Since grants and tax relief are generally thought to be

less effective in the long term, we consider it important to include otherinstruments in the analysis before designing future instruments. A coher-

ent forward-looking evaluation of the various economic instruments used

in the transport sector is needed. It is also essential to take account of in-

ternational aspects, such as industrial competitiveness and the EU emis-

sions trading scheme. Internationally coordinated or harmonised instru-ments should be given priority.

There are a few economic instruments aimed at specific sectors con-

cerned by the Zero Eutrophication environmental objective. The NOX

charge is one example of an effective instrument for the sources it cov-ers, but further use of instruments is required in many areas. The nature

of the environmental problem necessitates geographical differentiation of

instruments to create scope for cost-effective allocation of measures.

Since there is considerable doubt about the causes of this environmental problem, action and instruments used to mitigate leaching of both phos-

phorus and nitrogen should be given priority. Here too, international ef-

forts are of great importance – particularly as regards other countries im-

pacting on the Baltic Sea environment.

Very few economic instruments are being used to help achieve the Non-Toxic Environment objective, but we do not consider they are the best

means of combating chemical pollutants. This does not mean that they

cannot perform an important complementary function in specific in-

stances. International efforts are often of great importance. Funding for

site remediation is essential if the relevant interim targets are to be met.

We consider that an evaluation should be made of whether this funding is

being used cost-effectively, and whether the level of funding is sufficientto achieve the relevant interim targets.

Substantial funding has been made available under the Sustainable For-

ests objective for protection of land, which is essential to achieve this ob-

jective. Evaluations (mainly follow-up studies) have revealed that, given

the current price of forest and forest land, funding will have to be in-

creased to achieve the targets that have been set. We consider it neces-

sary also to analyse funding forms to ensure they are as cost-effective as possible.

The new market-based instruments systems, i.e. electricity certificates

and the EU emissions trading scheme, mainly act in concert with other

economic instruments to achieve the Reduced Climate Impact objective.

These instruments are aimed at actors in the energy production sector and




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in energy-intensive industries. The market-based instruments affect the

behaviour of actors and the scope for introducing other instruments that

should be used in combination with these systems.

As a general comment, we consider that further efforts in this field

should include an account of developments in the EU. In some cases EU-

coordinated or harmonised instruments may be a more effective means of

reducing environmental impacts as cost-effectively as possible. The EU

Commission intends to instigate a number of studies over the next fewyears. These may bring about a discussion of economic instruments at

EU level.

The agencies' proposals for further priority evaluations:

An overall evaluation of economic instruments in the transport sector.Examples include the interplay between motor fuel taxes, the carbon di-

oxide differentiated vehicle tax, and other taxes, and also ways of en-couraging the use of alternative motor fuels. The analysis should include

relevant environmental objectives, action strategies and other key socie-

tal goals within the sector. Potential joint EU-harmonised instruments

should also be examined.

Analysis of the effects of raising the energy tax or the carbon dioxide tax

in sectors not covered by the EU emissions trading scheme. Environ-

mental effects as well as the impact on corporate competitiveness should

be included. It will also be necessary to examine the legal scope for this, particularly bearing in mind that the situation has changed, following theimplementation of the EU emissions trading scheme.

Examination of whether or not raising green taxes and lowering other

taxes yields twin gains. If it is concluded that the current system is of du-

bious benefit, then, if possible, an alternative approach should be pre-

sented.

Evaluation of whether the funding allocated for Sustainable Forests issufficient to achieve the objectives. Evaluation of funding forms to en-

sure they are as cost-effective as possible.

Evaluation of whether the level of funding for site remediation is suffi-

cient to achieve the relevant interim targets, and whether funding is being

used cost-effectively.

Evaluation of whether funding for liming of lakes and watercourses issufficient. Evaluation of funding forms to ensure they are as cost-

effective as possible.

We also wish to point out that some of the analyses we have proposed

here may be performed as part of the in-depth environmental objectives

evaluation and in the forthcoming "checkpoint" interim review of Swe-

den's climate strategy in 2008.




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Effective long-term environmental policy

Our terms of reference state that our approach should be based on the long-term

socio-economically effective use of instruments to achieve environmental objec-

tives. This approach encompasses an overall view of the gains yielded by the envi-ronmental improvements (in fact an evaluation of the defined environmental objec-

tive), and the costs to society of the instruments used to achieve the environmental

objective. This is an extremely broad approach and is hardly ever adopted in a

single analysis. We have taken the environmental objectives for granted in our

analysis, which means that it is the cost side that must be socio-economically effec-

tive in the long term. Even a comprehensive analysis of this kind involves a greatdeal of work, and few evaluations include comprehensive impact analyses of socio-

economic effectiveness. Here, we have therefore defined three criteria in an at-

tempt to describe the ability of an instrument to achieve environmental benefits

effectively in the long term. These criteria are: (i) cost-effectiveness (taking theleast expensive measures first); (ii) dynamic efficiency (the capacity of an instru-

ment to generate technological development and encourage the most cost-effectivesolutions over time); and (iii) achievement of objectives (how well an instrument

achieves a stated objective). The report uses the phrase "long-term effective use of

environmental instruments" to refer to all these criteria together. In general, multi-

sectoral taxes are regarded as effective instruments, whereas narrowly targeted

grant schemes are considered less effective.

One step forward

The problems entailed when analysing instruments are often complex, i.e. there aremany interrelationships to be described. Various delimitations are usually made.

For instance, this report is largely confined to four environmental objectives, eco-

nomic instruments and existing national instruments. The report does not give a

comprehensive account of the way the economic instruments described affect and

are linked to related objectives such as other energy policy goals, other environ-

mental objectives and other societal goals in various sectors. This survey should

therefore be seen as one step towards understanding the approach the state should

adopt to achieve Sweden's environmental objectives.

Reduced Climate ImpactThe economic instruments used to mitigate emissions of greenhouse gases in Swe-

den are fairly numerous. Some of them span several sectors, such as energy (elec-

tricity and fuels), the carbon dioxide tax and KLIMP (local climate investment

programmes). Other instruments aimed at specific sectors, such as carbon dioxide

differentiated vehicle tax and tax exemption for alternative motor fuels in thetransport sector, conversion grants for individual heating systems, grants for con-

version and improved energy efficiency in public buildings and solar heating grants

in the housing sector, the NOX charge system and the PFE programme for im-

proved energy efficiency in industry. There are also economic instruments that

partly counteract the environmental objectives, such as company car taxation and

travel allowances in the transport sector, and reduced-rate energy and carbon




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dioxide taxes for industry. In addition, some instruments have a different primary

purpose or a number of different purposes. Examples include vehicle tax, company

car tax regulations and reduced-rate energy and carbon dioxide taxes. For instance,

the aim of the PFE programme for improved energy efficiency is that the effects onelectricity consumption should be equivalent to the effects that would otherwise

have been achieved by the EU minimum tax (which is also reduced for companies).

The ultimate effect on the Reduced Climate Impact objective depends on how the

reduced energy consumed would otherwise have been produced.

LOWER AND HIGHER TAXES?

In terms of economic theory, multi-sectoral taxes such as the carbon dioxide tax,

are cost-effective both in the near and the long term. This means that the tax has

the potential to cause actors to take what they consider to be the cheapest measures

first, while also sending a clear signal to market players, which creates an incentivefor technological development (dynamic efficiency). But this is a less certain way

of achieving objectives than regulation. It may be deduced from the evaluations

and follow-up studies performed that the energy tax and carbon dioxide tax have

had a major impact on emissions, particularly from district and individual heating

systems. The studies also reveal that current tax levels have a pronounced effect on behaviour. We are therefore of the view that a further increase in the tax on heating

might accelerate emission reductions and generate higher tax revenues for a limited

period (since a gradual adaptation to a reduced use of fossil fuels is taking place),

but would not improve the end result. One study also shows that the reduced en-

ergy and carbon dioxide taxes for private industry may be cost-effective if accountis taken of the risk of manufacturing operations being relocated to other countries.

Although taxes are generally attractive in terms of their cost-effectiveness, the

agencies consider that they offer limited additional potential for achieving the Re-

duced Climate Impact objective. Aside from the fact that these taxes (on energy

and carbon dioxide) already have a marked impact on certain kinds of fossil fuel

use, the recently introduced emissions trading scheme also influences the way that

Sweden should use the carbon dioxide tax. Nonetheless, we consider there are some areas where it should be analysed

whether the tax can be developed and its use possibly extended. One concerns

those industries not covered by the EU trading system. The analysis should include

the environmental effects that may be expected, as well as the effects of a higher

tax on the international competitiveness of Swedish companies. There has been no

evaluation analysing the interplay of various economic instruments in the transportsector. Those instruments include several taxes, such as the carbon dioxide differ-

entiated vehicle tax, motor fuel tax and the tax regime for company cars. The find-

ings presented in various evaluations/follow-up studies are that increased carbon

dioxide differentiation of the vehicle tax and the tax regime for company cars

would influence behaviour, particular if differentiation were sharp. However, there

has been no analysis of ways of combining higher motor fuel taxes with these, or of

the scope for devising EU-harmonised solutions so as to increase the positive im-

pact on the environmental problem and increase cost-effectiveness.




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REDUCE THE NUMBER OF GRANTS

The grants in use have not really been evaluated; they have been monitored. The

agencies do not consider grants to be the first choice as a means of reducing cli-

mate impact. If taxes are not practicable in specific instances, grants may be one ofseveral options requiring analysis (for possible use). Any such analysis should

include all possible alternatives. Cost-effectiveness and achievement of objectives

to reduce emissions are generally lower where grants are used instead of taxes, for

example, particularly if grant eligibility is narrowly framed. Moreover, there is a

theory in economics that the best approach to dealing with phenomena causing

negative external effects is to internalise the environmental cost (i.e. include it inthe price), perhaps by means of a tax, not to offer grants for alternative solutions. It

is also hard to retroactively evaluate the effects of grants on greenhouse gas emis-

sions alongside existing taxes (particularly the taxes on energy and carbon diox-

ide). This problem has been mentioned in relation to conversion grants for individ-ual heating systems and to some extent also KLIMP grants. Moreover, grants ne-

cessitate central government funding, and each grant scheme requires administra-tion, which in some cases may be disproportionate to the expected results of the

grant scheme. One such example is the conversion grant scheme administered by

county administrative boards.

Some grants may have a narrowly defined purpose, such as grants for solar col-

lectors and solar heating, where the main aim is to encourage use of this technol-

ogy. Other grants may serve various purposes. One example is KLIMP, where one

aim is to increase local support for action to combat climate change, and the grant

for improved energy efficiency and conversion of public buildings, where an express aim alongside the energy and climate objectives is to increase employment.One problem identified here is the shortage of installation technicians arising fol-

lowing the introduction of numerous grants in the housing sector. It is also uncer-

tain whether tax relief on the cost of installing energy-efficient windows and new

biofuel boilers is cost-effective or dynamically efficient. This inference is based not

on any evaluation made, however, but on interviews with builders and window

manufacturers, and with the Tax Agency, which administers the tax relief.One final conclusion is that the scope for further use of economic instruments

to achieve Reduced Climate Impact is limited in some respects (assuming that they

must be effective in the long term). It is therefore essential that future evaluations

include the other instruments available. For instance, it may be useful in the hous-

ing sector to ascertain how standards, building regulations and information can

serve as a complement to the present tax regime.




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Zero Eutrophication

SEVERAL ECONOMIC INSTRUMENTS CONTROLLING NITROGEN EMISSIONS

Although the tax on nitrogen has had a limited impact on the sale of artificial fertil-

isers, its indirect effects have been greater, in that the tax has funded environmental

compensation payments, which have reduced leaching of nitrogen as well as phosphorus. The NOx charge scheme for power plants is a cost-effective instrument and

a complement to emission conditions set in operating permits. The charge scheme

has yielded a quicker and cheaper reduction in emissions than could have been

achieved using the more static instrument of emission conditions alone.

EU agricultural support has done much to create agricultural surpluses, a situa-

tion which exacerbates nutrient leaching from agriculture. An analysis of the ef-fects of direct support (cash support based on area of cultivated land or livestock

numbers) and environmental compensation (e.g. support for pasture land, organic production and wetlands) shows that positive and negative environmental impacts

are often linked, and that grants may even counteract each other. Following the

recent reform of EU agricultural support, many of these effects are expected to

disappear, but it is too early to evaluate the results. The projected effects of the EU

agricultural reform in 2003, implemented in Sweden in 2005, indicate a reduction

in nitrogen leaching.

NEW OPPORTUNITIES OFFERED BY THE IMPLEMENTATION OF THE WATER

FRAMEWORK DIRECTIVE

The Swedish implementation of the EU Water Framework Directive (WFD) will provide additional means of safeguarding water quality. Although it only concerns

surface water, groundwater and coastal areas, measures taken within catchments

usually also benefit the marine environment. The WFD emphasises the use of pric-

ing policies and enshrines the "polluter pays" principle and the aim of achieving the

objectives cost-effectively. The WFD recommends instruments that are self-

financing as well as cost-effective, which suggests there is scope for greater use of

economic instruments in particular, since only they can meet these criteria.

NEED FOR GREATER USE OF INSTRUMENTS

First and foremost, there is great potential for developing economic instrumentsdesigned to reduce leaching of phosphorus, since economic instruments in Sweden

to date have largely focused on reducing the nitrogen load. Improved management

of farmyard manure is considered to offer great potential for reducing phosphorus

and nitrogen emissions at a low cost. This kind of action will require an instrumentthat creates financial incentives for farmers to make the necessary investments so

that farmyard manure can be stored until it can be spread at the right time. An

evaluation of whether economic instruments could help to improve treatment at

sewage treatment plants is also desirable.




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To reduce emissions of nitrogen oxides, perhaps the greatest development po-

tential concerns emissions of nitrogen oxides from shipping, since other forms of

transport will be covered by the new EC directive imposing tighter standards on

exhaust emissions from heavy duty vehicles. However, there is a need for interna-tional instruments in this area, since shipping faces international competition,

which limits the effect of national instruments.

In general, it may be said that since instruments designed to achieve action in

Sweden have a limited impact on eutrophication in the Baltic Sea, there is a need to

create international instruments also impacting on emissions from other countries polluting the Baltic Sea. And, to maintain our credibility in international environ-

mental cooperation, Sweden should also take additional measures.

GEOGRAPHICAL DIFFERENTIATION

Although there are now quite a number of economic instruments aimed at nitrogenemissions, there is a need to redesign them to better reflect their actual impact on

eutrophication by means of geographical differentiation. Unfortunately, at present

there is both considerable doubt and considerable disagreement about transport of

nutrients from source to receiving water body, and their effects on the water body.

A Non-Toxic Environment

ECONOMIC INSTRUMENTS SECOND A SECOND BEST SOLUTION

One study analysing whether economic instruments can be used more to achieve

the Non-Toxic Environment objective has said that taxation of chemicals use ismainly justified by the existence of negative external effects along the production

chain. The report also says that these diffuse effects are difficult to control directly,

and it may instead therefore be advisable to tax use or manufacture of the chemi-

cals causing the problems. But doubt about the marginal cost of reducing chemicals

use, combined with an often steeply rising marginal damage effect above a critical

level, means that quantitative controls (or even bans) may be a more effectivemeans of limiting chemicals use than taxes. Hence, taxes on chemicals do not offer

any general solutions to environmental problems associated with the Non-Toxic

Environment objective; their effectiveness relative to other instruments must be

assessed on its merits in each case. This does not prevent economic instrumentsfrom serving as an important complement in certain cases.

Since product streams are often international, it is important that economic in-

struments in this field are supported by international organisations, and do notconflict with international agreements.

RESULTS FROM ONGOING STUDY PENDING

There is an ongoing study initiated by the National Chemicals Inspectorate aimingto identify the areas of chemicals manufacture and use for which economic instru-

ments may be appropriate, either to reinforce existing instruments in the form of

laws and regulations, or for substances or areas in which there are currently no




17

instruments. We consider that we should wait until the results of that study are

published before drawing any definite conclusions about the way economic instru-

ments can be used to help achieve the Non-Toxic Environment objective.

FUNDING IMPORTANT BUT IN NEED OF EVALUATION

The funding that has been made available for site remediation is of great impor-

tance in achieving one of the difficult environmental objectives (Non-Toxic Envi-

ronment), besides being a very large sum of money.

Funding of site remediation and clean-up activities in general have been under-

going a phase of rapid expansion and development. This notwithstanding, it isconsidered that the relevant interim target will be hard to achieve on the basis of

current available funding. We therefore consider it a priority to evaluate the system

so as to assess the amount of funding required to achieve the relevant interim tar-

gets and whether this can be done more cost-effectively.

Sustainable Forests

There are few specifically environment-related economic instruments aimed at

achieving the Sustainable Forests objective. However, tax policy exerts a powerful

influence over forest owners and their forests. Hence, from an environmental ob-

jective viewpoint, it is essential to analyse tax effects and consider instruments that promote, or at least do not hamper, achievement of the objective.

Follow-up studies have shown that, given the current price of forest and forest

land, the funding available for formal forest protection must be increased if the

stated objectives are to be achieved.Current capital gains taxation regulations hinder the creation of nature re-

serves. These regulations should be reviewed with a view to encouraging and fa-cilitating the creation of nature reserves. A change in the right to treat income re-

ceived under nature conservation agreements in accordance with accrual account-

ing principles, which is one of the major obstacles to concluding agreements of this

kind, is also considered a priority.

Although budget appropriations for purchase of land and payment of compen-

sation for land-use restrictions and land management have risen sharply in recentyears, funding is considered to be inadequate. Monitoring and evaluation of the

land management appropriation needs to be developed and improved. In our opin-ion, there is an urgent need to evaluate the environmental effects of these appro-

priations, to determine whether they are cost-effective instruments.

The Swedish Agency for Public Management has been instructed by the Gov-

ernment to evaluate existing nature conservation instruments (nature reserves, bio-tope protection areas and nature conservation agreements) and their long-term cost-

effectiveness, and also how state forests can be used to help achieve the entire

Sustainable Forests objective. The Agency's report is to be submitted by 30 Sep-

tember 2007.




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Economic instruments and the three action strategies

We have also been asked to relate our evaluations of the economic instruments to

the three defined action strategies. Our general conclusions on economic instru-

ments are not altered when they are described in terms of the "intersection" in vari-ous strategies. All three strategies involve the use of economic instruments to

achieve their ends. Instruments are most frequently used in the strategies for More

Efficient Energy use and Transport and least frequent in Non-toxic and Resource-

efficient Cyclical Systems. One aim in developing the strategies is to identify in-

struments serving several environmental objectives and covering many measures

and sectors. The energy tax, carbon dioxide tax, sulphur tax and, to some extent,KLIMP grants, are examples of such economic instruments. The taxes in particular

also meet the long-term effectiveness criteria. The international perspective and

improving energy efficiency are of particular importance to the strategy for More

Efficient Energy use and Transport and the strategy for Non-toxic and Resource-efficient Cyclical Systems. In theoretical terms, general use of energy taxes is con-

sidered to be a cost-effective means of improving energy efficiency. This has also been confirmed by interviews with builders, window manufacturers and in a num-

ber of energy-intensive industries. High energy prices are cited as the single most

important reason for improving energy efficiency. Instruments leading to more

efficient use of electricity, e.g. the electricity consumption tax and the PFE pro-

gramme for improved energy efficiency, are fairly complicated to evaluate from an

environmental objectives perspective. One problem is that the environmental effect

materialises at the production stage, rather than the consumption stage. Moreover,

electricity is produced in a Nordic market, which means that the effect of measuresin Sweden on emissions may occur in other countries.

OBVIOUS GOAL CONFLICTS

In the agencies' view, it may be important when developing strategies to consider

the attitude to be adopted towards instruments/measures where there are potentialgoal conflicts. In general, it may be said that goal conflicts are seldom examined in

the studies we have read. One example of a goal conflict is increased use of ethanol

as a motor fuel (largely due to various economic instruments such as exemption

from energy tax, lower taxation of company cars, local incentives such as free

parking etc), and a desire to increase the rate of improvements in energy efficiency.The use of ethanol (based on renewable energy sources) reduces greenhouse gasemissions from the transport sector, but also reduces energy efficiency, since con-

verting solid biomass into liquid ethanol requires more energy than does the manu-

facture of petrol and diesel. This goal conflict in the strategy for More Efficient

Energy use and Transport is highlighted because increased use of renewable fuels

and energy efficiency are both important elements of the strategy. Another goal

conflict may be a sharp increase in use of biofuels (encouraged by economic in-struments, among other things) and the Sustainable Forests and Rich Diversity of

Plant and Animal Life objectives. If biomass use does increase sharply, the effect

of this on these other environmental objectives should be made clear. In addition,

new production of electricity from renewable sources may conflict with some of




19

the environmental objectives falling within the framework of the strategy for Man-

agement of Land, Water and the Built Environment. Building a power plant does

not always intrude and impact on the surrounding environment, however.

Coordination with the electricity certificate scheme and the EU emis-

sions trading scheme

The EU emissions trading scheme forms part of the joint EU climate strategy and

was introduced as a harmonised instrument in 2005. The system covers the energy

production sector and most energy-intensive industries, and is also linked to global

trade in that some emissions can be covered by credits under the project-basedmechanisms. It has therefore become important to take account of the effects of

this system in analyses of instruments covering Swedish emissions in the trading

sectors. In particular, the system operates together with the carbon dioxide tax and

the electricity certificate scheme. The latter was introduced primarily as an incen-tive for electricity production from renewable energy sources, thereby helping to

secure energy supply in the EU. However, the system has clear effects on the envi-ronmental objectives, since it favours renewable energy production over natural

gas-based electricity production, for example. The PFE programme for improved

energy efficiency in industry also acts together with these systems. Measures taken

under PFE and the EU emissions trading scheme can complement each other. It is

not possible to make a final assessment of the effects of PFE, as the programme has

not yet been evaluated.

Several studies have concluded that, as a matter of principle, the carbon dioxide

tax should be abolished in the sectors covered by the EU emissions trading scheme.The tax and the trading system act in the same way and duplicate instruments areinefficient. However, one study points out that the carbon dioxide tax should re-

main for parts of the energy production sector, i.e. the district heating sector, so as

not to forfeit progress already made in achieving a higher proportion of biofuels

used in production. The agencies also wish to highlight another consequence of the

EU trading system. In the near term (during the current allocation period for emis-

sion allowances) the effects on total EU emissions of lower electricity consumption(effects of the consumption tax on electricity and conversion grants for buildings

heated by electricity) or a greater proportion of renewable electricity production

(the electricity certificate scheme) remain unchanged. This is because lower emis-

sions from the Nordic electricity system at the same time allow higher emissions in

another EU country under the EU emissions trading scheme. Eventually, when new

trading periods begin, lower emissions resulting from these instruments may affectthe scope for future allocation of emission allowances.

Examine the scope for more joint EU instruments

Lastly, we wish to emphasise the importance of also examining the scope for fur-

ther development of joint EU instruments. The Commission will be presenting a

green paper on market-based instruments in early 2007. The European Environ-

ment Bureau has proposed a programme of tax reforms using the "open coordina-tion" method. The new sustainability strategy adopted at the EU summit in June




20

2006 urges member states to continue the shift towards green taxation. The Com-

mission will be presenting a report in 2007 on current systems used by member

states. In 2008 the Commission will be presenting a report containing proposals on

ways of phasing out the most environmentally harmful subsidies. Environmental problems associated with Reduced Climate Impact, the strategy for More Efficient

Energy use and Transport, the Zero Eutrophication, Non-Toxic Environment objec-

tives, and the strategy for Non-toxic and Resource-efficient Cyclical Systems are

not confined by national boundaries. Joint EU economic instruments should there-

fore be included in the analysis of the Sweden's approach to developing economicinstruments to achieve the stated environmental objectives. It may be added that

trade and industry have demanded more international harmonisation and coordina-

tion, since many companies make and sell their products in an international market.

Developments in the R&D field (both in the private sector and the academic world)

also often take place in an international arena.

A final coherent strategy must also consider other instruments

A comparison with other instruments must also be made to determine whether an

economic instrument is the most effective one. Moreover, instruments often act in

concert. For instance, the NOx system operates in parallel with operating permit

application procedures, which means that all existing and potential instruments

should be analysed in parallel to evaluate their effects and potential.

Defining the terms used in future evaluations

Finally, we wish to refer back to our introductory comments on various conceptsand definitions describing the socio-economic effectiveness of our approach to

achieving the environmental objectives. Going forward, it is essential that the termsused are defined clearly and used consistently. A comprehensive socio-economic

analysis should also analyse and evaluate the definitions of the objectives them-

selves. The socio-economic impact analysis should also examine the consequences

for other societal objectives. We would here like to stress that adverse effects on

other societal objectives may sometimes be a reason to modify the instrument, but

not in all cases. Other government measures can also be used to alleviate the nega-tive effects of the instrument.




21

Summary of the need to evaluate economic instruments

Table 1 Has the instrument been sufficiently evaluated and is it considered to be effective

in the long run? A summary of the instruments surveyed.Instrument Has the instru-

ment been suffi-ciently evalu-

ated?

Is the instrument along-term effectivemeans of furtheringenvironmental inter-ests (based on thecriteria of cost-effectiveness, dy-namic efficiency andachievement of objec-tives)?

Main objective(s)

Multi-sectoral

General comments on energy and

carbon dioxide taxes

Yes, except for re-

duced-rate taxes forindustry outside theEU emissions tradingscheme

Yes, tax reductions may be

justified for trade andindustry policy reasons.

Reduced Climate Impact.

Fiscal.

Energy system transition.

Sulphur tax Essentially yes, butthe effect of loweringthe tax exemptionlimit needs to beexamined.

Yes. Zero Eutrophication.

Natural Acidification Only.

Clean Air.

KLIMP (local climate investment pro-grammes

Yes. Probably not, but fairlyeffectively for a grantsystem, owing to broadcoverage and flexiblechoice of measures.



Grants for market launch of energy-efficient technologies

No. More analysis is needed.With the right design, theinstrument is thought tohave the potential to com-plement other instruments.


Manufacturing industry and

energy production

Financial support for wind power, in-cluding environmental bonus

No, no evaluationsmade.

No. Energy system transition.

Programme for Improved Energy Effi-ciency (PFE)

No. Doubtful, although theeffects of this instrumentinteract positively withother economic instru-ments.

Trade and industry policy.


Property tax on wind power and hydro-power

Not in terms of itsenvironmental im-pact.

Unclear. Fiscal.

Nuclear power output tax Not in terms of itsenvironmental im-pact.

Unclear. Fiscal.


NOx charge Yes Yes, for sources included. Zero Eutrophication.


Clean Air.




22

Instrument Has the instru-ment been suffi-ciently evalu-

ated?

Is the instrument along-term effectivemeans of furthering

environmental inter-ests (based on thecriteria of cost-effectiveness, dy-namic efficiency andachievement of objec-tives)?

Main objective(s)

Housing and services etc.

Tax relief for installation of biofuel unitserving as main heating source in newhouses and for installation of energy-efficient windows in existing houses.

No. No. Narrow focus. Reduced Climate Impact.


Grants for improved energy efficiencyand conversion in public buildings(OFFROT).

No. The Board ofHousing, Buildingand Planning pre-sented a plan formonitoring andevaluation of thesegrants in June 2005.

No. May have broughtmeasures forward, but theyare often profitable evenwithout grants.

Reduced Climate Impact.Energy system transition.

Increased employment.

Conversion grants for homes and re-lated premises

No. The Board ofHousing, Buildingand Planning pre-sented a plan formonitoring andevaluation of thesegrants in June 2005.

No. May have broughtmeasures forward, but theyare often profitable evenwithout grants.



Property taxation Not in terms of itsenvironmental im-pact.

Possibly counterproduc-tive, but probably limited.

Fiscal.

Solar heating and solar panel grants(solar panel grants under OFFROT)

No, monitored, ifanything.

No. The main aim is toencourage the use of agiven technology. Thedesign of the scheme is inneed of review.


Transport sector

Motor fuel tax Yes. Yes. The effect on othersocietal goals may limit thescope for using motor fueltax.

Fiscal.


+ other external effects

(noise, road wear etc).Tax exemption for biofuels No. Unclear. Its effect alone

and with other instrumentsneeds to be examined.



Vehicle tax No. Probably not. Its effect inconjunction with otherinstruments in the sectorneeds to be analysed.

Fiscal.


Environmental classification of motorfuels and differential taxes

Yes. Yes. Natural Acidification Only

Clean Air

Zero Eutrophication.

Non-Toxic Environment.




23

Instrument Has the instru-ment been suffi-ciently evalu-

ated?


environmental inter-ests (based on thecriteria of cost-effectiveness, dy-namic efficiency andachievement of objec-tives)?

Main objective(s)

Taxation of company cars and freemotor fuel

No. Counterproductive. Amended regulationscombined with other eco-nomic instruments in thetransport sector should beanalysed.

Fiscal.

Clean Air, Natural Acidifi-cation Only, ReducedClimate Impact.(Amended regulations)

Road charges for certain types of

heavy-duty vehicles

No. No. Different main pur-

pose. Effects combinedwith other economic in-struments in the sectorshould be analysed.

Fiscal.

Acidification, Clean Air.(Differentiation)

Subsidised public transport. Yes. Doubtful. Other aspectsneed to be taken intoaccount, however.

Several traffic policyobjectives



Car-scrapping premium Yes. Not in terms of encourag-ing people to scrap oldvehicles. Does encouragepeople to take their scrapvehicles to scrap yards.




Clean Air.

Congestion tax (trial in Stockholm) Yes. Yes. Clean Air.Fiscal.


Transport funding Yes. Probably marginal effect. Regional policy.

Lower tax on alkylate petrol No. Unclear. More incentivesneeded.


Aviation tax No. No. Does not influencetechnical development.Global markets entail a riskof carbon dioxide "leak-age".


Fiscal.

Environmental shipping lane dues No. No. Increased use of inter-nationally harmonised

instruments needed.



Clean Air.

Environmental landing fees Yes. No. Increased use of inter-nationally harmonisedinstruments needed.



Clean Air.

Grants for disposal of oil waste fromships

No evaluationsmade.

No. Essentially regulation.Very few grant applicationsreceived.

Balanced Marine Envi-ronment.

Agriculture, forestry, fisheries

Grants for planting of energy forest andcultivation of energy crops

Yes (white paperunder preparation)

No. Design of the schememay be in need of review.






24

Instrument Has the instru-ment been suffi-ciently evaluated?


environmental interests(based on the criteria ofcost-effectiveness, dy-namic efficiency andachievement of objec-

tives)?

Main objective(s)

Grants for conservation of natural andcultural heritage, and management ofbroad-leaved deciduous woodland

No, but not a priority. Difficult to say. But therehas been a positive effecton natural and culturalassets in woodland.

Sustainable Forests.

Tax incentives in the forest sector Yes. Counterproductive: Regu-lations in need of review.

General taxation princi-ples.

Sustainable Forests.

Purchases, compensation for land-userestrictions and management of forestland

No. Environmentaleffect and level offunding should beevaluated.

Unclear. Sustainable Forests.

Tax on cadmium in artificial fertiliser Yes. Yes, nationally speaking Non-Toxic Environment.

Tax on nitrogen in artificial fertiliser Yes. No: Geographical differen-tiation desirable.


Pesticide tax Yes. Limited effect Non-Toxic Environment.

Agricultural environmental compensa-tion

No, needed continu-ously.

Unclear, acts for andagainst.

Varied Agricultural Land-scape.

CAP.

Tax relief on light heating oil ( EO1)used in agriculture and forestry for

purposes other than operating motorvehicles

No. Counterproductive. Trade and industry policy.

Tax relief on use of diesel in agriculture,forestry and fisheries

No, but not a priority. Counterproductive. Trade and industry policy.

Other economic instruments

Landfill tax Yes. Yes (may require differen-tiation).


Good Built Environment.

EU waste strategy.

Funding of site remediation No, effectiveness andfunding level shouldbe evaluated.

Unclear. Non-Toxic Environment.

Good Quality Groundwa-ter.

Tax on natural gravel Yes. Limited contribution – mainimpact via permit applica-tion procedure.


Water pollution charge Yes. Unclear link but probablyprevents emissions.

Balanced Marine Envi-ronment.

Batteries charge No, the chargeshould be evaluated.

Unclear. Non-Toxic Environment.

Radon grants Yes. Can probably be mademore effective. Greaterincentive needed.


Government grants for liming of lakes No, effectiveness andfunding level needevaluating.

Unclear. Natural Acidification Only.

Government funding of fisheries con-servation measures

No, better monitoringneeded.

Unclear. Flourishing Lakes andStreams.




25

2 BackgroundIn their respective letters of instruction for 2006, the Swedish Energy Agency and

the Swedish EPA were given the following assignment by the Government:

The Swedish Environmental Protection Agency and the Swedish Energy Agency in

consultation with the National Institute of Economic Research and the Swedish Tax

Agency, following consultation with other agencies concerned with the environ-

mental objectives, and sectoral agencies, are instructed to prepare a summary of

existing knowledge on the effects of economic instruments in relation to Sweden's

environmental objectives. Where there are no evaluations of environmentally-related economic instruments, or where the quality of evaluations is inadequate,

new evaluations are to be made. The scope of those evaluations is to be agreed

with the Government Offices. The analysis made is also linked to the three action strategies: (i) More efficient energy use and transport; (ii) Non-toxic and resource-

efficient cyclical systems; and (iii) Management of land, water and the built envi-

ronment. The report should focus on the long-term socio-economically effective useof instruments to achieve environmental objectives. The potential synergies created

by various economic instruments in relation to one ore more environmental quality

objectives are to be taken into account, as are any counter-effects. The analysis

should therefore be linked to the three action strategies: (i) More efficient energy

use and transport; (ii) Non-toxic and resource-efficient cyclical systems; and (iii)

Management of land, water and the built environment.

The report should focus particularly on the environmental quality objectivesand interim targets that will be difficult or very difficult to achieve within a genera-

tion according to the Environmental Objectives Bill (2004/05:150). For the pur-

poses of this report "economic instruments in the environmental field" means taxes,

including relief, allowances, rebates and refunds, charges and direct grants. The

agencies involved should describe the way these instruments operate in conjunc-tion with emissions trading and electricity certificates. The report should also

cover taxes and charges whose primary function is to generate revenue, but that

have an impact on the environment and may therefore counteract the effects of

other instruments. The agencies may divide tasks between themselves on the basis

of their areas of expertise and responsibility. This report is the first of two parts of

a study that will form part of the in-depth evaluation in 2008. It is also a comple-

ment to the efforts being made by the agencies concerned by environmental objec-tives to propose measures, including economic instruments, under their respective

objectives. The "Checkpoint 2008" review of Sweden's climate strategy should

particularly be taken into account. The report must be submitted by 1 October

2006.

Following further discussions with the Ministry of the Environment, it was decided

that the main emphasis of the report would be a survey and review of evaluations

of existing environmental economic instruments, which includes identifying areas

where new evaluations are needed. Overall conclusions have also been drawn on




26

the basis of the evaluations reviewed. No new evaluations have been made as part

of this report.




27

3 Introduction3.1 Purpose, method and scopeThe main purpose of the report is to facilitate the work of the commission due to be

appointed in autumn 2006, whose task will be to submit proposals for new ormodified economic instruments with a view to achieving the environmental objec-

tives.

The report also constitutes background material for the in-depth evaluation of

the environmental objectives in 2008 and the "Checkpoint" review of the "Reduced

Climate Impact" objective, also in 2008. The report is largely based on existing

evaluations (as well as two interview studies on recently introduced instruments,

performed at the instigation of the Swedish Energy Agency. The project team has

summarised relevant evaluations and made overall conclusions for each instrument.

The agencies involved have had the opportunity to comment on the project intwo consultative phases: (i) on the scope of the instrument and the evaluations

considered to be relevant; and (ii) on the report as a whole. The agencies involved

have been assumed to be those having responsibility for an objective or a sector

relating to achievement of the Swedish environmental objectives. This project has

been carried out in fairly close cooperation with the National Institute of Economic

Research and the Swedish Tax Agency. These agencies have commented on work-ing material and also written some sections of this report.

The definition of economic instruments and hence how we have delimited this

project, is described in section 3.5. The report deals with existing (i.e. not abol-

ished/or not yet introduced) national (i.e. imposed by central government) Swedisheconomic instruments in the environmental field. Some borderline cases are exam-

ined where considered relevant, particularly instruments involving large sums ofmoney and playing a central role in achievement of environmental objectives, or

those clearly counteracting environmentally-related economic instruments.

Overall conclusions have been drawn with regard to the environmental objec-

tives regarded as being of the highest priority: the four environmental objectives

considered in 2005 to be very difficult to achieve by the set deadline (Reduced

Climate Impact, A Non-Toxic Environment, Zero Eutrophication and SustainableForests), as well as the three action strategies for achieving the environmental ob-

jectives: (i) More efficient energy use and transport; (ii) Non-toxic and resource-efficient cyclical systems; and (iii) Management of land, water and the built envi-

ronment.

Changes will also have to be made in our approach to achieving the other envi-

ronmental objectives. Hence, there may very well be good reason for using eco-nomic instruments to achieve these objectives and interim targets. In light of our

terms of reference, and to enable us to maintain some sort of uniform focus in the

project, overall conclusions have not been drawn for those other objectives and

interim targets. Some of them are presented in outline in chapter 2.3.




28

3.2 Structure of the reportChapter 3 describes the background, purpose and scope of the report. Environ-

mental objectives and their achievement, strategies and other societal goals are presented. The chapter also contains an introductory explanation of what is meant

by economic instruments, and quality criteria for assessing the effectiveness of a

given instrument.

Chapter 4 presents overall conclusions for the four priority environmental objec-

tives considered in the report. These conclusions are based on the survey of instru-

ments. Overall conclusions are likewise drawn for the three action strategies in this

chapter.

Chapter 5 presents the sector-by-sector survey of instruments that has been carried

out. The history and purpose of each instrument are presented, along with evalua-tions, followed by an overall assessment of the extent to which the instrument has

been evaluated and comments on its effectiveness.

3.3 Environmental objectives and other societal goalsEnvironmental protection and policy in Sweden are currently based on 16 envi-

ronmental objectives (see Table 2).

There are a number of interim targets under each objective (72 in total), which

are also listed in the table. There were originally 15 environmental objectives, dat-ing back to April 1999. The environmental objectives and interim targets were

revised in November 2005: several interim targets were altered, some were modi-

fied, some were added, and an entirely new environmental objective was adopted.

The in-depth evaluation in 2008 will propose new and modified interim targets, at

least for those with a 2010 deadline.

Table 2 Sweden's 16 environmental objectives and interim targets (objectives given prior-ity in this report are shaded)

Reduced Climate Impact Reduced emissions of greenhouse gases (2008 -2012)

Clean Air Concentration of sulphur dioxide (2005)Concentration of nitrogen dioxide (2010)Concentration of ground-level ozone (2010)Emissions of VOCs (2010)Concentration of particles (2010)Concentration of benso(a)pyrene (2015)

Natural Acidification Only Fewer acidified water bodies (2010)Trend reversal for soil acidification (2010)Reduced sulphur emissions (2010)Reduced nitrogen emissions (2010)

A Non-Toxic Environment Data on the health and environmental properties of

chemical substances (2010/2020)Information on hazardous substances in products




29

(2010)Phase-out of hazardous substances (2007/2010)Ongoing reduction of health and environmental risksassociated with chemicals (2010)

Guideline values for environmental quality (2010)Surveys of contaminated sites completed (2010)Site remediation areas (2005-2010)/2050Dioxins in food (2010)Exposure to cadmium (2015)

A Protective Ozone Layer Emissions of ozone depleting substances (2010)

A Safe Radiation Environment Emissions of radioactive substances (2010)Skin cancer caused by UV-radiation (2020)Risks associated with electromagnetic fields (ongo-ing)

Zero Eutrophication Reduced emissions of phosphorus compounds(2010)Reduced emissions of nitrogen compounds to thesea (2010)

Reduced emissions of ammonia (2010)Reduced emissions of nitrogen oxides to air (2010)

Flourishing Lakes and Streams Action programme for natural habitats and culturalheritage (2005/2010) Action programme for restoration of rivers andstreams (2005/2010)Water supply plans (2009)Release of animals and plants living in aquatichabitats (2005) Action programme for endangered species and fishstocks (2005)

Good Quality Groundwater Protection of geological formations (2010)Impact of changes in water table (2010)Groundwater quality standards (2010)

A Balanced Marine Environment, Flour-ishing Coastal Areas and Archipelagos

Protection of marine environments, coastal areasand archipelagos (2005/2006/2010)Strategy for cultural heritage and cultivated land-scapes in coastal areas and archipelagos (2005) Action programmes for endangered marine speciesand fish stocks (2005)Reduction in bycatches (2010) Adjustment of fishing quotas (2008)Disturbance caused by boat traffic (2010)Discharges from ships (2010)

Thriving Wetlands Protection and management strategy (2005)Long-term wetland protection (2010)Forest roads and wetlands (2006)Creation and restoration of wetlands (2010) Action programmes for endangered species (2005)

Sustainable Forests Long-term protection of forest land (2010)Greater biodiversity (2010)Protection of cultural heritage (2010) Action programmes for endangered species (2005)

A Varied Agricultural Landscape Management of meadow and pasture land (2010)Conservation and creation of small-scale habitats onfarmland (2005)Management of culturally important landscapefeatures (2010)Genetic resources of livestock and cultivated plants(2010) Action programmes for endangered species (2006)Farm buildings (2005)

A Magnificent Mountain Landscape Reduce damage to soil and vegetation (2010)Reduce noise in mountain areas (2010/2015)




30

Protection of areas rich in natural assets and culturalheritage (2010) Action programmes for endangered species (2005)

A Good Built Environment Planning documentation (2010)

Built environments of value in terms of their culturalheritage (2010)Noise (2010)Gravel extraction (2010)Reduction in waste quantities (2005/2010/2015)Energy use in buildings (2010)Good quality indoor environment (2010/2015/2020)

A Rich Diversity of Plant and Animal Life Halted loss of biodiversity (2010)Lower percentage of endangered species (2015)Sustainable hunting (2007/2010)

Source: Environmental Objectives Council (2006a).

The environmental objectives are a grouping of political objectives for society

among many others laid down in Sweden. The various societal goals impact oneach other, and may in some cases counteract one another. For this reason it is

essential that other policy areas and societal goals are also borne in mind when

evaluating instruments affecting the environmental objectives. This report de-

scribes other societal goals where they have an obvious connection to a given in-

strument, depending on whether they fall within the scope of existing evaluations.This report does not describe these other goals in full, however. Figure 1 illustrates

the environment in which instruments operate.

Increased wealth and welfare

Climate Environ-

mentEnergy

Industry

Distribution

Industrial competitiveness

HousingHealth

DefenceTraffic

Growth

Employment

Consumer

Transport

Forest

Fiscal

Agriculture

Research

Industry ServicesHouseholds

(housing)Transport

Energy

transition AgricultureForestry Municipalities

Agencies

Nationallegislation

Inter-

national

agreements

Directives

White cer-

tificates

Energy-declarations

Extended trading-scheme

Heating Certifcates

Kilometre tax

Planning,

building

and housing act

Environ-

mental code

Emissions

trading LTACO2 tax

Electricity

certificates

Energy

Tax

KLIMP Sulphur

Tax

NOX

charge

Waste

Tax

Environ-

mental-

bonus

Investment

grants

Conversion

grants

Labelling

Certif.

Energy

Advice

Vehicle

Tax

Information

Figure 1 Instruments, their interplay with other instruments and various societal goals and the waythey target different actors.




31

3.4 Instruments to achieve the objectivesThe following questions must be asked continuously when working to achieve the

various environmental objectives and when developing the various strategies in-volved:

Are there any central government instruments and, if so, how powerful

are they?

What kinds of instrument have the greatest impact on behaviour?

This survey of instruments in use focuses on economic instruments. The market-

based trading schemes are not included, but the way other economic instrumentsinteract with the market-based schemes should be described. Table 3 outlines the

main categories of instruments that exist.

Table 3 Main types of instrument

Economic Regulation Information Research

Taxes

Tax relief

Charges

Grants

Subsidies

Deposit

schemes

Emissionstrading

Certificate

trading

Emission guideline

values

Requirements for

fuel choice and

energy efficiency

Long-term agree-

ments

Environmental clas-

sification

Information

Advisory

Education/training

Lobbying/influencing

public opinion

Research

Development

Demonstration

(Technology

procurement)

Source: Swedish Energy Agency and Swedish EPA (2004b) (somewhat modified).

Economic instruments. According to the OECD, a characteristic feature of eco-

nomic instruments is that they affect the cost and benefit of choices made by those

concerned. This may be seen as a manifestation of the "polluter pays" principle.

Economic instruments are environmental taxes and environmental charges, trans-

ferable emission allowances, deposit schemes, grants and subsidies. When a tax or

charge is linked directly to an environmental problem, people are encouraged touse resources in a less environmental burdensome way. A variant of environmental

taxes is to environmentally differentiate product taxes that were originally intended

simply to generate revenue so as to help achieve an environmental objective with-

out increasing the overall tax burden. Transferable emission allowances are a com-

bination of regulation and economic instrument. The right to emit a substance is

regulated in the form of a "guideline value" at system level, and transferable emis-sions rights are issued at the same time. These can be sold in a market. The result

(i.e. the action taken) of the tax or emission right is essentially the same. Emission

reductions occur when adaptive measures that are cheaper than the cost of the tax

or the emission allowance are carried out.




32

Regulation Administrative instruments in the form of regulation under the Envi-

ronmental Code form the basis of Swedish environmental policy. Essentially

speaking, regulation may be quantitative (emission conditions, guideline values

etc) or technical. The most common regulation in environmental permit application procedures is in the form of quantitative regulations taking the form of maximum

permissible emissions. Building energy efficiency standards are another form of

regulation, designed to reduce climate impact.

Information can change attitudes and behaviour by informing people about envi-

ronmental impacts. Information differs from regulation and economic instruments

in that the recipient is not obliged to do anything and is not subjected to economiccost pressure; the desired change is voluntary. Information may nonetheless be an

important means of creating a more positive attitude towards the desired change in

behaviour, and greater understanding of the need to use taxes, charges and regula-tion to achieve that end. Another form of information is that which describes the

measures available. Research has shown that information must be accompanied by

another instrument in order to achieve real changes in behaviour.

Research, development and demonstration may also be said to be a form of instru-ment. Although R&D in itself is not a driver of change, technical developments

and knowledge of the effects of various changes are needed if we are ultimately to

achieve various environmental objectives. Investment in research helps to sur-

mount initial thresholds impeding the use of technologies with lower environ-

mental impact.

3.5 Socio-economically efficient useof instruments3.5.1 Introduction

Our terms of reference state that our approach should be based on long-term socio-

economically efficient use of environmental instruments. A socio-economic ap-

proach includes all the various effects of an instrument on the instrument's main

objectives and on other societal goals. And economic aspects are central. A com-

prehensive analysis of this kind entails a great deal of work and is very seldom

performed when evaluating instruments. See Figure 1 for an illustration of thecomplexity that typifies analyses of instruments in general.

The core of this report is the survey of instruments, i.e. the summary of results

from previous evaluations. However, we have also endeavoured to assess the vari-

ous instruments in terms of their long-term effectiveness in helping to achieve

environmental objectives. This has been done with the help of other studies andalso by using a number of defined criteria. These are described later in this chapter.

Lastly, we would like to stress that an assessment of an instrument's socio-

economic efficiency should really include both the type of objective it is designed




33

to achieve and the instruments being used (to achieve the objective)1. In this report,

however, the objectives are defined in the form of the 16 environmental objectives

described above (of which four are particularly examined in the report). Our as-

sessment is thus an evaluation of the efficiency of the economic instruments inachieving objectives that have already been defined .

3.5.2 Theoretical considerations

First of all, an outline is given of some theoretical considerations, starting with a

description of situations in which the state may be justified in using various in-

struments to influence the use of resources in society.

A socio-economic analysis is based on a social welfare function2. Depending

on the type of analysis, including whether the presence of a well-intentioned social

planner, who maximises social welfare, is assumed, or whether account is taken of

the influence of special interest groups over policy, the analysis attempts to find theoptimal use of instruments to internalise the external effects present in the econ-

omy. In a perfect market, resources are allocated via the price mechanism. Produc-

ers offer the products demanded by consumers at a given price level and at the

lowest possible production cost. The perfect market results in "Pareto optimality",

i.e. equilibrium where no-one can be made better off without sacrificing the well-

being of at least one other person. Producers will manufacture what consumersdemand at the lowest possible cost. Characteristic features of a perfect market are

many sellers and buyers, each having a small share of the market, no cooperation

between buyers and sellers, a homogenous product, full information and no exter-

nal effects or public goods.But the market is not usually entirely "perfect", which means that prices do not

fully reflect the socio-economically optimal use of resources. Government inter-vention may therefore be called for in order to improve the efficiency of resource

use in society and thereby increase our welfare. To achieve the Pareto criterion,

however, an action must not be detrimental to anyone else. Since the benefit of the

change exceeds the cost, it is theoretically possible for those suffering detriment to

be fully compensated by those who are made better off. Yet this compensation does

not always occur in relation to efficiency objectives in the environmental field. The"Hicks-Kaldor" criterion is often used instead of the Pareto criterion. This means

that the measure is socio-economically efficient if those benefiting from the meas-ure could compensate those losing by it so that were they were at least as satisfied

as they were before the measure was taken.

Two typical market imperfections that exacerbate environmental problems are

external effects and public goods. These are often the reason that the state uses

1 Two key questions to be asked before the state intervenes by using instruments to generate the

desired environmental effects are:

1. How much environmental impact should be allowed?

2. In light of the answer to question 1, how should we achieve the goal and who should pay?

2 The form of this function is by no means an established fact in economics. It may vary from an egali-

tarian function, where the same importance is attached to changes in the welfare of all individuals,

regardless of attributes such as income, sex, age etc, to the Rawlsian function, where the welfare of theworst off individual determines the welfare of society as a whole, regardless of everyone else's welfare.




34

various kinds of instruments. Incomplete information can also be a form of market

failure.

External effects. There are instances where socio-economic effects of productionor consumption are not reflected in market prices and thereby contribute towardsinefficient use of resources. External effects may be positive as well as negative.

Discharges to water during production of paper pulp may have a negative external

effect on a fisheries company, whereas apple growing may have a positive external

effect on an adjacent bee farm. The external effect may be locally limited, but in

environmental contexts it is not unusual for a problem to encompass an entire re-

gion or be global. Hence, both objectives and instruments may be designed on atransboundary basis. External effects in the form of emissions may be regarded as a

cost of production for which the polluter need not pay, in contrast to other produc-

tion costs, such as labour. The absence of a price put on the environmental cost cantherefore be seen as a subsidy of the activity in question, since, after all, society

bears the cost without causing the damage. A negative (positive) external effect

generates over- (under-) production/consumption of certain products because the price does not reflect the actual cost to society. The aim should then be to ensure

that the market price reflects the actual marginal cost to society of producing the

product or service in question. This can be done by imposing a tax on the product

corresponding to its negative external effect. Since there is often insufficient in-

formation about the cost of the external effect (the environmental impact of the

emission), various political objectives are laid down, followed by the introduction

of various instruments to achieve them. In the same way, an activity generating positive external effects is subsidised.

Public goods. A characteristic feature of these goods is that it is virtually impossi-

ble to exclude individuals from consuming them (non-excludability), and that my

consumption of the product is not affected by the fact that another person con-

sumes it (non-rivalry)3. Classic examples are lighthouses, national defence, TV and

the quality of air and water. However, in the case of television, technological de-

velopments have made it increasingly simple to exclude those who do not pay, and

so TV cannot always be regarded as a public good; it is rather a club good (see

footnote 3). The market fails to supply society with the optimal quantity of public

goods, or in some cases, with any quantity at all. In contrast to goods causing nega-tive external effects, there is thus an underproduction of public goods. It is not

surprising that it is precisely public goods that have traditionally been supplied by

the state (e.g. fire department, national defence, lighthouses, national parks). The

reason the Swedish lighthouse network was not financed by private enterprise was

3

Excludable Non-excludable

Rivalry Private goods: Food, clothing Common pool resources: Fish,

busy roads.

Non-rivalry Club goods: Cable TV, electricity

grid, telecom network.

Public goods: National defence,

air quality.

Source: Brännlund and Kriström (1998) and Wikipedia (2006)




35

that private interests would not have been able to exclude ships that were not pre-

pared to pay a fee for the benefit derived from the lighthouses. Nowadays the focus

has shifted to the state ensuring that public goods such as clear air, clean water and

biodiversity are protected from degradation. Many environmental problems can beseen as negative external effects on public goods. Examples include nutrients from

agricultural production, which affect water quality – a public good.

Lack of information: A fundamental information problem may be that we do not

know the extent of the damage caused by an external effect or the nature of thelong-term impact on the ecosystem. A lack of knowledge about cost-effective

measures is another important information problem. Another kind of information

shortage may be that a company emits more pollutants than it is allowed to under

its operating permit because it has decided that there is only a slight risk of discov-

ery (Brännlund and Kriström 1998).

3.5.3 Criteria for evaluating the effectiveness of instruments

We have based our approach on three main criteria when assessing the effective-

ness of instruments in achieving the long-term environmental objectives or interim

targets. The way the instrument relates to these criteria indicates how well an in-

strument has worked, and also gives guidance on the choice of an instrument for a

new purpose. These criteria should not be ranked; their relative importance de-

pends on the specific environmental problem as well as the nature of the measures

for which the instrument is to be used. However, in general it may be said that

instruments that do much to achieve the goal and are cost-effective are attractivefrom a socio-economic viewpoint. But whether priority should be given to goalachievement or to cost-effectiveness depends on the environmental problem in

question. There may be other factors to take into account when choosing between

instruments. Some of these are described below.

Goal achievement

Does the instrument have the potential to help achieve the objective?

It should be noted that the desirability of a high degree of goal achievement de-

pends on how well balanced the goal is. For instance, it may be necessary in some

cases to raise or lower the level of the economic incentive following assessment of

goal achievement. The goal may be easier to achieve than was believed (may jus-tify lowering the incentive), or more expensive (may justify raising the incentive).

The environmental goal can be expressed generally for the environmental problem,

e.g. to restore the Baltic to its 1950 state, or generally for the emission, e.g. to re-

duce the nutrient load on the Baltic by 50 per cent. It can also be expressed for a

given sector or emission, e.g. to reduce nitrogen leaching from agriculture by 50

per cent, or reduce emissions of nitrogen oxides to air by 50 per cent. If no specific

target is formulated, the direct effects of the instrument are assessed, as the number

of kilograms of reduced emissions of nitrogen oxides to air, for example.




36

Where there are threshold effects4 for damage caused by the emissions, or where

the environmental problem otherwise causes very serious damage even where there

are no threshold effects, goal achievement may be the most important factor inassessing the effectiveness of the instrument. It is then desirable to use an instru-ment offering great precision in terms of goal achievement – an instrument that

ensures that a given limit value is not exceeded, for example, quantitative regula-

tion or emissions rights under which the environmental objective is specified (see

Swedish EPA, 2004f). This is because a tax or charge cannot absolutely guarantee

that the emission target is not exceeded, which may have devastating effects in the

presence of threshold effects.

Cost-effectiveness

Will the instrument achieve the environmental objective at the lowest possiblecost?

Cost-effectiveness means that the stated objective is achieved at the lowest possible socio-economic overall cost. In practice, this means that the cheapest measures at

the margin are carried out first. The cost of reducing an additional unit of pollutant

is called the "marginal cost". It is of particular importance in terms of cost-effectiveness to use market-based instruments for environmental problems where

the marginal cost of treating emissions differs greatly from one source to another.

The more the marginal cost of treatment varies between the sources of the envi-

ronmental problem, the greater the efficiency gains made by using an economicinstrument as compared with quantitative regulation. Note also that an instrument

may be cost-effective within the collective affected by it, but not necessarily for theentire environmental problem in question unless all sources of the specific emis-

sions meet the same instrument, that is, the design of the goal affects the scope for

cost-effective use of instruments.

Where the location of the emission source plays a part in the environmental dam-

age, geographical differentiation of the instrument is needed to achieve cost-

effectiveness. If the additional administrative cost of a differentiated instrument is

high, then uniform instruments may nonetheless be a better alternative. It should

also be noted that if the environmental problem is regional or global, this may in-fluence the analysis of the effectiveness of the instrument. In the case of global

environmental problems, differing tax rates between different sources may be de-

sirable when companies operate in a competitive global market and there is a risk

of production being relocated to countries where environmental regulations are less

stringent. At worst, an economic instrument designed to combat specific emissionsmay cause more environmental harm if domestic production declines and is re-

placed by production abroad that generates higher overall emissions than before the

instrument was introduced. This problem largely applies to solving global

4 That is, an additional unit of emissions to a given ecosystem causes it to shift to a completely newequilibrium




37

environmental problems (greenhouse gases, for example).Thus, in stark contrast to

the "polluter pays" principle, which is sometimes used as a criterion for instru-

ments, a differential instrument may be considered cost-effective if, for example,

market considerations demand differentiation and the environmental problem is aglobal one.

Dynamic efficiency

How powerful an incentive for technological development does the instrumentcreate?

Assessment of effectiveness/efficiency should also be made from a dynamic per-

spective. In particular, the dynamic perspective includes the incentives for techno-

logical development created by the chosen instrument. If the emission source pays

for all emissions, there is a constant economic incentive to reduce emission quanti-ties, which in turn stimulates research and implementation of treatment technology

in the area. The Porter hypothesis also suggests that this reduction may be achieved

when a company improves the efficiency of its production process to increase the

quantity produced per unit of pollutant emission (see Porter and van der Linde,

1995). According to this hypothesis, environmental legislation can draw the atten-

tion of companies to potential efficiency improvements that not only benefit theenvironment, but also make companies more competitive and profitable. But it

should be mentioned that there is disagreement in this field of research as to

whether the Porter hypothesis actually exists. More empirical research in Sweden is

therefore desirable.

In this report we use descriptive criteria primarily as a basis for assessing each

individual instrument in relation to its specific purpose. We then go on to discuss

whether the action generated by the instrument is a cost-effective means of achiev-ing an overall objective. We would like to stress the distinction we draw between

measure and instrument, the former being a physical measure having a direct im-

pact on the environment, whereas the latter describes the instrument used to gener-

ate the desired measure. A measure may be carried out by anyone at all in society,

whereas an instrument is usually created by the state. In other words, an instrument

is cost-effective if it initiates a measure at the lowest cost within the collective or

sector at which it is aimed. In the same way, we assess the goal achievement of theinstrument in relation to its purpose before determining the contribution it makes to

the overall environmental objective. If, for example, the aim of support for catch

crops was to reduce nutrient leaching from agricultural land by 20 per cent, and

this is achieved, then the instrument has a good level of goal achievement even if

this has not in turn had any discernible impact in relation to the "Zero Eutrophica-tion" environmental objective. We mainly analyse Swedish instruments, and our

assessment is therefore made from a national viewpoint, since there is limited

scope for creating instruments designed to instigate action beyond our frontiers.

This has a bearing on the analysis of instruments aimed at global problems, such as

greenhouse gases, since international cost-effectiveness in dealing with these




38

problems cannot be achieved for instruments designed for Swedish emission

sources. However, we comment on the international dimension and whether this

has a bearing on the effects of a given instrument.

OTHER ASPECTS

In addition to the above criteria, there are other factors of importance when intro-

ducing an instrument. For example, there are political aspects such as redistribution

of wealth and regional policy considerations. These are often important because

they may affect the political scope for implementing an instrument, and it is neces-

sary to consider who will ultimately be paying for use of the instrument. A number

of factors additional to the above criteria are mentioned below. These have beenincluded in the assessment where they are considered important.

Is the aim effectiveness or redistribution of wealth?All political measures that are intended to compensate for market imperfections

(external effects, public goods, information shortage) are called efficiency goals,

since they have the potential to increase the efficiency with which resources are

used and thereby increase social welfare. Measures of this kind mean that the bene-

fit yielded by the measure exceeds its cost, which allows for "winners" to compen-

sate "losers" in accordance with the Hicks-Kaldor criterion. However, the aim ofsome of the instruments we describe in this report may be redistribution of wealth,

even though they have an effect on the environment. An aim to reallocate resources

may also be considered to be so important for political reasons that a lower level of

efficiency is accepted. If, for example, the aim is to improve the lot of single par-ents using housing benefit and child allowance, this can be funded by raising in-

come taxes. This distortive tax probably reduces total welfare because it reducesthe incentive to work. These instruments should therefore in the first place be as-

sessed in relation to their redistributive goals and secondly in terms of the envi-

ronmental effects they generate.

Polluter Pays Principle - PPP

The extent to which ownership rights are defined in society and who possesses

them are of great importance when designing instruments. The polluter pays prin-

ciple (PPP) implicitly allocates title to those affected. In other words, individualsare entitled to clean air, clean water and an unspoilt environment. If the polluter is

considered to have the right to impact negatively on the environment, the aim will be to find an instrument whereby those affected pay the polluter to reduce his emis-

sions. If the owner of the emission source does not need to compensate society for

the damage caused by its operations, there is no polluter pays principle. If the pol-

luter pays principle does prevail, and compensation is paid to those financially

affected by the emissions, it is essential that it be paid with no strings attached, so

that it does not engender behavioural changes potentially affecting theeffectiveness of the instrument. Account should also be taken of whether an in-

strument sharpens income differences, thus counteracting the redistributive effects

that the progressive income tax system is designed to achieve (Brännlund and




39

Kriström, 1998). Unclear or non-existent rights of ownership may also be the cause

of many environmental problems. The threat to Baltic cod stocks has largely arisen

because no legal entity owns the cod, and even if they did, it would be impossible

in practice to completely prevent others from fishing for cod. In other words, adegree of non-excludability prevails.

The market position of companies and the cost of the instrument

The characteristic features of the market in which various companies and industries

operate very much influences the extent to which those companies and industrieswill be financially affected by an economic instrument. A company may lose mar-

ket share if an instrument leads to sizeable cost increases. Companies producing a

fairly homogenous product and competing in the global market (e.g. pulp and paper

companies and farms) are more vulnerable to production cost increases of this kind

than are companies producing a heterogeneous product in the absence of competi-tion from the outside world (e.g. district heating plants, sewage treatment plants). It

is important to emphasise that exposure to competition depends not only on

whether one operates in a global market; it is also a question of how homogenousthe product is perceived to be by consumers. Although steel, for example, may

appear to be a homogenous product, there is evidence that steel quality, and not

only price, is a key factor driving demand. As regards the ability of a business

operation to bear its costs, it is also of interest to look at treatment costs as a per-

centage of sales, which indicates whether a given company would be rendered

insolvent by the financial burden placed on it by the instrument.

3.5.4 Outline description of instruments and their effectiveness

Some categories of instrument are described in outline here in relation to the se-

lected criteria. Although the emphasis of this report is on economic instruments,other categories of instrument are also described in outline. In some cases instru-

ments are combined to achieve the objective. For example, emission allowances for

carbon dioxide can be combined with a tax on the gas. Revenues from taxes de-

signed to combat external effects can fund subsidies for measures having positive

effects in the relevant area. So the tax on artificial fertilisers can be used to subsi-

dise the creation of wetlands, for example. Emission guideline values can also be

combined with a tax on remaining emissions.

TAXES

A tax can be imposed on emissions causing environmental damage. However, in

the case of diffuse sources, a common approach may be to tax the resource causing

the environmental problem (petrol tax, tax on artificial fertilisers). It is uncertain

whether the use of taxes helps to achieve the pollution reduction target, since fluc-

tuations in the economic cycle affect production levels, which may mean that agiven industry emits more (less) than is desirable during economic growth (reces-

sion). Moreover, a lack of information about the cost of measures may mean that a

tax is too low, or too high, although this can easily be remedied by raising or




40

lowering the tax until the objective is achieved. Taxes will always be cost-effective

within the collective on which they are imposed, provided that the location of the

emission source is not a factor in the environmental impact it causes. Since the

emission source pays for all emissions, there are always economic incentives forreducing emissions, which in turn encourages research and implementation of

treatment technology in the area. Thus, taxes are the instrument creating the most

powerful incentives for technological development, i.e. dynamic efficiency. Taxes

also satisfy the polluter pays principle, since the polluter must pay tax on all its

emissions, even after the desired level of treatment has been reached.

REGULATION

Regulation of pollution may assume various forms. The most common way is to

regulate emission levels by setting a guideline value for emissions that must not be

exceeded, or quite simply prohibiting the emissions. It is also possible to regulatetreatment technology by requiring owner of the production facility causing the

emissions to use a specific treatment technology. Production resources causing the

environmental problem can also be regulated, e.g. use of PCBs can be forbidden.

Regulation of pollutants and emissions assures goal achievement, assuming com-

plete compliance. If it is difficult to achieve 100 per cent compliance due to moni-

toring problems, for example, it may be advisable to use economic instruments as acomplement to regulation. It will be difficult to attain cost-effectiveness if the mar-

ginal cost of treatment differs from one source to another. The more the marginal

cost of treatment varies between emission sources, the less effective regulation is.

True, quantitative regulation of emissions is possible on an individual basis in or-der to achieve cost-effective regulation, but this also presupposes that the regula-

tory authority has full information about treatment costs in that industry. This maynot only be impossible in practice, it will also require extensive resources. An in-

strument of this kind is therefore scarcely realistic unless there are only a few emis-

sion sources and low information costs. Where there is doubt about the marginal

cost of measures, taxes, for example, are preferable instead of an administrative

instrument such as regulation. Furthermore, since regulation also means that the

regulated operator need not pay for its remaining emissions once the treatmenttarget has been reached, this approach does not incorporate the polluter pays prin-

ciple. Regulation creates no economic incentive for reducing emissions by morethan is required, which in turn limits the incentives for technological development

in the field.

SUBSIDIES

Subsidies can be seen as a negative tax that should primarily be used for activities

characteristically having positive external effects, such as wetlands, where subsi-

dies are paid so that the price for creating and managing them internalises the posi-

tive effects in the form of nitrogen removal, biodiversity and recreation that a

wetland can generate. Without a subsidy, the market price of the wetland exceeds

the socio-economic cost, and so the market creates fewer wetlands than is optimum

for society. In these cases, the assessment is the same as for taxes as regards goal




41

achievement, cost-effectiveness and dynamic efficiency. But it should be stressed

that funding this subsidy via taxes in another market, for example, may have nega-

tive (e.g. income tax) or positive (green taxes) effect in some other area of the

socio-economic sphere. Subsidising treatment of a negative external should beavoided as far as possible, since in the long term the subsidy will send the wrong

signals to the market. This is because average costs are lowered, which generates a

profit and hence an incentive for expansion and increased production in the subsi-

dised sector, which is contrary to the objective (see Brännlund and Kriström,

1998). Besides, subsidies must be funded out of other state revenues, which may inturn lead to distortive effects in the areas that are taxed, which may in turn impact

adversely on welfare. Other the other hand, welfare may increase if the subsidies

are funded via taxes on negative external effects.

TRADABLE EMISSION ALLOWANCESTradable emission allowances permit companies to emit a certain quantity of pol-

lutant (e.g. sulphur dioxide, carbon dioxide or the right to use groundwater). The

quantity is set so that the objective is achieved, that is, the target emission level set

by society. Emission allowances therefore guarantee goal achievement, assuming

total compliance. Thus far, this instrument is no different from regulation. How-ever, emission allowances can be transferred between the various sources, which

means that they can be traded. Unlike regulation, this will mean that the market

mechanism is used to drive the same cost-effective allocation of measures as taxes.

But emissions trading may entail high administrative costs for those involved,

which is to some extent due to the need for good information to operate in the mar-ket. Like taxes, emission allowances create an incentive for technological devel-opment, although taxes are somewhat better than emissions trading, because the

price of emission allowances tends to fall in the long term if new and cheaper

treatment technology is implemented. (see Tietenberg, 1992, page 383). But if the

overall tax level remains unchanged, profit, and hence the incentive (marginal cost

of treatment less tax) of new and cheaper treatment technology is not counteracted

by lower taxes.If the emissions trading market is to work properly, it must include a sufficient

number of players of approximately the same size. If there are not enough players,

there is a risk of existing players refusing to sell their rights to new players wishing

to enter the market. There is also a risk that some players will gain an advantage in

a monopoly (only one seller) or monopsony (only one buyer).

There are two ways of allocating emission allowances:

1) Issue them free of charge. What allocation principle to use? One exam-

ple is "grandfathering", where rights are allocated on the basis of currentemissions.

2) Auction: bids are submitted by prospective buyers.

From a cost-effectiveness viewpoint, it makes no difference theoretically speaking

how the emission allowances are allocated; both the above methods generate cost-

effectiveness. However, the prospects of achieving cost-effectiveness using these




42

methods may be limited by strategic behaviour, and also where the buyer and the

seller incur transaction costs in finding each other and those costs exceed the bene-

fit of this (see Baumol and Oates, 1988). The prospect of achieving a cost-effective

solution at an early stage is higher with an auction. In addition, an auction is theonly method that satisfies the polluter pays principle, since allocation of rights

means that society gives away the benefit of being allowed to pollute to the recipi-

ent of the right, although it is true that they will have to pay for any emissions ex-

ceeding their entitlement. An auction solves the problems involved in allocation as

regards the resources needed to decide on an allocation considered "fair" by allthose involved.




43

4 Environmental objectives,strategies and economicinstruments usedTrends for whether or not we are on course to achieve the environmental objectives

are presented each year in an Environmental Objectives Council publication enti-

tled De Facto. In the Council's report (2006b) seven objectives are considered to bevery difficult to achieve: A Non-Toxic Environment, Reduced Climate Impact,

Sustainable Forests, Zero Eutrophication, Natural Acidification Only, Clean Air

and a Rich Diversity of Plant and Animal Life. The last-mentioned objective is new

this year; Clean Air and Natural Acidification Only have previously been consid-

ered "merely" difficult to achieve. A Balanced Marine Environment, Flourishing

Coastal Areas and Archipelagos may also be very difficult to attain, since it is dependent on the Non-Toxic Environment and Zero Eutrophication objectives. In

addition there are a considerable number of interim targets under other environ-

mental objectives that will be very difficult to achieve. It is thought possible to

achieve the remaining objectives within the time frame, in most cases assuming

that further action is taken.

There is no clear link between the possibility of achieving the interim targetsand the possibility of achieving the overall objective. Two examples of this are

Zero Eutrophication and Natural Acidification Only, where it is thought that the

interim targets can be achieved. But there is still a great risk that the target situation

described under the environmental objectives will not be achieved in time. Why?The answer is that most of the load of eutrophying and acidifying substances origi-

nates in other countries. So the action taken in Sweden to achieve the objective is

not enough. Moreover, it takes time for nature to recover. These factors apply to

the "red alert" objectives Natural Acidification Only, Zero Eutrophication, Sustain-

able Forests and A Rich Diversity of Plant and Animal Life.

4.1 Reduced Climate Impact There is a long way to go to achieve the Reduced Climate Impact envi-

ronmental quality objective. The trend for emissions in industrialised na-tions is moving in the wrong direction.

There are good prospects of achieving the interim target of reducing

greenhouse gas emissions in Sweden by four per cent during 2008 – 2012

as compared with 1990.

The instruments used in the Swedish climate strategy also include deci-

sions taken as part of energy, transport and waste policy. In many casesimportant instruments to reduce climate impact have been introduced in

furtherance of other societal goals.

Internationally coordinated or harmonised instruments are essential. The

EU emissions trading scheme will in all probability be an importantmeans of controlling European emissions of greenhouse gases.




44

If Swedish emissions are to be reduced, we must reduce the use of fossil

fuels at industrial facilities within the emissions trading scheme, by in-

dustry in general, and in the transport and work machine sectors.

Long-term instruments are important, so that they can have a long-termimpact on the structural transition to an increased use of renewable en-ergy, increase energy-efficiency in the transport system and improve en-

ergy efficiency in buildings.

DESCRIPTION OF OBJECTIVE AND INTERIM TARGETS.

The Swedish climate strategy laid down in 2001 includes a near-term and long-term goal for the "Reduced Climate Impact" environmental quality objective. The

near-term target is that, on average, Swedish emissions of greenhouse gases should

have fallen by four per cent during 2008 – 2012 as compared with 1990. This targetis to be achieved without compensation for uptake by carbon sinks or using flexible

mechanisms. The long-term climate target is that Sweden should work to ensure

that the atmospheric concentration of the six greenhouse gases included in theKyoto Protocol is stabilised at a level not exceeding 550 ppm carbon dioxide

equivalents. This concentration of greenhouse gases is considered to represent a

reduction of greenhouse gas emissions to 4.5 tonnes carbon dioxide equivalents per

capita and year by 2050, followed by a further reduction. Achievement of this tar-

get is heavily dependent on international cooperation and contributions by all coun-

tries.

When debating the latest Environmental Objectives Bill – "Swedish Environ-mental Objectives – a Common Task" (2004/05:150), Parliament voted in favour

of a committee reservation (rskr 2005/06:48) proposing that the Reduced Climate

Impact objective be amended so as to be based on an acceptable temperature

change, not on the concentration of greenhouse gases in the atmosphere. In its 2006

Climate Bill (2005/06:172), the Government proposed that the long-term objectiveshould be supplemented by a target of a maximum average global rise in tempera-

ture of two degrees Celsius above the pre-industrial level by 2050. The Govern-

ment considered in the medium term that a 25 per cent reduction in Swedish emis-

sions would be possible. Attainment of this interim target is dependent on national

commitments made by other European countries to reduce their emissions, and is

based on the approach adopted by the Council of Europe, viz., that emissions in

industrial countries should be reduced by the equivalent of 15 – 20 per cent by

2020. Attainment of this objective is to be monitored by way of regular "check-

points" every five years starting in 2008. The evaluations will involve reviewingthe objective in the light of socio-economic consequences, taking into account the

energy system transition, economic growth, industrial competitiveness and other

societal goals. In preparation for "Checkpoint 2008", a closer examination will be

made of the way that various sectors in society can contribute to achievement of

the objectives in the near and medium term.




45

4.1.1 Problems

Since the mid-1990s Sweden has managed to reduce its total emissions of green-

house gases while maintaining an average growth rate of over three per cent a year.

Over the last five years, average emissions have been around four per cent lowerthan they were in 1990. However, the trend differs between the various greenhouse

gases and between sectors of society. The main reductions have been of methane

and nitrous oxide.

Emission reductions have primarily come from domestic heating and heating of

commercial and industrial premises, from agriculture and from landfill sites. Some

of the reduction from heating has been achieved by replacing individual heatingsystems with district heating. Although the use of district heating has thereby in-

creased during the period, emissions of greenhouse gases have also fallen in this

sector, since expansion has mainly been achieved by greater use of biofuels. Bio-

fuel-based electricity production at combined heat and power plants has risen by4.5 TWh since 2003. Higher emissions have come from the transport sector and

from some industrial sectors (mainly iron and steel works and refineries.

0

5000

10000

15000

20000

25000

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

C O 2 e q u i v

a l e n t s ( k t o n n e s )

Transport

Electricity and district

heating

Industrial combustion

Residential and

commercial

Agriculture

Industrial processes

and fluorinated gases

Waste

Solvent use

Figure 2 Emissions of greenhouse gases in Sweden 1990 - 2004 by sector.

Source: Ds 2005:55

WILL WE ACHIEVE THE INTERIM TARGET FOR 2008 - 2012?

If no new instruments designed to control emissions are decided on, it is estimated

that Sweden's emissions will rise somewhat in the near future as compared with thelevel of recent years. In the emission forecast submitted to the UN in 2005 (Ds

2005:55), it was estimated that emissions will be around one per cent lower in 2010

than they were in 1990. Most of the emission increases are expected to come from

transport (mainly goods transport), electricity and heat production, and from someindustrial sectors. A subsequent update (Swedish Energy Agency and Swedish

EPA, 2005) suggested that emissions might fall by around two per cent.

It should be emphasised that the updated emission projection is based on a ba-

sic forecast made in the autumn of 2003. The updated figures were mainly those on

the oil price and the rate of economic growth. Some of the instruments proposed or

under discussion are included in the projections. One proposal was that the carbon




46

dioxide tax be abolished for industry. This tax remains at present, along with a

number of other changes in instruments. In spring 2006 the Swedish Energy

Agency (Energy Agency, 2006f) estimated that the projections are probably some-

what too high, since emissions from housing appear to be falling more rapidly thanwas earlier thought, and new instruments introduced are expected to reduce emis-

sions by around two per cent more than the updated projections indicate by 2010.

All in all, there appears to be a good chance of achieving Sweden's national climate

objective (interim target), i.e. that Swedish greenhouse gas emissions should be

reduced by four per cent during 2008 – 2012 – without compensation for uptake bycarbon sinks or flexible mechanisms – as compared with 1990.

Table 4 Historical and projected emissions of greenhouse gases by sector (Mtonnes CO2

equivalents )

1990 2010 2020 1990-2010 1990-2020

Energy* excluding transport 34.8 33.2 36.2 -5% 4%

Industrial processes** 5.7 6.1 6.4 8% 12%

Transport 18.9 22.6 25.0 19% 32%

Waste 2.8 1.2 0.7 -56% -76%

Agriculture 9.6 8.1 8.1 -16% -16%

Solvents 0.4 0.2 0.2 -41% -41%

Total emissions (notLULUCF)

72.2 71.5 76.6 -1% 6%

* Energy includes electricity and district heating production, industrial combustion, hous-ing and services, refineries, diffuse emissions and other.

** Industrial processes comprise process emissions and fluorinated greenhouse gases.Source: Ds 2005:55

WILL WE ACHIEVE THE LONG-TERM OBJECTIVE?

Under Sweden's climate strategy, the long-term climate objective of a maximum of

550 ppm carbon dioxide equivalents represents a reduction in greenhouse gasemissions to 4.5 tonnes per person and year by 2050. Achievement of this target is

dependent on international cooperation and contributions by all countries, and is

based on the assumption that emissions will eventually be evenly distributed

among all the earth's inhabitants. Swedish emissions in 2004 were approximately

7.9 tonnes carbon dioxide equivalents per person and year, which means that Swe-den needs to reduce its emissions by about 35 per cent by 2050.To achieve the long-term climate objective will require substantial emission re-

ductions, particularly in the industrialised nations. The rate at which emissions

increase in high-growth developing countries will also have to be controlled. To

ensure that emission trends are consistent with the long-term targets, EU heads of

state and prime ministers wish to examine potential strategies for reducing emis-

sions of greenhouse gases in the EU by 15 – 30 per cent by 2020, as compared withemissions in 1990. Unfortunately, the UN Climate Secretariat has reported that

emissions in industrialised nations rose by an average of nine per cent between

1990 and 2003.




47

The latest emission projections for greenhouse gases to 2020 indicate that

Swedish emissions will rise after 2010. As mentioned earlier, this forecast, made in

2003, is predicated on the instruments in place at the time of the forecast. Other

assumptions were that nuclear power plants would be shut down after 40 years, theelectricity certificate scheme would remain in place until 2010, the price of emis-

sion allowances was assumed to be 10 euro, and the price of oil and gas was as-

sumed to be low in comparison with current levels. These assumptions, which may

now be seen to be on the low side, result in a higher projection for 2020 than would

probably be the case if a new forecast were made now.All in all, the inference is that there is a long way to go to achieve the long-

term climate targets, and that the trend for emissions in industrialised countries is

moving in the wrong direction. However, based on the instruments currently in use,

the trend for emissions of greenhouse gases in Sweden to 2020 may be more posi-

tive than the latest projections indicate.

4.1.2 Available instruments

The instruments used in pursuit of the Swedish climate strategy have been gradu-

ally developed since the late 1980s, and include not only climate policy decisions, but also, to a large extent, decisions taken within the framework of energy, trans-

port and waste policy. This means that many instruments that have played a key

role in mitigating climate impact have been introduced to achieve other societal

goals.

Several of the instruments aimed at Reduced Climate Impact affect more than onesector. These include:

energy and carbon dioxide taxes; the EU emissions trading scheme;

government grants for local investment programmes (LIP, Klimp)

The energy and carbon dioxide taxes have probably been the most important in-

struments in reducing carbon dioxide emissions in Sweden since 1990. Since the

energy tax makes energy consumption more expensive, total energy use decreases.In addition, the energy tax and the carbon dioxide tax raise the cost of consuming

fossil fuels, which makes them less profitable than renewable forms of energy.

Theoretically, a uniform tax on energy and carbon dioxide ought to be the most

cost-effective method, whatever the sector of society. However, reduced-rate taxes

apply in some areas for competition reasons.

In 2000 Swedish emissions from activities covered by the EU emissions trad-

ing scheme accounted for just under 30 per cent of total greenhouse gas emissions.

As mentioned earlier, the trend to 2020 depends on movements in energy prices

and the price of electricity certificates and emission allowances. The future effec-tiveness of the EU emissions trading scheme in terms of emissions depends on the

overall emissions ceiling that is set. The effect the system will have on Sweden is

largely dependent on developments in the price of emission allowances. LIP (the

Local Investment Programme for ecologically sustainable development) and Klimp




48

(local investment programmes for climate measures) are two government support

schemes for local authorities designed to reduce emissions of greenhouse gases.

LIP grants were given between 1998 and 2002 for a wide range of measures to

reduce climate impact. In 2003 LIP was replaced by Klimp, under which grants areonly available for action programmes designed to reduce climate impact.

A number of instruments have been introduced in the energy sector , mainly to

increase the rate at which energy efficiency is improved, reduce energy consump-

tion and increase the proportion of renewable energy. Alongside the energy and

carbon dioxide taxes, the electricity certificate scheme is one of the key instru-ments in this sector. Under the electricity certificate scheme, electricity producers

receive a certificate for every MWh of electricity from renewable sources they

produce.5 The certificate is then sold to electricity consumers, who are under astatutory obligation to buy electricity certificates corresponding to a certain per-

centage of their consumption. This percentage is raised from year to year. Thesystem is primarily designed to operate in the interests of energy policy by encour-

aging transition to a higher proportion of energy production from renewable

sources. But another effect is that emissions of greenhouse gases are lower because

of greater use of renewable fuels. In addition to these instruments, a wide range ofgrants for improving energy efficiency and changing over to renewable energy

sources have been available since the late 1990s.

An evaluation of the overall effect on carbon dioxide emissions in Sweden of

economic instruments existing and in place6 in the energy sector concluded that

they will have reduced emissions by 10 million tonnes carbon dioxide by 2010 and

by 38 million tonnes by 2020 (Swedish Energy Agency (2006a)). This comparisonis between a scenario based on economic instruments in use in 1990 and a scenario based on current economic instruments. The large difference in emissions (between

the scenarios) to 2020 is because investment in fossil fuel-based energy production

is included in the scenario based on economic instruments in use in 1990.

Emissions of greenhouse gases from industrial processes are affected by the

EU emissions trading scheme, and also mainly as a result of operating permit con-

ditions under the Environmental Code and regulations governing the use of refrig-

erants. A recently adopted EC regulation on control of emissions of fluorinated

greenhouse gases (F-gases) will help to reduce future emissions.The main instruments acting to limit fuel use and encourage the replacement of

diesel with ethanol and rape methyl ester (RME) are the energy and carbon dioxide

taxes in combination with tax exemption of biofuels for motor vehicles. Other

incentives introduced to promote the launch of eco-vehicles, such as the lowering

of the taxable value of eco-cars for income tax purposes, and required purchase of

eco-vehicles in public procurement, have helped, and will help, to further increasethe proportion of biofuels used by motor vehicles. The energy and carbon dioxide

taxes on motor fuels influence the choice of car and also how it is used. Tax rises

5 Electricity carrying entitlement to a certificate must have been produced using wind power, solar

energy, geothermal energy, certain biofuels, wave energy, new or small-scale hydropower or peat.

6 "Economic instruments" here means taxes, investment and operating support, the electricity certificatescheme and the EU emissions trading scheme.




49

improve energy efficiency. Other economic instruments such as vehicle tax and

taxation of company cars influence new car purchases. In addition, there are in-

struments used in the transport sector that are primarily aimed at achievement of

other societal and environmental objectives but that also have a bearing on theclimate objective. Examples of this are the congestion charge trial in Stockholm,

which is intended to cover the external costs of traffic and help to achieve the

Clean Air objective, but which also makes a significant contribution to lower

greenhouse gas emissions by reducing total road mileage and standstill time in

traffic queues. Another example is an environmentally harmful subsidy such as thetravel allowance, which is designed to even out the cost of travelling to and from

work and is available to people with a long journey time to work who travel by car.

Income tax relief for car use increases car road mileage and hence the use of fossil

fuels.

Requirements for municipal waste planning, producer responsibility for a number of product categories since the mid-1990s, tax on landfilled waste since 2000,followed by a ban on landfill of sorted burnable and organic waste, have markedly

reduced emissions of methane from waste sites. Investment grants in the late 1990s

for collection methane gas for energy extraction have further reduced methane

emissions and encouraged more municipalities to invest in landfill gas collection,

particularly since this step has often been found to be more cost-effective than

originally estimated. But the greatest contribution of waste policy to achievement

of the Reduced Climate Impact objective has probably been the requirement thatcollected waste be sorted. This has enabled burnable waste to be used for electricity

and heat production, thereby replacing the use of fossil fuels for energy supply.At present there are no instruments in the agricultural sector aimed at reducing

emissions of methane and nitrous oxide. But the CAP has an impact on the extent,

emphasis and profitability of farming, which in turn affects emissions of green-

house gases. Since the 1980s the Swedish Board of Agriculture has also been de-

veloping an action programme to reduce nutrient losses, which reduces emissions

of methane and nitrous oxide from the handling of fertilisers and from agriculturalland.

Forestry is subject to legislation indirectly increasing carbon sinks in the sector.

Forestry management regulations encourage forestry practices that reduce emis-

sions of greenhouse gases. New forest reserves, including voluntary reserves, help

to increase the store of carbon in forest biomass.

To sum up, it may be said that the instruments that are used and have impactedgreenhouse gas emissions have been designed differently in different sectors of

society. Economic instruments have been of greatest importance in the energy and

transport sector. The gradual raising of the energy and carbon dioxide taxes has

been the main factor persuading homeowners to change over from oil-fired and

electric boilers to district heating, heat pumps and pellet-fired boilers. Another

factor is that district heating production is now based to such a high degree on biofuels instead of oil and coal. The electricity certificate scheme has resulted in

greater electricity production from renewable energy sources. The increases in the

taxes on motor fuels, combined with tax exemption for biofuels for motor vehicles




50

have mitigated the rise in greenhouse gas emissions from road traffic. However, in

the waste sector the main factor operating to reduce landfill and hence methane

emissions has been the ban on landfilling burnable and organic waste (Ds

2005:55). Industry, which at present enjoys heavily discounted energy and carbondioxide taxes, experienced a lowering of the total tax it pays on energy when the

carbon dioxide tax was introduced in the early 1990s. Today, coal and oil con-

sumption in industry remains at its 1990 level.

4.1.3 Development potential

The emissions trading scheme will in all probability be a central means of control-ling European greenhouse gas emissions. It is also thought that the emissions trad-

ing scheme will act as a brake on emissions in the Swedish sectors involved. But

emissions from the activities covered by the system may nonetheless rise by 25 per

cent between 2000 and 2010 (Swedish Energy Agency and Swedish EPA, 2005).This would mean that carbon dioxide emissions from production facilities covered

by the trading system would then account for 37 - 38 per cent of Swedish green-house gas emissions. The forecast may be somewhat on the high side, as it is based

on a price of 10 euro per tonne carbon dioxide for the allowances, which is lower

than the price over the last year. Assuming a higher price for allowances, it is esti-

mated that the main effect will be that waste and biofuels will replace peat and oil

to a greater extent for electricity and heat production.

The remainder of emissions mainly come from the transport sector (around 30

per cent), and "Other" in the chart below (in order of size: methane/nitrous oxide

from agriculture, emissions from work machines, heating of homes and commer-cial/industrial premises, and from combustion of fossil fuels in industry not cov-ered by the emissions trading scheme). The chart forms a basis for further use of

instruments in various sectors. This should also involve the EU dimension, so that

future instruments are introduced where they can do most good, nationally or

throughout the EU.

Breakdown of emissions - Projection 2010

0

5000

10000

15000

20000

25000

30000

T r a n

s p o r

t

W o r

k i n g m a s h

i n e r y

R e s i d

e n t i a

l , c o m

m e r c i

a l

W a s t

e i n c i n e

r a t i o

n f o r e

n e r g y

p r o d

u c t i o

n

E m i s s

i o n s t

r a d i n

g ( C O

2 )

O t h e

r i n d u s

t r i a l

c o m b

u s t i o

n

O t h e

r i n d

u s t r i

a l p r

o c e s s

e s

A g r i c u l t

u r e

W a s t

e

S o l v e

n t u s

e

M i l i t

a r y C

O 2 e q u i v a l e n t s

( k t o n n e s ) Other

F-gases

Electricity anddistrict heatingRefineries

Industrial boilers

Paper and pulp

Minerals industry

Iron and steel

Figure 3 Projected greenhouse gas emissions to 2010 by sector




51

The emission trend depicted in Figure 3 clearly shows that if emissions in Sweden

are to be reduced, then the use of fossil fuels at production facilities included in the

emissions trading scheme, in other industry and for transport and work machines

must also be reduced. A supplementary feature could be carbon separation withcarbon storage where this solution is considered to be environmentally acceptable.

Since the EU emissions trading scheme incorporates an EU-wide emissions ceiling

for carbon dioxide, there is a particular need to reduce emissions in the other sec-

tors in Sweden (Swedish Energy Agency and Swedish EPA, 2004a). But to achieve

the long-term objective it is also necessary to bear in mind that these instrumentsaffect the structural transition to an increased proportion of energy from renewable

sources (in the sectors included in the EU emissions trading scheme as well), pro-

duce greater energy efficiency in the transport system and improved energy effi-

ciency in buildings.

For buildings (construction and modifications), standards for physical planningand for the energy performance of buildings are central, since the impact of thecarbon dioxide tax on behaviour is already considered to be so great that energy

consumption in the housing sector will soon involve virtually no fossil fuels.

Greater energy efficiency in all sectors of society is important for future resource

efficiency, and so energy taxes and emissions trading, the interplay between them

and their effectiveness may require further evaluation and impact analysis. The

cost-effectiveness of grants or tax relief for installation of biofuel heating systems,

for better insulation (e.g. energy-efficient windows) or for energy efficiency improvements in public buildings, can be questioned, since some of these measures

might have been taken even without grants or tax relief. These grants may inflatethe price of the products involved or create negative disturbances in the installation

industries.

It is essential that favourable and stable conditions be created for further intro-

duction of renewable energy as transformation of the energy system continues.

Improvement and extension of the Swedish electricity certificate system, with

enlargement to include other countries, is of importance. In the EU, Sweden should press for higher percentages of biofuels mixed into motor fuels. In general, energy

and carbon dioxide taxes are key economic instruments. For non-energy-intensive

industries (not included in the EU emissions trading scheme) it is also of interest to

study which economic (or other) instruments can effectively speed up the process

of lowering greenhouse gas emissions. New economic instruments to encourage

cultivation and use of Salix (willow) or alternative biomass is another area thatmay be worth analysing, since the use of domestic bioenergy other than forestry

waste and waste fuels has not increased to any great degree.

For much of the industrial sector, the EU emissions trading scheme is the in-

strument that will reduce carbon dioxide emissions. Other instruments are the elec-

tricity certificate scheme (which excludes energy-intensive industry, however) and

energy and carbon dioxide taxes (although the latter is heavily discounted). Takentogether, these instruments impact in various ways on corporate behaviour. There

is a delicate balance between reducing carbon dioxide emissions in Sweden, the

risk of carbon dioxide leakage, ensuring that Swedish industry remains competitive




52

and increasing the proportion of energy from renewable sources. For this reason,

impact analyses should be made, so that we can see how existing instruments act in

combination with the EU emissions trading scheme. One interesting alternative is

to auction off allowances to the companies involved in emissions trading. This isnot possible under current EU regulations, however.

There is a great need to improve the energy efficiency of transport. Greater use of

renewable fuels is needed, but since this is a limited resource, better fuel efficiency

is essential, so that the biofuel that can be produced suffices to reduce petrol and

diesel consumption. Travel habits are a major factor in greenhouse gas emissionsattributable to consumers, particularly journeys by car and air. Here, it is of interest

to analyse:

the potential for sales tax, vehicle tax, company car taxation and motor

fuel tax to contribute to energy-efficient vehicles and energy-efficient useof cars, and how these instruments work together. Account must also be

taken here of the scope for successful use of EU-wide instruments and

the ongoing analyses of the consequences of including transport in theEU emissions trading scheme;

indexation of motor fuel taxes in line with both GDP and the consumer

prices index (KPI). (At present these taxes are only index-linked to KPI);

mileage-based road charges for socio-economically efficient goods

transport in Sweden and the EU;

internationally harmonised taxes and charges on air traffic and shipping

that internalise the external costs of these modes of transport. A processis currently under way to include some parts of air traffic in the EU emis-

sions trading scheme.

There is a need to evaluate the complex of instruments governing biofuel for motor

vehicles and eco-cars. There are substantial synergies. In particular, an analysis

should be made of the cost-effectiveness of continuing to exempt biofuels for mo-

tor vehicles from tax at the present level, or taxing them at a lower level, as com-

pared with introducing a certificate system.

There are other instruments in the traffic field whose primary purpose is not

environmental. Examples include parking charges and travel allowances. They

nonetheless have an impact on traffic and, depending on its size and form, thecharge/tax allowance may reduce traffic appreciably in many suburbs. There have

been very few evaluations of the environmental implications of these instruments.

The Public Transport Commission (SOU 2003:67) has proposed that a revenue-

neutral travel allowance system be introduced, under which the allowance is related

more to the distance travelled than the mode of transport.There has been a sharp increase in the use of fossil fuels for work machines and

off-road vehicles, in the same way as for heavy goods transport. Apart from motor

fuel tax, there are no instruments to encourage energy efficiency. New economic

instruments or other forms of market-based instrument should be examined, such

as “green depreciation”, i.e. that companies can use accelerated depreciation for




53

new, energy-efficient, machinery and vehicles purchased to replace their old

equipment.

Technology sharing and development of new technology are an important factor inachieving long-term objectives. Implementation of new technology requires stable

and long-term instruments such that companies dare to invest in new technology,

and instruments to ensure that energy-efficient technology is available at a com-

petitive price. Investment in research and development is the most obvious means

of achieving this. Establishment of new technology in the market often requiresinitial support for launch and further development of the product. Whether or not

support of this kind is cost-effective often depends on the technology concerned

and the time involved. It is difficult to draw general conclusions about cost-

effectiveness, but it is important that the support drives technology and develops a

competitive business, not that it merely increases the use of a technology that italready commercially viable.

Grants paid to municipalities to carry out various kinds of measures have been acentral instrument in the Swedish climate strategy. In terms of their cost-

effectiveness alone, grants cannot compete with taxes. However, some of the ef-

fects of grants are difficult to estimate, particularly in the longer term. For instance,

they may help to heighten environmental awareness, which will result in more

spontaneous action. Or if a coherent analysis of measures to be taken is required to

obtain a grant, it may be possible to identify and implement cost-effective meas-

ures that have previously been overlooked. It is necessary to perform regularevaluations of existing grants, how they work together/counteract or overlap other

instruments, and whether they are working as they were intended to.

4.2 A Non-Toxic Environment

The environmental quality objective will be difficult to achieve, particu-

larly as regards persistent organic pollutants already dispersed in the en-vironment.

The diffuse and widespread negative effects often caused by use ofchemicals are difficult to control directly, so there may be reason to di-

rectly tax the use or production of the chemicals causing problems.

Where there is doubt about the marginal cost of reduced chemicals use in

combination with sharply increasing marginal damage, regulation and/or

bans may be more effective instruments than taxes.

Low tax levels combined with low demand elasticity sometimes explains

why taxes have little effect.

Taxes on chemicals do not often any general solutions; their effective-

ness compared with other instruments must be assessed in each case.




54

THE ENVIRONMENTAL QUALITY OBJECTIVE

The environment should be free of chemicals and metals created or abstracted that

pose a threat to human health or biological diversity. The Swedish Parliament has

decided that the outcome within a generation for this environmental quality objec-tive should include the following:

The concentrations of substances that naturally occur in the environment

are close to the background concentrations.

The levels of foreign substances in the environment are close to zero and

their impact on ecosystems negligible.

All fish in Sweden's seas, lakes and watercourses is fit for human con-

sumption in terms of its content of foreign substances.

Overall exposure in the workplace, the external environment and the

indoor environment to particularly dangerous substances is close to zeroand, as regards other chemical substances, is at levels that are not harm-

ful to human health.

Polluted areas have been investigated and cleaned up where necessary.

Assessment

New EU chemicals legislation, called REACH, is due to take effect in 2007.

REACH considerably improves the scope for protecting health and the environ-

ment, compared with current legislation. Companies will have a clearer responsi-

bility to declare the health and environmental hazards posed by their chemicals,

and will have to assess risks and say how those substances can be handled safely.The present proposals will not suffice to achieve a Non-Toxic Environment, how-

ever.

It will be difficult to achieve the target, particularly as regards persistent pollut-

ants already dispersed in the environment. But further national and international

efforts will make it possible to limit new hazardous substances entering the

environment.

INTERIM TARGETS

Description Assessment

Interim target 1

By 2010 data will be available on the properties of alldeliberately manufactured or extracted chemical sub-stances handled in the market.

REACH will improve knowledge of chemical properties.The proposed testing requirements for substances are notnearly exacting enough, and the timetable makes it impos-sible to achieve the target on time.

Interim target 2

By 2010 finished products will carry health and environ-mental information on any dangerous substances theycontain.

The interim target cannot be achieved unless further pow-erful measures are taken. An information requirement forhazardous substances needs to be incorporated in interna-tional agreements.

Interim target 3

As far as possible, newly manufactured finished productswill be free from

- new organic substances that are persistent and bioac-

cumulating, new substances that are carcinogenic,mutagenic and reprotoxic, and mercury, as soon as

The proposed permit system for particularly hazardoussubstances under REACH forms a good basis for ap-proaching the interim target. The scheme is expected tohave a preventive effect. Broad exemptions from the permitrequirement and an unclear timetable may make it difficult

to achieve the target.




55

possible, but no later than 2007;

- other carcinogenic, mutagenic and reprotoxic sub-stances, and endocrine disrupting substances or highlyallergenic substances, by 2010, if the products that con-

tain them are intended to be used in such a way that theywill enter natural cycles;

- other organic substances that are persistent and bioac-cumulating, and cadmium and lead, by 2010.

Interim target 4

Health and environmental risks associated with the manu-facture and use of chemical substances will be reducedcontinuously to 2010

There are few indications of clear trends at present. None-theless, it is considered possible to achieve the interimtarget if more measures are taken.

Interim target 5

By 2010 guideline values will be established by the com-petent authorities for at least 100 selected chemical sub-stances not covered by interim target 3.

The target has been achieved. The Swedish ChemicalsInspectorate has set and published guideline values for100 chemicals used in insecticides. The Swedish EPA haspublished guidelines on use of these values.

Interim target 6

Studies will have been carried out and, where necessary,appropriate action will have been taken by the end of2010 at all contaminated sites that pose an acute risk ofdirect exposure, and at contaminated sites that threatenimportant water sources or valuable natural environments,now or in the near future.

Contaminated sites have now been identified. It is esti-mated that clean-up and remediation have been performedat around half of the sites.

Interim target 7

Between 2005 and 2010, measures will be implementedat a sufficiently large portion of the prioritised contami-nated sites to ensure that the environmental problem as awhole can be solved by 2050 at the latest.

Surveys and investigations are being pursued to ascertainthe extent of the environmental problem posed by con-taminated sites and what measures should be taken.Particular emphasis is now being placed on regulatorycontrol to ensure that site remediation takes place whereliability exists and grants are not available.

Interim target 8

By 2010 clear action programmes will have been estab-lished to bring about a continuous decrease in levels infood of dioxins harmful to humans.

Ongoing action programmes are the Swedish plan forimplementation of the Stockholm Convention and the EUprogramme for common limit values for foods. The EU limitvalues were introduced in 2002 and will be reviewed in2008. Proposal of further effective measures will requiremore knowledge about the contribution of various sourcesto dioxins in foods, including the importance of varioussecondary sources such as atmospheric deposition andcontaminated sites.

Interim target 9

By 2015 the dietary and occupational exposure of thepopulation to cadmium will be at a level that is safe from along-term public health point of view.

It is not possible at present to determine a safe exposurelevel. No overall review has been made of the effects ofongoing measures. In view of these uncertainties, it isdifficult at the moment to say what is needed to achieve theinterim target. For the time being the emphasis should beon reducing exposure, which is required under the EU

programme for existing substances.


There are a considerable number of economic instruments that can be related to the

Non-Toxic Environment objective:

Pesticides Tax- has encouraged farmers to change to low-dose pesticides

Charge on batteries- Sales of hazardous batteries declining- Lower cadmium emissions




56

- The batteries charge has indirect effects, e.g. in the form of information. Dif-ficult to estimate direct effects of the charge, however

Tax on cadmium in artificial fertilisers

- has contributed to the present low leakage of cadmium from artificial fertilis-ers to arable land. Producer responsibility for car tyres

- the tyre charges have ensured that virtually all tyres are recycled Car scrapping premium

- helps to create an incentive for taking vehicles to scrap yard. Support for organic farming Site remediation grants

- This funding provides the greatest single impetus for site remediation Chemicals charges (around SEK 50 million), have a negligible impact on be-

haviour, but fund monitoring of compliance with safety regulations An hourly charge for regulatory control of products is to be introduced

Several of the above instruments have had an effect. But in most cases it is fairly

limited, either because the level of the tax or charge is low, or because only a lim-

ited part of the environmental problem is addressed by the instrument.


A Swedish EPA report (Swedish EPA 2004c) evaluates the effectiveness of se-

lected taxes on natural resources and chemicals, and also analyses the potential for

increased use of these taxes in Sweden. With regard to chemicals, the report states:

"Taxation of chemicals use is mainly justified by the negative external effects

along the product chain. These diffuse and widely dispersed effects are difficult tocontrol directly, and there may therefore be reason to tax the use or production of

the chemicals causing the problems instead. However, doubt as to the marginal cost

of reducing chemicals use, combined with often sharply rising marginal damage

functions above a critical level mean that quantitative regulation (or even bans)

may be a more effective instrument than taxes in limiting chemicals use." Thereport concludes that chemicals taxes do not offer any general solutions to envi-

ronmental problems associated with the Non-Toxic Environment objective; their

effectiveness compared with other instruments must evaluated in each case. Model

analyses show that taxes on chemicals may be an effective means of mitigating the

negative environmental effects, but there is a clear goal conflict between imposingtax as "close" to the environmental problem as possible, and a simple tax with lowcompliance costs. The latter strategy is often employed. Most existing chemicals

taxes are "second-best" options, since they are imposed on consumption or sale of

the chemical in question. The effectiveness of chemicals taxes has often resulted

from using the tax revenues for research and information purposes. However, the

report mentions the Dutch tax on fertilisers and the Norwegian tax on pesticides as

examples of how chemicals taxes can be designed to be more intimately related to

the environmental damage they cause.




57

The report also mentions how important it is that chemicals taxes are supported by

international organisations, do not conflict with international agreements, and can

be supported by strong policy coalitions.

As part of the in-depth evaluation, the Swedish Chemicals Inspectorate has be-gun a study designed to identify the chemicals areas for which economic instru-

ments may be appropriate, either to reinforce existing instruments in the form of

laws and regulations, or for chemicals or areas for which there are no instruments

at present.

4.3 Sustainable ForestsUnder this environmental objective, we have chosen to include funding for land

purchases and compensation for land-use restrictions, as well as land management,

even though these cannot be regarded as economic instruments in the strict sense as

defined in chapter 3.5. We have nonetheless included them because of the key role

they play in achieving the environmental objectives. The other economic instru-

ments discussed under this environmental objective have been selected in consulta-tion with the Swedish Forest Agency. Proposed new grant schemes currently under

discussion are not included here, nor are limited-period grants and tax relief for

forestry enterprises suffering losses in the storm that hit southern Sweden in Janu-

ary 2005.

The environmental quality objective will probably not be achieved by

2020, even though it ought to be possible to achieve most of the interim

targets. In the case of biodiversity, this is because many forest processestake a long time and forestry has had far-reaching impacts on the forest

ecosystem for many years. The economic instruments relating to this objective have been evaluated

to a varying extent and depth.

The goal for long-term protection of soil will be difficult to achieve

within the stated time. This is mainly because insufficient funding has

been allocated for nature reserves and biotope protection. Large amounts

of money are allocated every year for purchase of land and payment ofcompensation for land-use restrictions. The amount and nature of this

funding is the decisive factor determining whether the objective will beachieved. The Swedish Agency for Public Management has been in-

structed by the Government to evaluate existing nature conservation in-

struments (nature reserves, biotope protection areas and nature conserva-

tion agreements) and their long-term cost-effectiveness, and also howstate-owned forest land can aid achievement of the entire Sustainable

Forests objective. The agency is to submit its report by 30 September

2007.

The level of compensation paid for land-use restrictions to which a forest

owner is subject having concluded a nature conservation agreement is

seen by many forest owners as too low, which tends to render these




58

agreements less financially attractive.

Capital gains tax regulations governing the creation of nature reserves or

biotope protection, and the prohibition against applying accrual account-

ing principles to income received under nature conservation agreementsmilitate against formal protection of forest land and thereby hinder ful-filment of the environmental objective.


The value of forests and forest land for biological production must be protected, atthe same time as biological diversity, as well as cultural heritage and recreational

assets are safeguarded. The aim is that this objective should be achieved within a

generation.

The Environmental Objectives Council (2006b) considers that the environ-mental quality objective will probably not be achieved by 2020, even though the

prospects appear promising for several of the interim targets. In the case of biodi-versity, this is because many forest processes take a long time and forestry has had

far-reaching impacts on the forest ecosystem for many years. Marked improve-

ments in biodiversity are unlikely to be discernible until after 2020.

INTERIM TARGET

Interim target 1 – long-term protection of forest land

A further 900,000 hectares of forest land deserving of protection will be excluded

from forestry production by 2010. Of that figure, 320,000 hectares of productiveforest land will be turned over to nature reserves, 30,000 hectares will be covered

by biotope protection and 50,000 hectares by nature conservation agreements. For-

est owners are expected to allocate at least a further 500,000 hectares voluntarily.

This means that at least 730,000 hectares of productive forest will be voluntarily

protected by 2010.

Achieving the nature reserve target (320,000 hectares by 2010) is considereddifficult. Insufficient funding has been allocated for land purchases and compensa-

tion for land-use restrictions. Based on the current funding level, the target will not

be achieved until 2020. The area target for biotope protection and nature conserva-

tion agreements can be achieved if more funding is granted. At present 14,780hectares are covered by nature conservation agreements (the target is 50,000 hec-

tares by 2010) and 12,007 hectares under biotope protection (the target is 30,000hectares by 2010). The Swedish Forest Agency estimates that funding for protec-

tion of land under biotope protection and nature conservation agreements fell from

SEK 170 million in 2003 to SEK 150 million in 2004. The annual requirement is

estimated at SEK 250 million.

Fewer voluntary allocations of land for nature conservation by small-scale for-

estry enterprises are being made than had been expected. Only one in four forestry

enterprises owning less than 5,000 hectares of forest is reported to have allocated

land voluntarily. This was revealed by an update on voluntary land allocation by




59

small-scale forestry enterprises presented by the Swedish Forest Agency in its

annual report to the Environmental Objectives Council in March 2006. The update

takes no account of the nature conservation/biological aspects of the allocations, or

their permanency. The council (2006b) takes a serious view of this development; itis likely that more areas will need to be allocated if the target is to be achieved by

2010.

Interim target 2 – improved biodiversity

The amount of dead wood, the area of mature forest with a high proportion of de-ciduous trees and the area of ancient forest will be maintained and increased by

2010 by

increasing the quantity of hard dead wood by at least 40 per cent

throughout the country and considerably more in areas where biologicaldiversity is particularly at risk;

increasing the area of mature forest with a large deciduous element by at

least 10 per cent;

increasing the area of old forest by at least five per cent;

increasing the area replanted with deciduous forest.

According to the Environmental Objectives Council (2006b), it ought to be possi-

ble, based on current trends, to achieve the targets for dead wood, ancient forest

and mature deciduous forest without taking any further steps.

Interim target 3 – protection of cultural heritage

By 2010 forest land will be managed in such a way as to avoid damage to ancient

monuments and to ensure that damage to other known valuable cultural remains is

negligible.

At present forestry causes far too much damage to ancient monuments. One problem is a virtual lack of information about the location of these monuments.

Natural and man-made monuments are being surveyed in almost all counties, often

jointly with the labour market authorities, but these surveys will not be completed

in time to enable the objective to be achieved. There is also a pressing need to de-

velop less harmful scarification methods and to educate, train and inform those

involved. It will be difficult to achieve the objective within the stated time.

Interim target 4 – action programmes for endangered species

By the end of 2005 at total of 23 action programmes for endangered species had

been drawn up. These incorporate proposed measures affecting 52 endangered

species.

NATIONAL FORESTRY SECTOR OBJECTIVES

The forest policy decision of 1993 (Bill1992/93:226) lays down two objectives: a

production objective and an environmental objective. They are given equal weight.

The production objective is worded as follows: "Forest and forest land shall be




60

utilised efficiently, with the goal of achieving a sustainable yield of high market

value. The composition of forest production shall be such that it will be able to

satisfy a variety of human needs in the future." The Environmental Objective is:

"Biological diversity and genetic variation of the Swedish forest shall be preservedand secured for the future. The forest shall be managed in such a way that plant and

animal species that occur naturally in forest ecosystems can survive under natural

conditions and in self-sustaining populations. Endangered species and vegetation

types shall be protected. The forest's historical, aesthetic and social values shall be

preserved."In 2005 the Swedish Forest Agency was instructed to devise new (third genera-

tion) sectoral objectives in which forest policy and relevant parts of environmental

policy are interpreted. Long-term objectives have been formulated, clarifying and

interpreting the objectives laid down by Parliament. Short-term objectives have

also been drawn up. Most of these have been quantified and given 2010 as thedeadline for their fulfilment. The short-term objectives incorporate all or parts ofinterim targets 1 - 3 under Sustainable Forests.

4.3.1 Economic instruments

The remaining grants following abolition of the forest management charge, are

available for nature and heritage conservation measures (NOKÅS), and grants for

management of deciduous woodland. NOKÅS has not been evaluated, but the

Swedish Forest Agency (2001a) considers that allocation of NOKÅS funding for

improvement and restoration of valuable natural heritage sites in the forest have

helped to create good quality local environments and provided opportunities forrecreation and appreciation of nature in forests and the countryside.

Tax policy is one of the most powerful forces acting on forest owners and their

forests. The current regulations governing capital gains taxation are a hindrance to

the creation of nature reserves. These regulations should be reviewed with a view

to increasing the rate and efficiency of implementation of greater forest protection.

The Swedish Forest Agency has identified accrual accounting of income under

nature conservation agreements as one of the main contractual problems.Land owners concluding nature conservation agreements receive financial

compensation for the restrictions on use of their land imposed by the agreement. It

has proved difficult to conclude agreements at the rate and to the extent planned by

the Swedish Forest Agency. The area covered by nature conservation agreements

did not reach a level permitting achievement of the objective until 2002. Many

forest owners think that the compensation is too low, which makes the agreementsless financially attractive.

According to a Swedish EPA report (2006a), EPA funding for purchase of land

and compensation for land-use restrictions more than doubled between 2004 and

2005. The cost of land purchases and compensation for land-use restrictions to-

talled around SEK 1 billion in 2005. With current funding and prices for forest and

forest land, the interim target for long-term protection of forest land will not beachieved until 2020. The specific land management costs for the Swedish state are

around SEK 200 million. Monitoring of the financial implications of land




61

management should be improved, particularly as regards the cost of various man-

agement methods and their relative effectiveness, their environmental benefits. No

evaluations have been made of the extent to which this funding achieves its aim,

i.e. protection of biological production and conservation of biodiversity, culturalheritage and social amenities.

OTHER INSTRUMENTS

There are several other instruments of importance in relation to this objective:

Forestry Act

According to the Swedish Forest Agency (2001b), the Forestry Act (1979:429) has

been a key instrument of forest policy since 1903. In addition to the Forestry Act

and the Forestry Ordinance (1993:1096), there are regulations and general guide-

lines issued by the Swedish Forest Agency, which is the regulatory authority underthe Forestry Act. Among other things, the Act contains provisions governing forest

regeneration, felling methods, sub-montane forest, deciduous forest and concern

for the natural environment and cultural heritage.

Environmental Code

Significant provisions of the Environmental Code in relation to forests and forestryinclude those governing environmentally hazardous activities (which apply to fer-

tiliser use in forests), land drainage and pesticides.

Certification of forest landThe Forest Stewardship Council (FSC) scheme and the Programme for the En-

dorsement of Forest Certification schemes (PEFC) are voluntary market-based

schemes designed to promote socially beneficial, environmentally sustainable andfinancially viable forestry.

A land owner wishing to have his forestry enterprise certified enters into an

agreement with an approved certification organisation. Under the agreement, the

land owner must comply with current forestry standards by implementing specific

measures in its forestry practice. The certification process involves an examination

of how forestry is practised in the field and on paper. Regular checks are also made

on certified land owners.Advantages gained by a forest owner by certifying his forest include the fact

that he is then able to show his customers that he is showing concern for environ-

mental and social issues, and can thereby avoid being associated with less respon-

sible forestry and charge a higher price for certified timber.

73% of PEFC-certified forest owners and 62% of FSC-certified forest ownershave made voluntary land allocations.

Green forestry plans

Green forestry plans are based on the twin goals for production and environment inforestry practice in line with forest policy aims. Protection of environmentally

valuable forest land is a natural part of the process of devising these plans. Green




62

forestry plans are the forest owner's tool for planning forest management measures,

felling and nature conservation. The plan is adapted to ensure that it can be effec-

tively used when the forest owner wishes to obtain certification.

Education, training, advice and information

The 1990 Forest Policy Commission report said that the advice and information

provided by the forestry authorities was an effective means of disseminating cur-

rent forest policy to forest owners and the general public. The emphasis of advice

given has been clearly environmental since the late 1990s. Information takes thefollowing forms:

Surveys and distribution of information on the location of ancient

monuments.

Method development and applied research on development of sustainableforestry methods.

Targeted advice.

Approximately 16 per cent of the Swedish Forest Agency's advisory services, edu-

cation, training and information (mainly aimed at forest owners) comprise 16 percent of its activities by volume measured as operational days in service, and seven

per cent of turnover (SEK 1,795 million in 2005). The provision of advice is in-

tended to meet forest owners' need for information and know-how, thereby helping

to achieve the aims of forest policy.

A Swedish Forest Agency report (2001b) has found that the "Greener Forest"information campaign has had a substantial impact on forestry. "Greener Forest"

accounts for a large proportion of all advisory services currently being conducted –

46 per cent of all operations. The campaign may be expected to influence the atti-tude of forest owners in favour of forestry practices in which the environmental

objective and the production objective are given equal weight.

LIFE

The aim of LIFE is to give impetus to the implementation and development of EU

environmental policy. LIFE consists of three parts: LIFE-Environment, LIFE-

Nature and LIFE-Third Countries. The forestry authorities are taking part in a

number of projects funded by LIFE.

Job creation and retraining schemes

There is a job creation and retraining scheme in the form of "green jobs" for long-

time job seekers. The aim is to give these people a chance to gain a foothold in the

labour market. The Swedish Forest Agency offers a temporary position involving

heritage and nature conservation. Green jobs are the result of an agreement be-

tween the Swedish Forest Agency, the Swedish Labour Market Administration and

the Swedish ESF Council.




63


It will take time to achieve the objective, but we are on track to achieve most of the

interim targets. Few evaluations of the economic instruments have been performed.

However, we consider that direct economic support, such as the NOKÅS and otherschemes, need not be made a priority for further evaluation.

The economic instruments that are most central to achievement of this target,

which is also one of those that is most difficult to achieve (interim target 1) are the

various instruments for long-term protection of land (purchase, compensation for

land-use restrictions, land management). There is a need for evaluation of the ex-

tent to which this funding has achieved its purpose, i.e. protection of biological production and conservation of biodiversity, cultural heritage and social amenities.

The rate at which land is allocated for protection needs to be speeded up. There

are tax regulations that reduce the incentive for allocations of this kind. These con-

cern capital gains taxation of real property and accrual accounting of income re-ceived under nature conservation agreements. These regulations are in need of

review.

4.4 Zero Eutrophication


Nutrient levels in soil and water must not be such that they adversely affect humanhealth, the conditions for biological diversity or the possibility of varied use of land

and water.

Eutrophication is caused by the increase in the nutrient load that has occurred

over the last century. The Zero Eutrophication environmental quality objective is

beset by the current uncertainties about the actual effects of nitrogen and phospho-

rus. Agriculture and private and municipal sewerage systems make up the mainsource of emissions of these nutrients. Numerous measures have already been

taken to reduce the load from these sources, with a slight bias towards nitrogen

over the last few decades. The transport sector also accounts for a significant pro-

portion of emissions of nitrogen oxides. Since much of the nutrient load entering

This environmental quality objective will probably not be achie-

ved, although some of the interim targets can be reached. Typical of this area are time lags and uncertainty as to whether

eutrophication is being caused by nitrogen or by phosphorus. In-

struments should therefore focus on measures having an effect on both these nutrients.

There are a considerable number of economic instruments aimed

at nitrogen emissions, but few aimed at phosphorus. Geographical differentiation of instruments would be justified to

achieve cost-effectiveness.

Efforts should concentrate on bringing about measures in other

countries whose emissions affect the Baltic Sea.




64

the Baltic Sea comes from sources in other countries, action taken in Sweden only

has a limited effect on eutrophication in the Baltic.

The environmental objective breaks down into four interim targets aimed at

emissions of various nutrients to water and to air from Swedish sources.

INTERIM TARGETS

Interim target 1 for emissions of phosphorus: "By 2010 Swedish water-

borne anthropogenic emissions of phosphorus compounds into lakes,

streams and coastal waters will have decreased by at least 20% from

1995 levels. The largest reductions will be achieved in the most sensitive

areas."

Interim target 2 for emissions of nitrogen: "By 2010 Swedish waterborne

anthropogenic emissions of nitrogen compounds into sea areas south of

the Åland Sea will have been reduced by at least 30% compared with1995 levels."

Interim target 3 for ammonia emissions: "By 2010 emissions of ammonia

in Sweden will have been reduced by at least 15% compared with 1995

levels."

Interim target 4 for emissions of nitrogen oxides: "By 2010 emissions of

nitrogen oxides to air in Sweden will have been reduced to 148,000 ton-nes."

WILL WE ACHIEVE THE INTERIM TARGETS BY 2010?

According to the Environmental Objectives Council (2006b), achievement of the phosphorus reduction required by interim target 1 will require additional action.

Diffuse emission sources (i.e. without an obvious location) offer the greatest poten-

tial for reducing the phosphorus load. It is doubtful whether it will be possible to

achieve the reduction in nitrogen emissions required by interim target 2, despite the

substantial reduction in these emissions from point sources in particular (sewage

works and industry). Diffuse emissions of nitrogen from arable land have de-creased by 12 per cent since 1990, due to action taken to control nitrogen leaching,

better use of fertilisers and a reduction in the area of arable land. Given that a re-

duction of 13 per cent in ammonia emissions was achieved as early as 2003, the

prospects of achieving interim target 3 are thought to be good. To achieve interimtarget 4 (nitrogen oxides), further measures will be necessary, mainly in the trans-

port sector. The EC directive imposing requirements for further development ofexhaust emission standards for heavy-duty vehicles offers potential for reducing

emissions from the transport sector. According to the Swedish EPA, its proposed

increase in, and widening of, the nitrogen oxides charge will increase the chances

of achieving this interim target.

WILL WE ACHIEVE THE LONG-TERM OBJECTIVE?

Although emissions to air and water have diminished and are continuing to do so,

this has not been clearly reflected in reduced eutrophication. The substantial




65

uncertainties about nitrogen and phosphorus cycles in nature and about the interac-

tion between these two nutrients do much to explain this, but the lack of results

may also be due to long recovery times and the slow-moving processes that typify

nutrient cycles. Another reason why it is difficult to achieve the long-term objec-tive is that the difference between measures decided and measures implemented is

too great, which suggests a need to redesign instruments aimed at those measures,

so as to create stronger incentives for implementation. More priority given to cost-

effective measures aimed at nutrient emissions would improve the prospects of

achieving the long-term objective, even though doubts remain as to which meas-ures have greatest effect on eutrophication.


The following environmental taxes exist at present.

Tax on mineral fertilisers containing nitrogen

The NOx charge

The tax on nitrogen has reduced sales of artificial fertilisers, and has been esti-

mated to reduce nitrogen leaching from agricultural land by between 1,300 and

1,800 tonnes of nitrogen a year. Even though it has thus had a direct impact tosome extent, its indirect effects have been greater. The negative impact of the tax

on the competitiveness of Swedish agriculture has been fairly moderate. Evalua-

tions (Swedish EPA 2003 and 2004) have show that the NOx charge scheme is a

cost-effective instrument and a complement to operating permit emission condi-tions. The charge system has produced a more rapid and cheaper reduction in emis-

sions than could have been achieved relying solely on the more static emissionconditions in operating permits.

The following environmental grants having some impact on eutrophication ex-

ist at present: Conservation of pasture land and natural hay meadows, restoration of

natural hay meadows and pasture land, conservation of valuable natural environ-

ments and cultural heritage, open and varied agricultural landscapes, grassland

cultivation, organic farming, reduced nitrogen leaching, wetlands and small water

bodies, kidney beans on the island of Öland, sugar beet on the island of Gotland,

protection zones and catch crops.

There are other forms of support additional to environmental grants. These in-clude farm support, male livestock grant, milk grant, protein crop support, energy

forest support, energy crop support and others.

Many of the forms of agricultural support currently in place may have contrib-

uted to overproduction, in international terms, from this sector, which in some

cases will have exacerbated nutrient emissions. When the effects of direct support

and environmental grants are analysed, it transpires that the positive and negativeenvironmental impacts are often interlinked. Different kinds of support may even

counteract one another. The projected effects of the EU agricultural reform in

2003, implemented in Sweden in 2005, suggest that nitrogen leaching will decrease

owing to changes in crops grown, more extensive cultivation and the same area of




66

arable land but with less intensive production, as well as fewer animals, of which

the last-mentioned will also reduce ammonia emissions. The effect of certain in-

struments may also be affected by the presence of other instruments also aimed at

the same nutrient flow. If, for example, wetlands are created downstream of anagricultural area in order to remove nitrogen from water as it makes its way from

source to receiving water body, this will reduce the effect of upstream action in the

form of catch crops and reduced fertiliser use, and vice versa. When granting sup-

port for catch crops, for example, it may therefore be advisable to consider whether

action has also been taken downstream.Apart from these economic instruments, there are the following administrative

instruments having an actual or potential impact on eutrophication.

Environmental Code

Regulation of nitrogen and phosphorus emissions from sewage works Law on private sewer systems

The Water Framework Directive – an instrument in itself

The "Focus on Nutrients" information campaign.

As regards the statutory provisions governing private sewer systems, property taxhas a counterproductive effect, since investments in treating discharges from pri-

vate sewers will increase the taxable value of a property. There is little incentive to

make these investments, since the property owner sees no benefit to himself of

reducing emissions.

The Water Framework Directive will increase the scope for safeguarding water

quality. Although the directive only applies to surface water, groundwater andcoastal areas, action taken within a catchment area generally improve the marine

environment. The directive underlines the use of pricing policy, the polluter pays

principle, and also the importance of achieving objectives cost-effectively. In all

probability this will reinforce instruments aimed at nutrients and encourage the

development of new instruments that cover their costs and are cost effective. This

will favour the use of economic instruments in particular, since only they are capa-

ble of meeting these criteria (see section 3.5.3 on criteria for the effectiveness of

instruments).


For interim targets 1 – 3, the polluter pays principle will result in greater use of

economic instruments to combat these pollutants. There is great potential to de-

velop economic instruments to achieve interim target 1, since measures designed to

control phosphorus have lagged behind owing to a focus on reducing the nitrogenload. At present there is no tax on phosphorus in mineral fertilisers. Whether or not

a tax on phosphorus like the one on nitrogenous fertiliser would have a limited

impact on emissions, it can be justified on the basis of the polluter pays principle.

The limited effect on nitrogenous fertiliser may also suggest that the tax is too low,

and that a further tax increase is needed to attain a clearer direct effect. Improved

handling of farmyard manure is considered to be one measure offering great




67

potential for reducing phosphorus emissions at low cost. Introduction of measures

of this kind requires instruments that create financial incentives for individual

farmers to make the investments necessary to ensure that manure is spread at the

right time. Digestion of farmyard manure, which produces biogas and organic fer-tiliser, is another possible way of reducing nutrient leaching from agriculture. This

may eventually offer great potential if the demand for biogas increases in the future

(Luhti, 2005). For private sewer systems, there is an administrative instrument in

the form of the statutory requirements governing treatment of discharges. Since

emissions have nevertheless not been dealt with to the extent actually prescribed bylaw, there may be a need to examine the potential for economic instruments aimed

at these sources. The main reason that private sewers have not been improved to

the extent provided by law is that regulatory control has not been effective, as well

as the fact that there are no financial incentives for property owners to carry out

these measures. Although support is currently available for creation of protectionzones7, as things stand, there appears to be a need to redesign this instrument so

that these zones are created where they will have the greatest impact on eutrophica-

tion.

The new wording of interim target 1 – "the greatest reductions should beachieved in the most sensitive areas" – justifies the use of geographically differen-

tiated instruments.

Although there are currently a fair number of economic instruments aimed at

nitrogen emissions, there is a need to redesign them to take greater account of their

actual effect on eutrophication, which was also pointed out in the Action Plan for

the Marine Environment (Swedish EPA 2006e). By taking greater account of geo-graphical differences affecting many of these measures, it will be possible to re-

duce these emissions at a lower cost than under the present system (Elofsson and

Gren, 2004). It is also desirable to evaluate whether economic instruments could do

more to increase treatment at sewage works than the current regulations by creating

stronger incentives for additional treatment and also by implementing the polluter

pays principle. The fact that the marginal cost of nitrogen removal from outgoingsewage differs to a great extent from one sewage works to another suggests that the

present instruments are not cost-effective. Since the marginal utility of reducing

emissions may also vary, depending on the location of the source in relation to the

receiving body of water, the variation in the marginal cost of reducing the load may

be further accentuated. One reason for this may be that investments in nitrogen

removal are made in order to reduce emissions to the prescribed level, not to

achieve the greatest possible nitrogen removal at the lowest possible cost. Mussel

farming is another approach to nitrogen removal for which economic instruments

could be designed.Interim target 4 for emissions of nitrogen oxides is not expected to be achieved

without additional action. There is great scope for reducing NOx emissions from

shipping as a means of achieving the NOx emission reduction required by interim

target 4. But if an economic instrument is to produce a significant reduction in

7 The fringes of watercourses, which are protected from conventional cultivation and are grassed, whichenables them to absorb nutrients (mainly phosphorus).




68

these emissions, it should be of an international nature, since most of these emis-

sions originate from ships sailing under a foreign flag. In the Swedish EPA's opin-

ion (2005e), raising and broadening the NOx charge system would speed up the

reduction in nitrogen oxide emissions, even though the sources affected by thecharge account for a fairly small proportion of emissions compared with the trans-

port sector. According to the Swedish Maritime Administration, the environmen-

tally differentiated shipping lane dues relating to NOx emissions from shipping

have accelerated the introduction of nitrogen removal on board ship. However,

there is a need for international instruments in this area, since shipping operates inthe face of global competition , which limits the effect of national instruments.

Given the current doubts about whether action should focus on nitrogen or on

phosphorus reduction, it is desirable to favour measures that reduce both of them.

Examples include catch crops, wetlands, regulated drainage and protection zones.

COST-EFFECTIVE ALLOCATION OF MEASURES

There are some general problems with instruments that are intended to reduce eu-

trophication. One major problem is the difficulty in establishing a causal link be-

tween a measure and its effect on the receiving body or bodies, which limits the

scope for creating cost-effective instruments, i.e. achieving the objective at thelowest possible socio-economic cost. The instrument should be designed so that

measures are taken where they do most good in relation to eutrophication, which is

not the same thing as achieving a certain emission reduction at source at the lowest

cost. Elofsson (2006) shows that if synergies exist between nitrogen and phospho-

rus in terms of eutrophication, it would be cost-effective to concentrate emissionreduction efforts on only one of them. However, this will require better understand-ing of which of the two nutrients is the main problem, which is not the case at pre-

sent.

Unfortunately, there is currently a great deal of doubt and disagreement about

the transport of nutrients between source and receiving body, and also their impact

on receiving bodies. Regardless of these uncertainties, all instruments used uni-

formly throughout the country or over large geographical areas will involve effi-ciency losses, since they are indirectly based on the assumption that the benefit of

reduced nutrient emissions is the same, wherever the measure is implemented,

which is not true (see, for example, Kolstad, 1986, 1987; Newell and Stavins,

2003; Gren, 2004; Scharin 2005a, 2005b). This means that a geographically differ-

entiated tax on artificial fertilisers could achieve the same reduction in eutrophica-

tion as the present one at substantially lower cost, or, vice versa, a substantially

greater reduction in eutrophication at the same cost as the present tax (Gren and

Scharin, 2006).

EXAMPLES OF GEOGRAPHICAL FACTORS AFFECTING THE IMPACT OF A

TREATMENT MEASURE

In some cases the effect of the treatment capacity of the measure depends on geo-

graphical conditions in the area, such as soil type, topography, climate etc. Some-times the impact at source is affected; in other cases the natural buffering capacity




69

between source and receiving body is impacted. For instance, the presence of

heavy clay in the Mälar valley farming region of Sweden influences the effect of

reducing nitrogen leaching using catch crops, because autumn ploughing is more

attractive than spring ploughing from the farmer's viewpoint. The heavy clay alsoincreases nitrogen retention in this region, which reduces the effect of emissions on

watercourses and lakes downstream. The combined effect of these two factors is

that catch crops as a means of reducing eutrophication of lakes and watercourses

has little impact on receiving bodies of water in this area. But the fact that a meas-

ure has relatively little effect need not mean that it is not attractive, since the important thing is the cost per effect of the measure in comparison with alternative

measures. A cheap measure with little effect may therefore be preferable to an

extremely expensive measure having a great effect, and vice versa. It is therefore

very important that the assessment of measures does not focus solely on the treat-

ment effect; the effect must also be related to the cost.To create cost-effective economic instruments it is necessary to identify and

form a view of the way that measures actually affect the receiving body to which

the objective relates. The cost of a measure is determined by the cost of its imple-

mentation and its effect on the receiving body. For instance, if the cost of reducing

phosphorus emissions at an upstream sewage works is SEK 50/kg phosphorus

reduction and the effect on the receiving body of water is 0.5 kg phosphorus, the

cost at the receiving body will be SEK 100/kg phosphorus reduction, since an

emission reduction of 2 kg is needed at the sewage works to achieve a 1 kg reduc-tion in the load on the receiving body of water.

SUMMARY

Achievement of the Zero Eutrophication objective will necessitate modifying and

improving existing measures so that greater account is taken of the effect of geo-

graphical variations on the environmental impact. New instruments designed to bring about measures considered capable of achieving the various interim targets

will also be required. Instruments designed to bring about measures to reduce

phosphorus emissions are the main priority, since the latest findings emphasise the

role played by phosphorus in eutrophication. Since instruments aimed at measures

in Sweden have a limited effect on eutrophication in the Baltic Sea, there is a need

to create international instruments impacting on emissions from other countriescontributing to the load on the Baltic.




70

4.5 Three action strategies and economicinstruments used

All three action strategies involve use of economic instruments. They aremost prevalent under the "More efficient energy use and transport" strat-

egy, and least used under "Non-toxic and resource-efficient cyclical sys-

tems".

The motor fuel tax and carbon dioxide tax are examples of instruments

covering several environmental objectives and involving many strategies

and sectors. They thereby also possess the qualities looked for within thestrategy framework, as well as being dynamically efficient.

However, the carbon dioxide tax may counteract the land and water man-

agement strategy unless biofuels are abstracted in a sustainable way.

The international dimension is important in relation both to "More effi-cient energy use and transport", and to "Non-toxic and resource-efficient

cyclical systems". Both these strategies emphasise instruments/measures resulting in more

efficient energy use. The energy and electricity taxes are considered to be

the most cost-effective and dynamically efficient economic instruments

for achieving more efficient energy use. Electricity-intensive industry,

house builders and energy advisers have all mentioned high energy prices

as being the main incentive for carrying out improvements in energy ef-ficiency.

The management strategy involves many forms of economic support.

These grants/support often consist of compensation or direct funding of

environmental conservation projects. The majority of these are consid-

ered important, but insufficient to achieve the various objectives falling

under this strategy.

The EU emissions trading system and the electricity certificate schemealso operate under the "More efficient energy use and transport" strategy.

In particular, they act together with the carbon dioxide tax to increase the

use of energy from renewable resources.

Three environmental action strategies were identified during the process of defin-ing Sweden's environmental quality objectives (white paper SOU 2000:52). The

aim was that these strategies would help to achieve the environmental quality objectives within a generation.

1) More efficient energy use and transport – mainly to reduce emissions from

the energy and transport sectors and to increase the proportion of energy ob-

tained from renewable sources.

2) Non-toxic and resource-efficient cyclical systems – to reduce the use of

natural resources and reduce diffuse emissions of environmental pollut-

ants, and to create energy and material-efficient cyclical systems.




71

3) Management of land, water and the built environment – to conserve

biodiversity and valuable cultural heritage, protect human health and to

achieve sustainable physical planning and sustainable settlements.

The white paper SOU 2000:52 says the following about the instruments that arespecifically linked to the strategies. The More efficient energy use and transport

strategy mainly involves a combination of informative and economic instruments.

The Non-toxic and resource-efficient cyclical systems strategy largely comprises a

combination of informative and normative instruments, such as producer responsi-

bility, for example. The Management of land, water and the built environment

strategy is mainly based on economic and normative instruments, backed up withinformation. For Non-toxic and resource-efficient cyclical systems a study was also

proposed to examine the scope in the longer term for use of more economic in-

struments aimed at materials use. That study has now been carried out (SwedishEPA, 2004c).

It is also explained that the term "strategy" means the collective resources used

to achieve the stated objectives. "Action strategy" means a combination of meas-ures and instruments. The reason given for the action strategies is that a single

measure may help to achieve several environmental quality objectives, and a single

instrument may create an incentive for many measures throughout the various sec-

tors of society.

In its latest Environmental Objectives Bill ( Bill 2004/05:150), the Government

confirms that efforts to achieve the environmental objectives will continue to focus

on three strategies. This is expressed by saying that "three challenges are particu-larly important". Taken together, the three strategies cover all the environmental

objectives, i.e. the sum of Sweden's aims in the environmental field. Using three

strategies to address the environmental problems allows for different perspectives

and different angles.

The Government Bill mentions that the strategies are based on use of cost-

effective measures in the near and long term that are capable of achieving several

environmental quality objectives or interim targets at the same time and that can

also help to achieve other political goals.

The following are examples of other general aspects given emphasis in relation to

the strategies. Economic instruments are important. Other instruments are also high-

lighted, however.

A coordinated international approach is fundamental to the strategies.

An overall approach and cost-effectiveness are central.

The commitment and involvement of key players is important. General economic instruments and other instruments help to achieve

several environmental objectives at the same time.

Instruments must be coordinated and optimised.




72

Table 5 General description of the three action strategies

Main environmental objectivesconcerned

Characteristic features of the strategy

More effi-cient energyuse andtransport

Reduced Climate Impact

Acidification

Clean Air

Zero Eutrophication

A Good Built Environment

Encompasses all emission targets. Energy and transport policy important.

Marked impact from transboundary

sources, hence the need for interna-

tional cooperation.

Key phrases: improved energy effi-

ciency and renewable energy.

Vision "that Sweden will ultimately base

its entire energy supply on energy from

renewable sources".

Emphasis on the transport sector.

Central to achievement of the emission

targets.

Non-toxicand re-source-efficientcyclicalsystems

A Non-Toxic Environment

A Protective Ozone Layer

Zero Eutrophication

A Safe Radiation Environment


Encompasses chemicals use in particu-

lar, as well as flows of materials and

products throughout their cycles.

Emphasis on better knowledge and

information.

Key concepts: life cycles and ecocy-

cles.

Managing to decouple the use of re-

sources from economic growth.

Integrated product policy is mentioned.

International efforts also important here.

Three strategic areas; production and

consumption and waste disposal will be

non-toxic and resource-efficient.

Managementof land,water andthe builtenvironment

A Rich Diversity of Plant and Animal Life

A Magnificent Mountain Land-scape

A Varied Agricultural Landscape

Sustainable Forests.Thriving Wetlands

A Balanced Marine Environment,Flourishing Coastal Areas and Archipelagos

Good Quality Groundwater.

Flourishing Lakes and Streams


Encompasses sustainable use of land,

water and particularly valuable envi-

ronments and resources, sustainable

physical planning and societal devel-

opment and sustainable regional devel-

opment.

Focus on development of landscape

strategies at county administrative

boards.

The scope for increased use of renew-

able energy sources is central.

Key concept: the resource perspective.

The ecosystem approach is fundamen-

tal. Every decision concerning use of

resources must be evaluated in relation




73

to its effects on the functions and pro-

ductivity of the ecosystem.

Emphasis on involving many actors and

creating local participation.

The need for an in-depth analysis of the

right approach to the strategy is also

mentioned.

Note: Bill 2004/05:150 describes these strategies in more detail. The above table is anattempt to encapsulate and emphasise the characteristic features of the strategies.

4.5.1 More efficient energy use and transport

PROBLEMS

The More efficient energy use and transport strategy contains many importantcomponents in Sweden's efforts to achieve its environmental objectives. The strat-

egy includes greenhouse gas emissions as well as emissions of sulphur and nitro-

gen oxide. A key concept in the strategy is more efficient energy use, but lower

emissions by greater use of renewable energy sources and new technology for

treatment of emissions are also central.

Fundamental problems

There are several fundamental problems. Energy from renewable sources is often

more expensive than that obtained from fossil fuels. Abstraction of energy from

renewable sources is a limited natural resource, as are fossil fuels. Treatmentequipment for nitrogen and sulphur emissions entails extra costs. The fact that, to

date, the demand for energy has largely kept pace with economic growth, and is

also relatively price insensitive, has made it difficult to limit energy consumption.

But if future energy prices remain at a high level (are raised further) it may be ex-

pected that energy consumption will be further reduced. It has been possible toreduce emissions of sulphur and nitrogen thanks to state intervention and the ability

to install treatment equipment, however. It has been, and still is, more difficult to

succeed in bringing greenhouse gas emissions under control. The fact that climate

problems are global adds a further complicating factor at the same time as energy is

of great importance to the global economy. Yet Sweden has been able to mitigate

its growing emissions of greenhouse gases thanks to state intervention in combina-tion with the availability of energy from renewable sources. Sweden has also lim-

ited final use of energy in industry and the housing sector (consumption has not

increased at the same pace as economic growth). This is partly a result of a struc-

tural transition in industry, development of district heating networks and expansion

of nuclear power.

More efficient energy use

As mentioned above, more efficient use is central to this strategy. It is also one of

the cornerstones of the EU climate strategy. One problem with measures whose

main purpose is to reduce energy use is that it is often difficult to estimate the




74

effects of emissions. The outcome is affected by the system limit that is set as well

as the assumed "rebound" effect. An example of the latter is that a change to a

more energy-efficient car may also mean that the car is driven more. Hence, more

benefit is derived from the same energy consumption, but emissions remain thesame. The same example can be used to illustrate the problems resulting from the

chosen system limit. Setting the system limit at the actual change of car will not

give the whole picture. The less energy-efficient car will probably be sold to some-

one else and will therefore continue to produce exhaust emissions until it is

scrapped. The effect should therefore be analysed using "all vehicles on the roads"as the system limit. Notwithstanding the above problems, more efficient energy use

will always yield a given benefit with lower use of resources. Conversely, defined

resource will last longer if the energy it contains is used more efficiently.

Renewable forms of energyAnother central feature of this strategy is greater use of renewable resources. But

this is not necessarily the most energy-efficient solution. One example is an in-

creased use of ethanol as a motor fuel, since the production of ethanol requires

more energy (than petrol and diesel) to be converted from a solid fuel to a liquidone. Under this strategy there are therefore a number of measures that are both in

line with, but also counteract, key aspects of the strategy. In these cases careful

consideration should be given to the direction to be pursued under the overall strat-

egy.

The transport sectorA very important aspect of the strategy is how to control/reduce emissions in thetransport sector. Technically, there are many alternatives to petrol, but they are

more expensive and not entirely without problems (both in terms of resources and

their performance). Since the motor industry is a global one (vehicles are manufac-

tured in many countries and products are sold in an international market), trans-

boundary instruments are attractive.

The international dimension

Pursuit of this strategy is very much influenced by progress in other countries. The

impact of greenhouse gas emissions is global, and emissions of nitrogen and sul-

phur are regional. When economic instruments are linked to this strategy it is there-fore important to consider what can be done jointly within the EU, and also what it

is reasonable for Sweden to do in terms of cost in comparison with other countries.




75

AVAILABLE INSTRUMENTS

The following economic instruments are used under the More efficient energy use

and transport strategy

Economic instruments are used frequently under the More efficient energy use andtransport strategy. Taxes (including certain rights to reduced tax rates), tax allow-

ances and relief, grants and charges are all used. Brief comments are given on each

category below. The following outline contains a certain amount of repetition inrelation to the other synthesis chapters for the four environmental objectives. The

NOx charge, environmentally differentiatedshipping lane dues and landing charges, road

charges for heavy traffic.

Taxes

Tax relief

Grants

Charges

Operate in combination with the EU emissions trading scheme or the electricity certificate

scheme: The general taxes in particular and the tax reduction (SEK 0.005/kWh) for electricity-

intensive industry (PFE) operate in direct combination with the emissions trading and electricity

certificate schemes, i.e. they are aimed at the same actors. All the above economic instruments operate

together under the More efficient energy use and transport strategy, and the main or secondary pur-

pose of many of them is to help to achieve the climate objective.

General:

Energy tax including con-

sumption tax on electricity,

sulphur tax, carbon dioxide

tax.

Specific:

Vehicle tax, differential motor fuel tax,

landfill tax, aviation tax, counterproduc-

tive effect of property tax.

"Klimp" climate investment progreammes, conversion and improved energy

efficiency in public buildings, conversion of individual heating systems, solar

heat/solar cell grants, subsidised public transport, grants for energy crops, car

scrapping premium, grants for market launch of energy-efficient technology.

The PFE programme for improved energy efficiency, installation of biofuel

units and energy-efficient windows, tax treatment of company cars and free petrol, tax exemption of biofuels for motor vehicles, environmental bonus for

wind power, counterproductive effects of: tax relief (in relation to the standard

tax level) for agriculture and fisheries and manufacturing industry, and also

combined power and heat production and tax exemption for shipping/aviation.




76

results of the instruments (evaluations) are still the same, but they are described

from a different angle.

Taxes encourage more efficient energy use (energy tax including the consumptiontax on electricity), as well as increased use of fuels from renewable sources (carbondioxide tax). These taxes are general as well as multi-sectoral, and are also used

within specific areas of the transport sector. The vehicle tax and differential taxa-

tion of motor fuels are examples of this.

A number of general conclusions can be drawn from the survey of existing

economic instruments, which includes an assessment of their long-term effective-

ness. Among other things, it may be seen that the energy and carbon dioxide taxesare cost-effective, since they influence behaviour by putting the same price tag on a

fairly large proportion of Swedish emissions. This causes actors to take that which

they consider to be the least expensive measures first. The taxes are also consideredto be dynamically efficient because they provide a long-term incentive to adapt

production and consumption to take account of the cost imposed on the external

effect (the emissions). But their cost-effectiveness is reduced by the existence oftax rebates. Yet a tax rebate need not reduce cost-effectiveness, provided that the

environmental effects are global. A tax rebate is then offered to avoid carbon diox-

ide leakage, i.e. relocation of industrial operations in another country with lower

environmental standards.

The carbon dioxide tax has been gradually raised since 2000, accompanied by a

lowering of the energy tax. This has encouraged a change-over to energy from

renewable sources. The overall tax burden has been increased on the use of fuelsfor small and large-scale heat production in particular. The tax paid by industry has

remained fairly stable. In an effort to promote efficient combined heat and power

production, taxes on the use of fuels for energy production of this kind were low-

ered in 2004. Tax rises in the housing sector have very much deterred the use of oil

for heating purposes. Calculations have shown that any tax reduction below current

levels will make it financially advantageous to install heating systems that rely on

any fuel other than oil. It is considered that the main effect of the increases in car-

bon dioxide tax over the last few years has been to speed up the pace of conver-sion.

The sulphur tax has made a significant contribution to reducing sulphur emis-

sions but, here too, the Environmental Code has played a part in developments. Thevehicle tax is of a different kind, since it is not general, but instead applies to a

specific measure (it may influence the choice of a new car purchase). Its cost-

effectiveness is therefore lower. It should be added that the purpose of the vehicle

tax was originally to generate tax revenue. Greater differentiation of the tax to take

account of carbon dioxide emissions is considered necessary so as to increase the

incentive for improved energy efficiency, i.e. to encourage more fuel-efficientvehicles, which is one of the cornerstones of the More efficient energy use and

transport strategy. The aviation tax (tax on air travel) is merely a proposal at pre-

sent. Several referral bodies have said that the tax will not yield any appreciable

environmental effects, and that a tax on aviation fuel would have a greater




77

environmental impact. The problem here is that aircraft may then refuel in other

countries with untaxed fuel, which will not reduce emissions overall. The landfill

tax is thought to have somewhat reduced the amount of waste going to landfill,

increased waste incineration, and resulted in slightly higher household waste disposal charges. Developments in recent years have been influenced more by the

landfill ban.

These taxes, and the carbon dioxide tax in particular, act in direct conjunction

with the EU emissions trading scheme, i.e. they are aimed at the same actors. The

instruments have the same objectives and operate in the same way, i.e. they put a price on carbon dioxide emissions. They therefore have the same effect and so a

national carbon dioxide tax causes more action to be taken in Sweden, which re-

duces overall cost-effectiveness in the EU. However, since emission allowances are

allocated free of charge, there is a redistribution of wealth (as compared with a tax)

from the state to participating enterprises. But the cost of emitting carbon dioxide isstill the market price of the emission allowances.

The carbon dioxide tax also operates in combination with the electricity certifi-

cate scheme, being partly aimed at the same actors, and also because they both

encourage increased use of energy from renewable sources. Model calculations and

assessments made by companies themselves both show that the electricity certifi-

cate scheme provides a very powerful incentive for renewable electricity produc-

tion. In the case of combined heat and power production, the electricity certificate

scheme is considered to be the instrument having the greatest impact, whereas thetax has resulted in a high proportion of biofuel use in district heat production. Since

the carbon dioxide tax, the EU emissions trading scheme and the electricity certifi-cate scheme have a marked combined effect in the energy production and other

sectors, an analysis should be made of the combined impact of these instruments.

Charges are used in the energy production sector and the transport sector. The

NOx charge system is considered to be cost-effective for the plants participating in

the system. In general, it is has also been seen as positive that the charge is "re-

funded" to the plants covered by the system. In the transport sector the charges

have only a limited environmental impact and have not been evaluated to any greatextent. Landing charges are an example of a charge which has not had a particu-

larly marked effect because they only exist in a few countries. When more coun-

tries introduce these charges, it is expected that they will have a greater impact on behaviour.

Grants and subsidies exist in the housing sector, the transport sector, the energy

industry and in agriculture and fisheries. Under the "Klimp" climate programme,

grants are awarded to "packages" of measures in various sectors. Grants cannot beregarded as being an effective economic instrument in the long term as long as they

are aimed at negative external effects. Generally speaking, grants should be

awarded to promote action or conditions that cannot be managed by the market.

One example is that of wetlands; see also section 3.5.4 “Subsidies”. Grants are

often more specific to given measures than are taxes, which limits their overall




78

cost-effectiveness. Moreover, grants must be funded out of the state budget,

whereas taxes generate revenues for the state. If grants are used "on top of" existing

taxes, their impact may eventually become less effective. One example is that of

conversion grants for changing over from individual oil-fired or electric heatingsystems. These grants mainly help to speed up the rate of conversion. Projections

show that the present taxes will suffice to bring about these conversions. Energy

advisers have also stressed the risks involved in overuse of grants, since this may

fuel public expectations of support for other energy-related measures, which may

in turn cause people to delay taking action that would save them money. Somegrants are desirable because they have other effects or because of special circum-

stances.The "Klimp" climate investment programme is one example of this, since it

does not award grants for certain kinds of measures, and is primarily intended for

local authorities, which in turn helps to foster local commitment to combating envi-

ronmental problems. It is unlikely that Klimp grants are dynamically efficient, i.e.that they provide a clear impetus for technological development.

Tax relief is available for electricity-intensive industry (the PFE programme forimproved energy efficiency) and in the housing sector (for installation of energy-

efficient windows and biofuel boilers). In addition, biofuel for motor vehicles and

all fuels used in shipping and aviation are entirely tax exempt. The latter exemption

is actually counter to the aim of the UNEP EET strategy, but since the traffic using

these fuels is international and can to some extent choose the country in which it

refuels, it is difficult to tax them. It is not considered that the tax relief available

will have an effective environmental impact in the long term. The aim of the PFE programme for more efficient energy use is both improved energy efficiency in

industry, and also to allow tax relief, i.e. exemption from the minimum tax on elec-

tricity payable by companies under the EC Energy Tax Directive. PFE's contribu-

tion to improved energy efficiency is very much in line with that strategy and the

general desire to increase the pace of energy efficiency improvements. However,

the PFE programme does not possess the right qualities to be dynamically efficient.

Window manufacturers consider that the tax rebate available for energy efficient

windows has had some effect on demand. However, the general view is that energy

prices are the factor most affecting demand. A series of interviews with house

manufacturers revealed that neither customers nor manufacturers were particularlyaware of grants available for solar heating and biofuel systems. To a large extent

manufacturers choose materials and technologies on the basis of statutory stan-

dards. It was also found that customers generally place more importance on interior

design than energy costs when making their final choice of house. As regards tax

exemption for biofuels for motor vehicles, it may be said that developments in thisfield are rapid, several instruments act in combination and it has not been analysed

whether the combination of instruments in use is effective in the long term.

Grants for market launch of energy-efficient technology are difficult to evaluate

from a cost-effectiveness viewpoint. These grants can be justified on the basis of




79

learning curves (a learning curve is needed, during which the technology is devel-

oped). On the other hand, from a macro-economic point of view, the market itself

should arguably decide what investments are to be made. Other results are that the

effect of a technology procurement process is expected to increase when furtherefforts are made to disseminate the product, e.g. by way of information.

DEVELOPMENT POTENTIAL FOR ECONOMIC INSTRUMENTS UNDER THE

MORE EFFICIENT ENERGY USE AND TRANSPORT STRATEGY

As mentioned in the introduction, the original purpose of creating action strategies

was to identify measures to help in achieving several environmental quality objec-

tives, and also to identify instruments capable of creating incentives for taking a

wide variety of measures in all sectors of society. Some current economic instru-

ments in particular operate in this way. The general energy and carbon dioxide

taxes help to bring about measures in several sectors. To some extent, Klimp cli-mate investment grants also result in various types of measures, even though the

decision as to the measures for which a grant is awarded is taken and administered

by public authorities. Other grants, tax allowances and relief are more specific to

certain measures or sectors. They may have a positive effect on several environ-

mental objectives, however, since a measure that reduces fossil fuel use may alsoimpact on other environmentally harmful emissions.

Notwithstanding the positive aspects of using taxes to internalise external ef-

fects, the agencies consider that the potential for future use of energy and environ-

mental taxes is limited. This is because the existing taxes are already having a

marked impact on developments, and also because the EU emissions tradingscheme has limited the scope for using additional national instruments in the "trad-ing" sectors. Some areas are in need of further analysis, however. One is the scope

for raising the energy and carbon dioxide taxes in the sectors not covered by the

EU emissions trading scheme. The analysis should include both the environmental

effect of raising taxes, and also the effect on corporate competitiveness. The analy-

sis should also include an examination of the legal scope for this, particularly bear-

ing in mind the constraints imposed by the introduction of the EU emissions trad-ing scheme. There is also a need to analyse the potential for continued use of taxes,

including energy tax, carbon dioxide tax and other taxes such as the targeted car-

bon dioxide differentiated tax on motor vehicles, in the transport sector.

The survey of instruments reveals that no evaluations have been made of many

of the economic instruments used in the transport sector. The economic instruments

are of varying kinds and to some extent aimed at the same actors. Hence, there is adevelopment potential in analysing the combination of instruments that would have

the most effective long-term environmental impact in the transport sector. Another

important issue arising when analysing transport sector scenarios is the question of

natural resources (in fact the strategy for Management of land, water and the built

environment ). One issue, for example, is the extent to which it is possible to sus-

tainably manufacture biofuels, taking into account land and forest aspects.As mentioned earlier, the international dimension is a key aspect of the More

efficient energy use and transport strategy. The climate problem, which is a global




80

one, and also problems of eutrophication, clean air and acidification, which are

regional, extend over national boundaries. Our terms of reference do not include

describing the instruments used generally by the EU. Nonetheless, we consider the

strategy for More efficient energy use and transport should be included in futureefforts.

4.5.2 Non-toxic and resource-efficient cyclical systems

PROBLEMS

The strategy for Non-toxic and resource-efficient cyclical systems is particularly

concerned with the use of chemicals and streams of materials and products

throughout their life cycle. Key concepts are life cycles and cyclical systems, and

also the necessity of decoupling the use of resources from economic growth. As

under the strategy for More efficient energy use and transport, the latter represents

one of the main challenges ahead.Another similarity with the UNEP EET strategy is the importance of an inter-

nationally coordinated approach. Products are manufactured in and for a global

market, and many companies nowadays are multinational. This means that instru-

ments should be designed to straddle national boundaries. An example of this ap-

proach is the new EU chemicals legislation - REACH.

The white paper SOU 2000:52 stated that the main instruments under this strat-

egy were information and regulations. A more comprehensive description requiresan analysis of economic instruments in terms of their effect in combination with

other instruments such as information and regulations. This has not been carried

out as part of this report, however.




81


The above chart shows that economic instruments are also used under this strategy.However, there are not as many (economic) instruments as under the More efficient

energy use and transport strategy. Some of the instruments (e.g. energy tax, includ-ing the consumption tax on electricity) energy efficiency improvement grants and

PFE) primarily contribute to achievement of resource-efficient cyclical systems

because their aim is that energy should be used more efficiently. Other instruments

are mainly aimed at the Non-Toxic Environment objective. These include the tax

on cadmium in artificial fertilisers, the pesticide tax, charges on car tyres and bat-

teries, and the radon grant.

Non-toxic and resource-efficient cyclical systems

Taxes

Tax relief

Grants

Charges

Operate in combination with the EU emissions trading scheme or the electricity certificate

scheme: The general taxes in particular and the tax reduction (SEK 0.005/kWh) for electricity-

intensive industry (PFE) operate in direct combination with the emissions trading and electricity

certificate systems, i.e. they are aimed at the same actors. The energy tax contributes to resource-

efficient cyclical systems under this strategy. The main purpose of the EU emissions trading scheme

(the climate problem) falls outside the scope of this strategy, as does the main aim of the electricity

certificate scheme (increased production of renewable fuels). All the above economic instruments act

together under the Non-toxic and resource-efficient cyclical systems strategy.

General:

Energy tax, including tax on electricity consumption, sul-

phur tax, tax on cadmium and nitrogen in artificial fertilis-

ers, pesticide tax, landfill tax. See also under Tax allow-

ances for reduced rate ener tax.

NOx charge, batteries charge, environmentally differentiated

shipping lane and landing charge, charge on car tyres.

Grants for improved energy efficiency in public buildings, grants

for disposal of oil waste, radon grants.

The PFE programme for improved energy efficiency in industry, installa-

tion of energy-efficient windows, lower tax on alkylate petrol, tax relief for

agriculture, fisheries, manufacturing industry and combined heat and

power production.




82

The tax on cadmium is one reason for the present low input of cadmium from arti-

ficial fertilisers. But the tax on nitrogen in artificial fertilisers has a limited impact

on their sale. Its indirect effect is thought to be greater, since tax revenues have

gone towards funding information campaigns and advice. The environmental impact of the pesticide tax is considered to be limited. The landfill tax is considered to

have reduced quantities of waste going to landfill and increased the amount of

waste incinerated. Over the last few years the landfill ban has been the main driver

of this trend, however.

DEVELOPMENT POTENTIAL FOR USING ECONOMIC INSTRUMENTS IN

DEVELOPMENT OF THE STRATEGY

The Swedish EPA (2004c) has evaluated the scope for increasing the use of eco-

nomic instrument (particularly taxes) for finite resources and for chemicals. The

agency states in its report that taxes on natural resources or chemicals do not offera general solution to environmental problems. Their effectiveness in each case

must be assessed on its merits. Low taxes in combination with low demand elastic-

ity, and also the exemption regime, explain why taxes have had limited effect. With

chemicals, quantitative regulations may sometimes be more effective. This is be-

cause of the doubts that may exist as to the marginal cost of reducing chemicals usecombined with an often steeply rising marginal damage function above a critical

level. We believe there is limited potential for using economic instruments in this

strategy and that analysis of instruments should include non-economic instruments.

4.5.3 Management of land, water and the built environment

PROBLEMS

The management strategy is about creating sustainable production conditions for

our ecosystems, safeguarding nature and cultural heritage, and promoting sustain-

able use of land, water and the built environment. Central features of this strategy

are thus environmentally friendly agricultural practices, protection of particularly

sensitive environments and resources, as well as conservation of a rich cultural andnatural environment, together with sustainable societal planning and building. An

overall aim is that abstraction of natural resources must be weighed against the

resources available. One example of this issue is the trend in Sweden for increaseduse of biofuels to produce energy, partly as a result of a growing use of economic

instruments. Biomass resources are also used as raw materials by industry. Here, it

is essential that these resources are abstracted in a balanced way, so that the forestenvironment is not eventually degraded. The same applies to construction of new

wind farms, which is expected to result following the introduction of the electricity

certificate scheme. Wind turbines should be built and sited so that the surrounding

environment does not deteriorate.




83


Various economic instruments are also used under this strategy. Most common are

grants of various kinds, such as grants for energy crops, grants for nature conserva-tion and conservation of cultural heritage, funding for long-term land protection,

lake liming grants etc.

With regard to taxes and tax relief, the carbon dioxide tax (and the lower rates

of that tax) are the main instruments operating to increase the use of energy from

renewable sources. The electricity certificate scheme and the EU emissions trading

scheme act in the same direction, that is, they encourage greater use of renewable

Management of land, water and the built environment

Taxes

Tax relief

Grants

Charges

Operate in combination with the EU emissions trading scheme or the electricity certificate scheme: The

general taxes in particular and the tax reduction (SEK 0.005/kWh) for electricity-intensive industry (PFE) operate

in direct combination with the emissions trading and electricity certificate systems, i.e. they are aimed at the same

actors. The energy tax contributes to resource-efficient cyclical systems under this strategy. The main purpose of

the EU emissions trading scheme (the climate problem) falls outside the scope of this strategy, as does the main aim

of the electricity certificate scheme (increased production of renewable fuels). All the above economic instruments

act together under the Management of land, water and the built environment strategy, and the main purpose of

some instruments is to encourage the use of energy from renewable sources.

General:

Carbon dioxide tax (counterproductive unless

biofuels are abstracted sustainably), tax on natural

gravel. See also under Tax relief for lower rate

carbon dioxide tax.)

Water pollution charge.

Grants for conversion in public buildings, solar heat/solar cell grants, grants for energycrops, grants for nature conservation and conservation of cultural heritage, grants for

nature conservation agreements, funding for creation of nature reserves, nature conser-

vation agreements and biotope protection areas, environmental compensation in agri-

culture, government grants for liming of lakes, government funding of fisheries conser-

vation measures.

Installation of biofuel systems in new homes, tax exemption of biofuel for

motor vehicles. Counterproductive: tax relief for agriculture and fisheries

and manufacturing industry, environmental bonus for wind power (unless

concern is shown for the physical environment).

Specific:

Counteracted by property tax

and accrual accounting of

forestry income.




84

energy. In addition to this, there is a tax on natural gravel and a water pollution

charge, the only charge under this strategy.

DEVELOPMENT POTENTIAL

As may be seen from Table 5, this strategy covers many environmental objectivesnot included in our survey of economic instruments. There is therefore insufficient

background material to assess the effects of using economic instruments under this

strategy.

The white paper produced in 2000 (SOU 2000:52) emphasises the importance

of designing financial support for agriculture and fisheries so as to create the

maximum environmental benefit. Progress in the agricultural sector towards achie-ving some of the interim targets under the "Zero Eutrophication" and "Thriving

Wetlands" objectives is too slow. Examples of this are the interim target for wet-

lands and small water bodies. There is thus development potential in endeavouringto improve the extent to which certain interim targets are being met. The system of

grants for creating energy forest and cultivating energy crops should be reviewed.

There is scope for increasing the rate at which land is allocated for long-term pro-

tection of forests. This can be achieved by reviewing the levels of compensation

paid to landowners and the regulations governing accrual accounting of income

from sale of land and compensation received for land-use restrictions, in particular .The Swedish Agency for Public Management has been instructed by the Govern-

ment to evaluate existing nature conservation instruments (nature reserves, biotope

protection areas and nature conservation agreements) and their long-term effec-

tiveness, and also how state-owned forest land can be used to facilitate achieve-ment of the entire Sustainable Forests environmental objective. The evaluation

report is due to be presented by 30 September 2007.




85

5 Survey of instrumentsThe second part of the report presents a survey of existing economic instruments.

The survey adopts a sector-by-sector approach. The sectors are (in order): multi-sectoral, industry, housing, transport and agriculture and fisheries. We conclude

with a summary of other economic instruments. The purpose and design of each

economic instrument is described. This is followed by an account of the evalua-

tions we have reviewed. The effect of the instrument in combination with otherinstruments (particularly the EU emissions trading scheme and the electricity cer-

tificate scheme) is described in a separate chapter. Finally, an overall appraisal is

made, based on the various criteria for assessing the socio-economic effectiveness

of an instrument, as set out in the introductory section.

Each chapter begins with an outline description of energy use and emissions in

that sector. The chapter ends with a table showing the economic instruments usedin the sector and the environmental objectives and action strategies the instrument

is designed to help achieve.

5.1 Multi-sectoral

5.1.1 Energy and carbon dioxide taxes in outline

The carbon dioxide tax has been introduced for environmental reasons.

Energy tax on fuels and electricity was introduced largely to generate tax

revenue. The rise in the tax on oil in the 1970s was justified for supply

reasons. The increase in tax on electricity (green taxation) is explained by

a desire to achieve more efficient use of electricity.

The environmental effect is ultimately dependent on the overall tax level. There has been a shift in the tax burden between the carbon dioxide tax

and the fuel taxes since 2000. The overall energy tax burden has risen

during this period, however.

The present energy tax system is a more effective means of reducing

carbon dioxide emissions than the system existing in 1990.

The energy and carbon dioxide taxes have been fairly thoroughly evalu-ated.

The carbon dioxide tax is dynamically efficient, since it provides a clearincentive to the various players in the market to adapt their production

and consumption to relative price changes.

However, the scope for further use of the energy and carbon dioxide

taxes is somewhat limited. See 4.5.1 under "Development potential". Compared with a trading scheme under which emission allowances are

allocated free of charge, carbon dioxide taxation (i.e. carbon dioxide tax

revenues) constitute a "green" shift in the tax burden, which means that

other distortive taxes can be abolished. Like the carbon dioxide tax, a

trading scheme under which emission allowances are auctioned generates

tax revenue, but is more effective in achieving the objective.




86

Trading schemes where emission allowances are allocated free of charge

have been the most internationally accepted instrument for combating

global warming.

Green taxes have been fairly thoroughly evaluated. The results of thestudies vary, however. Some of them stress the potential for double divi-dends, whereas the results of other analyses (particularly analyses of the

Swedish system) reflect more doubt about these double dividends. We

therefore consider that a further study of green taxation in Sweden is

needed. If necessary, the study should include proposals as to how the

system could be changed.

BACKGROUND INFORMATION

The Energy Tax Act (1994:1776) governs three taxes, viz., energy tax, carbondioxide tax and sulphur tax. The energy tax comprises two kinds of tax, i.e. selec-

tive sales taxes on fuels and tax on electric power. Energy taxes are affected to

some extent by some EC directives. Among other things, Community law contains

provisions governing minimum tax rates that are mandatory for member states.Unless otherwise stated, the following description of energy and carbon dioxide

taxes is largely based on information from the Swedish Tax Agency (2005b).

THE PURPOSE OF ENERGY AND CARBON DIOXIDE TAXES

The energy tax on fuels and electric power has been designed to take account of

energy and environmental policy and also fiscal considerations, the latter often being predominant. The reason given for raising the tax on oil in the 1970s was one

of supply. One of the reasons for the shift towards green taxation in recent years,

including the consumption tax on electricity, has been to encourage more efficient

use of electricity. The carbon dioxide tax on fuels is an "environmentally-related

tax", which means that it has primarily been introduced for environmental reasons.A central development in energy and carbon dioxide taxes over the last few

years has been an increasing emphasis on green taxation, which began in 2001.

Green taxation means that higher environmental taxes are paid back to consumers

and companies, mainly by way of increased personal allowances and lower social

security contributions8

. The aim is to achieve a SEK 30 billion green tax shift overa ten-year period, i.e. between 2001 and 2010. This has involved a sharp increasein tax on fossil fuels, which has been accompanied by a steady fall in the use of

these fuels in the housing and service sectors. A green tax shift of SEK 13.6 billion

had been implemented by the end of 2005.

8 Green taxation means that new or higher taxes are imposed on environmentally harmful activities, and

that these tax revenues are used to lower distortive taxes, mainly on labour. It is hoped that this shift in

the tax burden will lead to increased welfare thanks to a better environment and a more efficient econ-

omy. If the efficiency gains of reducing harmful taxes exceed the cost of the green tax, there is thus a

double dividend. This means that even if the environmental improvement has not been quantified, theeconomy will operate more efficiently and result in a higher standard of welfare.




87

The tax rises imposed to date are increases in the carbon dioxide tax, the en-

ergy tax on electricity, the diesel tax, waste tax, the tax on natural gravel, pesticide

tax, road vehicle tax and petrol tax, as well as the introduction of SEK 0.005 elec-

tricity tax for industry. The taxes that have been lowered are the general salarycharge, the energy tax and the diesel tax for agriculture and forestry. The personal

allowance for income tax has been raised9. The largest items in the green tax shift

are the raised personal allowance, the raised carbon dioxide tax and the raised en-

ergy tax on electricity.

Table 6 Tax increases and reduction as part of the green tax shift, 2001 - 2005.

2001 – 2005 Individuals Companies Total

Total tax increases

SEK billions

9.57 4.05 13.62

Total tax reductions

SEK billions -12.54 -1.13 -13.67

DESIGN OF TAXES

Tax on fuels is usually levied according to volume. However, there are exceptions

for LP gas, coal-based fuels and petroleum coke, which are taxed by weight. Bio-fuels, like peat, are not subject to fuel taxation except when sold or used as motor

fuel or as an additive to motor fuel or as a means of increasing the volume of motor

fuel. Biofuels used to operate motors have been exempt from fuel taxation since

2004. The fuel tax rate is differentiated by dividing products into environmentalclasses, and by taking account of the use to which the fuel is put. According to the

Tax Agency, the environmental classification of fuels will in all probability bereviewed in 2006.

The carbon dioxide tax is not levied on emissions of carbon dioxide itself; it is

payable on the raw materials, even though it is intended to reduce carbon dioxide

emissions. Emissions of carbon dioxide from combustion/incineration are mainly

due to constituents in the fuel. Although, formally speaking, it is the raw materials

that are taxed, in practice the tax is imposed on carbon dioxide emissions, since thecarbon content of a fuel corresponds to the quantity of carbon dioxide emitted. A

separate statutory provision states that if carbon dioxide tax has been levied on afuel other than fuels taxed as petrol, and if emissions of carbon dioxide from use ofthe fuel have been limited , the tax authorities will grant a refund of carbon dioxide

tax on application in relation to the amount by which emissions have been reduced.

It thus seems that the tax is designed to also work when carbon separation technol-ogy becomes commercially viable. However, it may be that when this technology

is used to a greater extent at some time in the future, it will be possible to design

the tax more simply so that it is not payable on separation of emissions. Fuel and

carbon dioxide tax rates in 2006 are shown in Table 7.

9 A personal allowance is a given sum of money a person is allowed to earn each year that is not subject to income tax.




88

Table 7. Fuel and carbon dioxide tax rates in 2006

Fuel category Tax on fuel Carbon dioxide tax1. Petrol meeting the requirements for:

environmental class 1 SEK 2.86/litre SEK 2.13/litre

Alkylate petrol SEK 1.28/litre SEK2.13/litre

environmental class 2 SEK 2.89/litre SEK 2.13/litre

2. Petrol other than the above SEK 3.56/litre SEK 2.13/litre

3. Heating oil, diesel heating oil, paraffin etc that:

has a marking agent added or produces less than 85per cent distillate by volume at 350°C

SEK 739/m3 SEK 2,623/m3

does not have a marking agent added or producesless than 85 per cent distillate by volume at 350°C,belonging to environmental class 1

SEK 1,042/m3 SEK 2,623/m3

does not have a marking agent added or producesless than 85 per cent distillate by volume at 350°C,belonging to environmental class 2

SEK 1,286/m3 SEK 2,623/m3

does not have a marking agent added or producesless than 85 per cent distillate by volume at 350°C,belonging to environmental class 3 or not belongingto any environmental class

SEK 1,609/m3 SEK 2,623/m3

4. LP gas used for:

operation of motor vehicles, ships or aircraft SEK 0/1000 kg SEK 1,357/1000 kg

purposes other than the above SEK 145/1000 kg SEK 2,759/1000 kg

5. Methane used for:

operation of motor vehicles, ships or aircraft SEK 0/1000 m3 SEK 1,116/1000m3

purposes other than the above SEK 239/1000 m3 SEK 1,965/1000m3

6. Natural gas used for:

operation of motor vehicles, ships or aircraft SEK 0/1000 m3 SEK 1,116/1000m3

purposes other than the above SEK 239/1000 m3 SEK 1,965/1000m3

7. Coal-based fuels SEK 315/1000 kg SEK 2,282/1000 kg

8. Petroleum coke SEK 315/1000 kg SEK 2,282/1000 kg

9. Raw tall oil SEK 3,362/m3 -

Source: www.skatteverket.se

According to the Swedish Agency for Economic and Regional Growth (Nutek)

(2005), 233 companies paid tax on oil, gas and methane every month in 2003. Of

these, 232 could be defined as holding stocks of these fuels. 76 companies paid tax

on natural gas, coal-based fuels and petroleum coke, and 25 companies paid tax on

petrol. 12 companies paid tax on raw tall oil, of which two companies sell raw tall

oil to customers and the remainder only report their own consumption. Accordingto Nutek (2005), 426 companies filed selective sales tax returns for electricity tax

each month in 2003, and 239 filed an annual return the same year.

Tax on electric power is levied on electricity consumed in Sweden, subject to

certain exceptions. Thus, electric power that is exported and consumed abroad is

not taxable. The consumption tax on electricity varies. Electricity tax is SEK

0.201/kWh on electricity consumed in all municipalities in the counties of Norrbot-

ten, Västerbotten and Jämtland in northern Sweden, and also in some




89

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

ear

SEK million

Tax on energy

Tax on fuel

Electricity tax

Carbon dioxide tax

municipalities in the counties of Västernorrland, Värmland and Dalarna (also in

northern/central Sweden). The tax on all other electricity consumption is SEK

0.261/kWh. Electricity tax of SEK 0.005 has been levied on electric power used for

industrial operations (sector code SNI 10-37) since 1 January 2006. Electricity production is exempt from energy tax on the fuels for generation, but has been

covered by the EU emissions trading scheme since 2005.

The Energy Tax Act (1994:1776) provides a large number of exemptions from

energy taxation. These exemptions and reduced rates are shown in detail in Table

13.Figure 4 shows the rise in energy tax revenue during the period 1993 – 2004 at

current prices. Fuel tax revenue peaked in 2000, when it totalled SEK 27,013 mil-

lion. Since then revenue has fallen in nominal terms. Electricity tax revenue has

continued to rise, as has carbon dioxide tax revenue. The latter has more than dou-

bled in nominal terms since 2000, and now adds more to the state coffers than thefuel tax and electricity tax together. Total revenues from tax on energy, includingfuel, electricity and carbon dioxide tax, as well as other production taxes on electric

power (hydropower tax and nuclear power tax) and the charge/tax for decommis-

sion and storage, have also risen continuously.

Figure 4. Energy tax revenues. Total energy tax revenues (from fuel, electricity, carbon dioxideand other electricity production taxes) as well as revenues from fuel, electricity and carbon dioxidetax at current prices, 1993 – 2004.

Source: Statistics Sweden.




90

0

10

20

30

40

50

60

70

80

90

100

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

ear

SEK/kg CO2

CO2 tax, standard

CO2 tax for industry

Figure 5 shows changes in the carbon dioxide tax rate in Swedish kronor per kilo-

gram carbon dioxide in nominal terms. When the tax was introduced in 1991 the

same rate was paid by industry and consumers. However, since 1992 industry has

paid a lower rate of carbon dioxide tax than other emission sources.

Figure 5. Carbon dioxide tax rate, SEK per kilogram carbon dioxide, 1991 – 2006, nominal fig-ures.

Source: Swedish Energy Agency

EVALUATIONS

Impact on other societal goals and the macro economy

Several aspects of energy taxes (green taxes) have been the subject of examination,

both in academic literature and in official reports. We begin our survey of the lit-

erature by describing a number of studies that have analysed the green tax shift,

and also studies that have compared the welfare effect generated by various in-struments. This latter aspect has mainly been studied by analysing the difference

between the carbon dioxide tax and a trading system involving allocation of emis-

sion allowances free of charge when other distortive taxes (e.g. taxation of labour

and capital) exist in the economy.

A report produced by the Swedish Energy Agency and the Swedish EPA

(2004b) studied the consequences of various energy and carbon dioxide taxes in thesectors covered by the EU emissions trading scheme. The calculations were made

using the EMEC (Environmental Medium-term Economic) model developed by the National Institute of Economic Research. The model calculations show relatively

little difference in the socio-economic effect measured as GDP. Broken down into

sectors, the model calculations show that the sectors included in the EU emissions

trading scheme are growing somewhat more slowly (measured as value added)where the carbon dioxide tax is retained. Further analyses have been performed

using the EMEC model (2004). The analysis concentrates on the socio-economic

consequences that would arise between 2005 and 2010 as a result of altering the tax

rates on petrol, diesel, electricity and carbon dioxide as proposed in the Finance

Bill 2005. It was concluded that the proposed tax changes would have relatively

little impact at the macroeconomic level until the carbon dioxide tax was raised to




91

two or three kronor per kilogram carbon dioxide emissions. Those tax levels would

also impact on the economy as a whole, with GDP being just over one per cent

lower than in the reference scenario by 2010 (assuming a tax rate of SEK 3 per kilo

carbon dioxide.)The green tax shift has been studied in depth, in official and other reports, and

by academic writers (e.g., see SOU 1997:11; Ds 2000:73). Bovenberg and Goulder

(1995) use an analytical and numerical general equilibrium model as a framework

for analysing the costs resulting from a green tax shift. Their model suggests that it

is possible to carry out a green tax reform in which the socio-economic costs of thetax system are either held steady or fall. This is possible because a green tax reform

shifts the tax burden from labour and capital to other (untaxed or under-taxed)

production factors, such as emissions. Bovenberg and Goulder (1996 and 2002) use

a similar model to study the optimal level of environmental taxes in the presence of

other distortive taxes, but in the absence of green taxation. Their main conclusionis that the optimal environmental tax in the presence of other distortive taxes (e.g.income tax, employer's social security contributions, taxation of capital) is lower

than the optimal (Pigouvian) environmental tax.10 The explanation given for this is

that other distortive taxes also act as a brake on emissions. Moreover, the authorsfind that more distortive other taxes in the economy are, the lower the optimal

environmental tax rate should be set.11 In these circumstances the actual carbon

dioxide tax can easily be set far too high in relation to the optimal tax.

A green tax shift has often been recommended, since it is considered to help

reduce unemployment (see e.g. Goulder (1994) on the "double dividend" derived

from a green tax shift", or Brännlund and Kriström (1998)), because the green taxrevenues are used to lower employer's social security contributions. But Kolm

(1999) points out that the higher employment rate may be reduced if the lower

social security contributions are accompanied by wage rises (for example, as a

result of salary negotiations between trade unions and employers' associations).

Another factor that may counteract a higher employment rate is indexation of un-

employment benefits, which reduce the incentives for unemployed people to enter

the labour market.

Two main forms of double dividend (Goulder, 1995) are discussed in the litera-

ture: a weak and a strong double dividend. The hypothesis of a weak double divi-dend is that welfare is improved by using green tax revenues to lower harmful

taxes instead of paying them in the form of a lump sum to taxpayers. Most analyses

show that such a double dividend does exist. The hypothesis of a strong double

dividend is that a tax shift between green taxes and distortive taxes results in im-

proved welfare. But there must be a strong double dividend in order to argue that

environmental taxes not only improve the environment, but help the economy to

10 Environmental economists term the optimal environmental tax a " Pigouvian" tax. An optimal envi-

ronmental tax in the absence of other effects usually equals the marginal damage caused by the exter-

nal effect.

11 Distortive taxes lower the general level of economic activity. When economic activity is sub-optimal,

emissions are also lower. Green taxes need not then be so high in order to internalise the externaleffect of emissions.




92

operate more efficiently. There is considerable disagreement as to whether or not

there is a strong double dividend (Markandya, 2005).

The Green Taxation Commission presented its final report in January 1997

(SOU 1997:11). In its analyses, the Commission found that the prospects of doubledividends are very limited in the case of a shift involving a doubling or trebling of

the carbon dioxide tax and a corresponding reduction in employer's social security

charges.

A new analysis, covering theoretical considerations as well as practical experi-

ence of green taxation, has found that the green tax shift policy of recent years inSweden has not resulted in improved welfare. On the contrary, it may be so that

when a green tax shift means that already high and distortive global warming and

energy-related taxes are raised, the result may be a welfare deterioration. The

analysis also shows that a continuing shift towards green taxation will have an

adverse impact on corporate competitiveness and individual welfare (Brännlund,2006). However, the potential impact on welfare resulting from a change in taxshift orientation is also an empirical question.

The Swedish EPA has produced a report (2004b) in which is proposes changes

in energy and environmental taxes in furtherance of future green taxation. Unlike

earlier proposals, the report suggests energy tax increases for manufacturing indus-

try. The report also contains a table showing state revenues resulting from the

green taxation proposals. That table is not reproduced here.

A number of studies compare the welfare effect of the carbon dioxide tax and

that of a trading system involving free allocation of emission allowances in the

presence of other distortive taxes. Parry et al. (1999) finds that the presence ofexisting taxes (such as taxes on labour and capital) increase the socio-economic

cost of introducing a carbon dioxide tax and also of emissions trading, as compared

with the situation where no taxes previously existed. And the cost increase is con-

siderably greater for emissions trading of emission allowances allocated at no

charge, since this instrument does not generate revenue that can be used to achieve

a green tax shift. Hence, the authors estimate that emissions trading (of emissionallowances without charge) will not improve welfare until the environmental dam-

age is greater than approximately USD 18/tonne carbon dioxide. On the other hand,

a carbon dioxide tax will increase welfare as long as the environmental damage

exists. (See also Goulder et al., 1996; Parry and Williams, 1999.) Bye and Nyborg

(2003) arrive at similar conclusions in their model for Norway. Their comparison

between a uniform carbon dioxide tax, a differential carbon dioxide tax and emis-sions trading with emission allowances granted free of charge leads them to rec-

ommend that Norway retain its present system featuring a differential carbon diox-

ide tax. But it is not clear whether Bye and Nyborg's findings can be applied in

other countries, since conditions for a carbon dioxide tax are quite unusual in Nor-

way, where oil and gas fields generate enormous tax revenues. Moreover, their

analysis does not take into account international cooperation on global warming.

Böhringer et al. (2005) analyse effectiveness in the current situation prevailing in

Europe, where different tax and trading systems for carbon dioxide exist side by




93

side.12 They show how a hybrid system entails much higher costs than does a gen-

eral emissions trading system. In addition, it is likely that the present system, to-

gether with the current national allocation plans for emission allowances, discrimi-

nates against those sectors not participating in emissions trading.

Wealth distribution factors

The distributive effects of energy taxes have been analysed by a number of authors.

Bovenberg and Goulder (2000) have studied the adverse impacts of CO2 abate-

ment policies on the profits and stock values in the US. They find there is littleefficiency loss (to society) of compensating companies for the costs they incur

following the introduction of either emissions trading with auctioned emission

allowances or a carbon dioxide tax. This is because climate policy can create huge

revenues compared with the potential loss of profit. Allowing companies to retain a

very small proportion of these potential revenues protects their profits and sharevalue. One way of achieving earnings neutrality studied by Bovenberg and Goulderis to have the state allocate emission allowances free of charge to companies, or to

allow companies part-exemption from the carbon dioxide tax. The proportion of all

emission allowances that must be allocated free of charge (proportion of the carbon

dioxide tax from which companies must be exempt) to achieve earnings neutrality

varies from industry to industry, and is estimated at 15 per cent for the oil and gas

industry, but at only 4.3 per cent for the coal industry. Auctions (tax) revenues

from the remaining emission allowances (the carbon dioxide tax) are valuable,

since they can be used in a green tax shift. The authors also demonstrate that com-

pensation for the carbon dioxide tax in the form of lower corporation tax corre-sponding to the carbon dioxide tax paid by industry substantially overcompensates

companies. This is because producers are able to pass on much of the carbon diox-

ide tax burden to consumers.

Wagner (2005) analyses the impact of environmental policy on unemployment,

and shows that environmental policy and employment policy are complementary

objectives within a given tax range. In their analysis green taxes encourage compa-nies that combat emissions and environmental damage, which creates jobs in those

industries. The author also demonstrates that the stronger the negotiating position

of employees, the higher the optimal tax on emissions is.

Lastly, Bull and Hassett (1994) and Metcalf (1998), among others, have studied the

impact of introducing a carbon dioxide tax on people in different income brackets.

Their main finding is that the effect of carbon dioxide tax tends to be small butregressive. However, the approach of these studies affects the conclusions drawn,

in that the effect of the tax is greater when annual incomes are studied, and smaller

when the focus shifts to lifetime earnings, since the latter are less affected by

temporary differences. It is possible to remedy the regressiveness of the carbon

dioxide by lowering income tax for the poorest and by increasing transfers to those

12 Böhringer et al. also provide access to an online interactive simulation model at

http://brw.zew.de/simac/, which can be used to specify and evaluate various alternatives under the EU

ETS. The model has also been recently extended to include additional EU countries, JI/CDM, the mar-ket power of Russia under Kyota, more recent data etc.




94

households. An appendix to the “long-term study” (2003:2) discusses income and

expenditure resulting from environmental policy. Among other things, it is evident

that a greater share of the costs of environmental policy is generally borne by low-

income groups than by high-income earners and city-dwellers. According to anevaluation performed by the Ministry of Finance (Bill 2003/04:1), by raising the

personal allowance, Sweden has managed to neutralise some of the redistributive

effects regionally and also between households. A white paper evaluating the green

tax shift produced by the Ministry of Finance (SOU 2003:2) shows that the tech-

nique of raising the personal allowance prevents the less well-off from being dis-advantaged by tax rises. This is because a higher personal allowance gives a low

earner more in relation to his salary than a proportional reduction in income tax,

which has a regressive effect. The report finds that even though the green tax shift

has been fiscally neutral, the statistical analysis shows that, on average it has had a

positive effect on the disposable incomes of virtually all households.

Administrative factors

As a whole, the administration of the energy and carbon dioxide tax involve fairly

low costs in relation to revenue. Most resources are needed for the exemption re-gime, under which tax is refunded. See Appendix 1 to the Tax Agency Memoran-

dum.

Nutek (2005) has examined the administrative burden placed on industry by

energy taxation. The study is based on analyses of the requirements made of com-

panies by the Energy Tax Act and on a number of interviews with the companies

concerned. Nutek concludes that the administrative burden imposed by the EnergyTax Act is mainly borne by those maintaining fuel depots, who are also distributors

and suppliers.

Table 8 shows the cost to industry of administering taxes on various fuels and

on electricity. For certain fuels, companies are classified by size, since the time

spent on administration varies depending on the size of company. The number of

companies affected has been extrapolated from a selection of 50 enterprises.

Table 8. Cost to industry of calculating the gross tax payable on various fuels and onelectricity.

Requirement Total time spent

per year andcompany (min-

utes)

Number of

companiesconcerned in

Sweden

Total cost per year

(SEK thousand)

Tax on oil, gas and methane:

Gross tax (large distribu-tors/suppliers)

5,760 9 207

Gross tax (medium-sized andsmall distributors/suppliers)

4,320 42 726

Gross tax (own consumption) 360 182 262

Tax on natural gas, coal-based fuels and petroleum coke:

Gross tax 180 76 55

Tax on petrol:

Gross tax 1,080 25 108




95

Tax on raw tall oil:

Gross tax (manufacturingplants)

360 10 14

Gross tax (suppliers) 720 2 6Tax on electric power:

Requirement for calculation ofgross tax (large producers withdistribution and large distribu-tors)

9,000 20 724

Requirement for calculation ofgross tax (medium-sized pro-ducers with distribution andmedium-sized distributors)

2,160 246 2,161

Requirement for calculation ofgross tax (small producers withdistribution, small distributorsand small producers with con-

sumption of their own)

2,040 399 3,313

Source: Nutek (2005).

Other evaluations

Energy taxes have been examined extensively in a white paper (SOU 2003:38).The main conclusion of the study was that, since all business operations face com-

petition, legally speaking, all business operations should be treated equally for

energy tax purposes.13 The proposals are founded on the contention that it should

not be possible to classify the tax system as a state subsidy under EC law, and that

the system should also maintain the competitiveness of trade and industry. The

energy tax system proposed by the white paper included the maintenance of a di-vide between energy taxation for trade and industry and energy taxation for indi-

vidual consumers. Other features were that industry should only be burdened withenvironmentally-related taxes (the carbon dioxide and sulphur tax), that the carbon

dioxide tax rate for industry should initially be set at SEK 0.19 per kg CO2, that a

general cap on the tax levy should be introduced for all energy-intensive compa-

nies, that the previous delimitation of the sectors entitled to reduced-rate taxes

should be abolished, and finally, that the energy conversion sector should be taxed

in line with the rest of trade and industry. The Swedish Energy Agency (2005a) has

evaluated proposed changes to the energy tax system based partly on the white

paper recommendations. One difference is that district heat production remainssubject to carbon dioxide tax. Among the conclusions are that the proposed energy

tax system improves the competitiveness of combined heat and power plants. The

abolition of the carbon dioxide tax for combined heat and power plants makes

biofuels less competitive, whereas retaining the tax will have the opposite effect. If

the electricity certificate scheme is included in the analysis, biofuels become amore competitive alternative for combined heat and power plants as well. Lastly,

the analysis concludes that by 2010 the use of fossil fuels is expected to be greater

13 At present manufacturing industry is given special treatment; the rest of industry pays the standardtax rates.




96

under the proposed changes to the tax system. But no new investments in oil or

coal-fired plants are expected.

Some international aspects of the use of instruments to combat global warming

have also been analysed by the Swedish Energy Agency (2003). Its report con-cludes that, based on model calculations, gains derived by way of Nordic coopera-

tion may exceed SEK 100 billion. Cooperation is primarily expected to take the

form of emissions trading instead of schemes involving different national carbon

dioxide and energy taxes. European or global cooperation would increase gains still

further. However, the study does not consider whether emission allowances areallocated free of charge or are auctioned off, and so does not take account of the

effect discussed above, i.e. the scope for a green tax shift. The gain suggested in

the report should thus be seen with this in mind.

The Swedish Energy Agency (2005b) asked Luleå University of Technology to

analyse methodological issues to be considered when evaluating the cost-effectiveness of energy and climate policy instruments. Among other things, thereport concluded that it is more important to analyse the design of instruments and

the incentives they create than to specifically attempt to estimate the cost of the

measures brought about by a given instrument. It is also important that the aim of

the instrument be clearly identified so that goal achievement can be analysed. If the

goal is achieved, it is important that the instrument acts to encourage technological

development. The authors also present a quick guide to analysing the cost-

effectiveness of instruments.Other instruments that have been comprehensively analysed mainly relate to

global warming (carbon dioxide tax, emissions trading). Kontrollstation 2004("Checkpoint 2004") (Swedish EPA and Energy Agency, 2004a) and the back-

ground studies for that report may be mentioned in particular (see Swedish Energy

Agency and Swedish EPA, 2004b). In another report (2003a), the Swedish EPA

analyses numerous climate instruments, including energy and carbon dioxide taxes,

concluding that they have played a major part in reducing carbon dioxide emis-

sions. The Swedish Energy Agency (2006a), which has analysed economic instru-ments introduced in the energy sector since 1990, reaches the same conclusion. Its

analysis primarily compares actual emissions with estimated emissions assuming

that the instruments in place in 1990 have remained unchanged until the present

day. The agency concludes that emissions of carbon dioxide have fallen substan-

tially as compared with the reduction that would have been achieved if the 1990

energy tax regime had remained in place. Industrial emissions are somewhat higherwith the current reduced-rate carbon dioxide tax than they would have been under

the 1990 energy tax regime, however.

EFFECTIVENESS OF INSTRUMENTS

Criteria for assessing the instruments covered by this report were presented in the

introduction. These criteria were goal achievement and cost-effectiveness, the latter

also from a dynamic perspective (technological development). Here we summarise

the discussions above and elaborate in order to assess the instruments in use fromthese viewpoints.




97

The goal achievement of fuel and electricity taxes may be considered to be

good, bearing in mind that the aim of these instruments is primarily fiscal. The fact

that they also yield certain environmental benefits can be seen as a bonus. Fuel tax

can also be considered to be relatively cost-effective as an instrument, since differ-entiating the tax according to environmental classes may be justified for environ-

mental reasons. However, their cost-effectiveness is diminished by the exemptions

for certain industries. These exemptions, together with exemptions from the elec-

tricity and carbon dioxide tax are examined in further detail in Table 13. Finally,

the fuel tax is a dynamically efficient instrument, since it encourages technologicaldevelopment of more fuel-efficient products.

Electricity tax, on the other hand, is only cost-effective within industries and

regions, not between them. This is because it cannot be regarded as cost-effective

to differentiate the tax rate between northern and southern Sweden. This differen-

tiation may be called for on grounds of wealth redistribution or regional policy.One reason that may be given for differentiating between industries, so that manu-facturing industry pays tax at a lower rate of SEK 0.005/kWh, while the service

industry, for example, pays a higher tax rate, is that manufacturing industry faces

foreign competition. The tax also provides an incentive for technological develop-

ment of methods to reduce electricity consumption.

The carbon dioxide tax in its present form and under the present technological

conditions also has a good, albeit somewhat uncertain, level of goal achievement.

Taxes rarely achieve their objectives precisely, but since calculations suggest thatthe general carbon dioxide tax in Sweden has been raised to a level where it no

longer affects emissions, it may be said to have achieved its maximum potentialemission reduction effect. If a tax is too high, its impact is "too great" and can only

be justified by fiscal reasons.

Finally, the tax is a cost-effective instrument insofar as the lower rate of tax

paid by manufacturing industry can be justified by the risk of leakage.




98

5.1.2 Sulphur tax

DESIGN OF THE INSTRUMENT

The tax is levied at a rate of SEK 30 per kg sulphur in the fuel for peat, coal, petro-

leum coke and other solid or gaseous products. Sulphur tax on liquid petrol is lev-

ied at a rate of SEK 27 per cubic metre for each one tenth of a per cent sulphur inthe fuel. When calculating the tax based on the sulphur content, measured as per-

centage sulphur by weight in the fuel, the percentage by weight is rounded up to

the nearest tenth of a per cent. If the sulphur content of the fuel is less than 0.05 per

cent by weight, the fuel is tax-exempt. Fuels used for manufacturing lime, stone

and cement, and in soda boilers in the pulp and paper industry are wholly exempt

from the tax. Diesel and heating oils used for shipping, trams and railways, andalso aviation fuel are exempt from the tax. It is possible to receive a refund of the

tax if sulphur emissions are limited by treatment or if the sulphur is to some extent

fixed in ash or a product. In that case a refund is given in proportion to the quantity

of sulphur thereby not emitted.

ENVIRONMENTAL OBJECTIVES AND STRATEGIES

The sulphur tax mainly concerns Natural Acidification Only, but also has a bearing

on the Clean Air and Good Built Environment objectives, as well as the strategy

for More efficient energy use and transport .

EVALUATIONS

The sulphur tax is estimated to account for 30 per cent of the total reduction insulphur dioxide between 1989 and 1995 (Swedish EPA 1997b). Other factors in-

clude the fact that industry has reduced its process emissions and substantiallylower emissions due to lower permitted levels of sulphur in fuel. Emissions from

shipping have fallen since 1995 thanks to environmentally-related shipping lane

dues (see chapter 3.5.5). Another key factor is the permit application procedure for

industrial operations under the Environmental Code. One effect of the sulphur taxhas been to reduce the sulphur content of heating oils. The sulphur content of light

heating oils fell below the threshold for tax exemption (0.1 per cent by weight)

even before the tax was introduced. Between 1988 and 1989, when the forthcoming

introduction of the sulphur tax was announced, the sulphur content of heavy heat-

ing oils fell from 0.8 to 0.7 per cent by weight. This has in turn played a major part

in reducing emissions. An analysis of sulphur emissions from manufacturing

The sulphur tax is estimated to account for 30 per cent of the total reduction

in sulphur dioxide between 1989 and 1995. The tax has impacted manufacturing industry emissions in three ways:

• manufacturing plants have improved their energy efficiency• refineries have reduced the sulphur content of oil• there has been a limited changeover from heavy to light heating oils.

The effect of lowering the threshold for tax exemption should be followed up.




99

industry between 1976 and 1995 concluded that the sulphur tax has indeed played a

major part in abating sulphur emissions (Hammar and Löfgren, 2001). The sulphur

tax has impacted on emissions from manufacturing industry in three ways:

Manufacturing plants have improved their energy efficiency Refineries have reduced the sulphur content of oil

There has been a limited changeover from heavy to light heating oils

The sulphur tax has acted as an effective means of reducing sulphur emissions

from the fuels that are taxed. The tax has affected energy prices, encouraging a

changeover from heavy to light heating oil, and also substitution of other energy

sources for oil. The sulphur tax has also had a direct impact on the sulphur content

of oil. On 1 January 2002 the threshold for tax exemption was lowered from 0.1 to

0.05 per cent by weight. The hope was that light heating oils having lower sulphurconcentrations than 0.05 per cent by weight would become more competitive. Oils

of this kind have been on the market for some time, but there has been little interest

in them because they have not been able to compete on price terms with light heat-

ing oils containing somewhat higher levels of sulphur.

5.1.3 Klimp (local climate investment programmes)

The grants of SEK 1,040 million awarded to date are expected to reduce annual

emissions by 567,000 tonnes carbon dioxide equivalents and annual electricityconsumption by 340,000 MWh.

Only 86 measures out of the 134 project applications in the first round of grantsincluded the information necessary to calculate grant efficiency, which is one of

the key figures that can be used for evaluation.

Klimp allows considerable flexibility in choice of measures, unlike grant sys-

tems that target specific investments. One attractive feature of Klimp is that funding is only paid to cover a portion of

the "environmentally-related" costs associated with the basic investment in the

project.

The application process at municipal level has a value in itself; it draws the

attention of local officials and politicians to environmental issues and encour-

ages them to identify measures. Local actors are often those most aware of theleast expensive and most effective measures.

One problem with Klimp is the difficulty of measuring the actual effects of the

scheme. Studies point out the risk of overestimating the potential emission re-

duction achieved by a project.

Projects in the "other" category (households and non-energy-intensive industry)

receiving grants based on the assertion that they would not otherwise have beencarried out, may become profitable even without grants just a year or two later if

the carbon dioxide tax is raised.




100

HISTORY AND PURPOSE

Further funding for Klimp was proposed in the Climate Bill (Bill 2001/02:55),

which has subsequently been enacted by Parliament. Funding of SEK 1,040 million

has been allocated for the period 2003 - 2006. The first round of applications took place in 2003.


Funding is governed by the State Funding for Climate Investment Programmes

Ordinance (SFS 2003:262) and by Swedish EPA Regulations and General Guide-

lines on State Funding for Climate Investment Programmes (NFS 2003:13) . As

with the earlier "LIP" (Local Investment Programme) grants, Klimp funding can be

sought by Swedish municipalities. Unlike LIP, county councils and sometimes

companies can submit their own applications. Applications must include an ac-

count of local conditions and emission sources, as well as a strategy for reducingemissions. The strategy should have firm local support and be integrated with othermunicipal planning. It should also include targets based on the national objectives

and an action plan. The action programme should present planned activities and

methods, as well as a plan for monitoring and evaluating the success of the pro-

gramme. One aim is that the criteria for assessing applications should be clearer to

applicants than they were for LIP applications. The guidelines on reporting of ex-

pected environmental effects and environmentally-related investment costs havealso been tightened to make it easy to compare projects with each other and to

monitor and evaluate programmes.

The idea is to award grants for projects yielding the maximum possible effectsto 2050 in relation to the amount of funding, in terms of greenhouse gas emissions,

energy transition and energy saving. Funding is thus intended to serve the long-

term climate objective as well as the interim target by 2008 - 2012. These invest-ments can also be used as a means of influencing behaviour. For this reason, an

information strategy must accompany the measures to be taken. Klimp grants are

not available for measures that are taken in compliance with the law or other regu-

lations, or that fall within the scope of normal activities and would have been car-

ried out in any case.

EVALUATIONSA Swedish EPA report (2006h) describes the scope and anticipated effects of

Klimp. The grants totalling SEK 1,040 million awarded to date have resulted in 72

climate investment programmes involving total investments of SEK 4.7 billion.

Measures taken under the programmes that have so far received grants are expectedto yield an annual reduction in greenhouse gas emissions of 567,000 tonnes carbon

dioxide equivalents. The average lifespan of the measures is 20 years. It is esti-

mated that electricity consumption will decrease by 340,000 MWh annually.

Grant efficiency can be calculated by dividing the grant awarded with the total

difference in carbon dioxide equivalents. This key figure can be calculated per year

or for the lifespan of the project. But grant efficiency does not tell us anything




101

about the cost-effectiveness of the measure. A Swedish EPA report (2004a) con-

cluded that only 86 measures out of the 134 project applications provided sufficient

information to calculate grant efficiency. For those 86 measures the average grant

efficiency throughout the life of the project was SEK 0.12 of grant money per kgcarbon dioxide equivalent, i.e. 8 kg carbon dioxide equivalents per krona of grant.

Taken over their whole lifespan, energy projects appear to yield the greatest emis-

sion reductions per krona of grant.

The above Swedish EPA report (2004a) also estimates the cost-effectiveness of

Klimp grants in relation to carbon dioxide emission reductions. The report con-cludes that only 20 sub-projects (out of the 86 where sufficient information is given

to allow calculation) can be said to be socio-economically profitable in the strict

economic sense.

Under the Klimp Ordinance, Klimp grants may only be awarded for cost-

effective measures that are not profitable in the short term. In order to study themeasures that would have been carried out even without a grant, and the measuresthat may have been brought forward thanks to a grant, the Swedish EPA (2004a)

has estimated the profitability of the various projects. In an economic sense, a pro-

ject that is profitable without a grant would be carried out without a grant, whereas

a measure that only become profitable with a grant may be regarded as having been

carried out as a result of the grant. The Swedish EPA (2004a) has estimated the

current value14 of the 134 sub-projects with and without grants, finding that 20

measures had a positive current value even without grants. Those measures had a

total investment cost of approximately SEK 565 million, of which about SEK 281

million was environmentally-related investment. The measures were estimated toyield a total carbon dioxide reduction of 28.5 ktonnes, and could have been carriedout even without Klimp grants. In that case, the SEK 62 million that has been paid

out in grants for these measures could have been used more effectively on alterna-

tive projects, which would have yielded more overall. Some of these measures

have received grants because they were considered high risk projects in need of

grants to be carried out. In general, energy-efficiency improvements are markedly

more profitable than other types of measures. They usually have lower operating

costs owing to a changeover to biofuels, which are cheaper, or because of lower

energy consumption. In the transport sector there is always an obvious economicgain.

The current value of fifteen sub-projects without grants was negative, but

turned positive with the help of the grant. In terms of strict economic considera-

tions, these projects would not have been carried out without the Klimp grant. It is

interesting that the entire investment cost of these projects (SEK 9.5 million) is

regarded as being environmentally related. This means that the measures in ques-tion were taken purely for environmental reasons, mainly in the energy sector. The

SEK 24 million or so paid out to these projects has resulted in a 22 ktonnes reduc-

tion in carbon dioxide emissions.

14 "Current value" can roughly be described as the total sum of the annual net surplus yielded by the

project during its estimated lifespan, including residual value, all discounted by (in this case) a notionalinterest rate of 4 per cent to obtain the current value.




102

Another way of deciding whether a project is economically profitable is to examine

the payback time. A short payback time suggests that the measure is profitable. In

two cases measures in receipt of Klimp grants have had a payback time of just over

two years. Other measures display great variation (between 5 and 15 years). From astrictly economic viewpoint, some measures are not profitable at all, not even in

the long term.

As may be seen above, the Swedish Energy Agency report (2005a) evaluates

the instruments operating to combat global warming, including LIP. Many of the

comments made about LIP also apply to Klimp. One problem from a cost-effectiveness viewpoint is that calculations are based on average rather than mar-

ginal costs. Low average costs do not always mean low marginal costs. The Energy

Agency report (2005a) also shows that grant efficiency (average LIP grant per

annual kilo reduction in carbon dioxide emissions) varies considerably from one

measure to another. According to the agency (2005a), this suggests that the statecan reallocate funding away from high-cost measures to low-cost measures,thereby achieving greater environmental benefit, without increasing the overall

level of funding. The evaluation also stresses that the LIP scheme has "cost-

effective features". It allows considerable flexibility in choice of measures , unlike

grant systems aimed at specific investments. The agency considers (2005a) that this

surely improves the "grant efficiency".

The Energy Agency (2005a) also considers whether the projects for which mu-

nicipalities have applied for grants are relatively inexpensive compared with thosefor which they have not sought funding. The scheme invites self-selection. LIP

grants have the attractive feature of only being available to cover a portion of the"environment-related" costs associated with the basic investment in the project.

The agency considered it remarkable that no attempt had been made to estimate the

transaction costs of the scheme. They are likely to be substantial.

The evaluation also emphasises that the application process at municipal level

may have a value in itself; it draws the attention of local officials and politicians to

environmental issues and encourages them to identify measures. Local actors areoften those most aware of the least expensive and most effective measures.

The Energy Agency arrives at the general conclusion that "LIP grants as such

seem to be designed in a way that promotes cost-effectiveness to a fairly high de-

gree. The main problems are not so much a matter of the design of the instrument

as such, but rather the difficulty in measuring the actual effects of the scheme.

Another report by the Swedish Energy Agency (2005b) also deals with LIP andKlimp. The agency considers that "a serious problem with grants of this kind is that

contrafactual developments cannot be observed; they must be estimated. This is

made more difficult because it is in the interests of the recipient of the grant, who

may be presumed to possess information that is essential to determine whether a

project or parts of it would have been carried out in the near future even without a

grant, to portray the grant as necessary for implementation of the project. There isthus an obvious risk that the funding authority will overestimate the baseline emis-

sion factor (i.e. the emissions that would have occurred if no grant had been

awarded), and hence also the estimated emission reduction resulting from the




103

grant." The Energy Agency also discusses the problem of raising the carbon diox-

ide tax. Projects in the "other" category (households and non-energy-intensive

industry) receiving grants based on the assertion that they would not otherwise

have been carried out, may become profitable even without grants just a year ortwo later if the carbon dioxide tax is raised.

5.1.4 Grants for market launch of energy-efficient technology

According to the Energy Agency's letter of instruction for 2006, the aim of grantsfor market launch is to accelerate the market launch of new and existing energy-

efficient technology. The maximum market launch grant is 25 per cent of certain

specified costs. Before the grant is awarded, the applicant must, if so requested by

the Energy Agency, show that the grant is necessary and will give the market

launch the intended boost. Funding of SEK 57 million for technology procurement

and market launch was allocated for 2005. However, much of this money was ear-marked for information campaigns and to improve our knowledge of energy con-

sumption in the built environment.

Table 9 Number of projects receiving grants in 2005, by theme area

Theme area 2005

Research 23

Industry 10

Built environment 56

Total 89

Source: Swedish Energy Agency (2006d)

In some cases market launch grants are linked to technology procurement projects

for improved energy efficiency so as to achieve more widespread use of the win-

ning products in the procurement process.

Table 10 Number of ongoing technology procurement projects during 2003 - 2005, bytheme area

Theme area 2003 2004 2005

Transport 1 1 -

Industry 1 1 1

Built environment 12 13 10Other 1 - -

Total 15 15 11

Source: Swedish Energy Agency (2006d)

EVALUATION

The evaluations made primarily cover technology procurement projects in which

market launch grants are often included. By their nature, technology procurement

and market launch grants are difficult to evaluate, since the effects will often only

become apparent after a number of years. It may be hard to know whether the out-

come is due to the grant, or whether it would have been the same even without the




104

grant. The Energy Agency has made a number of follow-up studies of technology

procurement and market launch (2001). These studies primarily identify the prod-

ucts that have come onto the market, and in some cases also include a rough esti-

mate of their technical and economic potential for reducing energy consumption,expressed in TWh or improved product performance. In the Energy Agency's an-

nual report for 2005 measurement of cost-effectiveness includes an estimate of the

project cost of technology procurement in relation to the energy saved. This gives a

very low cost per kWh, and is not intended to serve as a measure of the cost-

effectiveness of a measure according to the definition used in this report for thecost-effectiveness of instruments or measures.

An evaluation performed by Carl Bro (2006) concludes that the current ordi-

nance provides scope for a very broad interpretation of the term "market launch".

Projects are being conducted in this area with the emphasis on improved energy

efficiency in industry and in the built environment and with a view to testing newforms of energy-efficient procurement, energy services etc.

The ÅF Group (technical consultants) has published a report (2004) in which it

presents its experience of technology procurement. One problem is said to be that

the current ordinance (2003:564) acts counter to some of its own purposes. Among

other things, the ordinance provides that grants may not exceed 50 per cent on any

one occasion during the technology procurement process. It is very difficult to

persuade purchasers to finance preliminary studies in this field. It is argued that it

would be simpler if a larger grant could be given in the early stages of a technology procurement process. The ÅF Group identifies a number of key requirements for

successful technology procurement:

Technical potential, i.e. that the technology in question is relevant and

offers scope for development and improvement

There is a market for the technology

The proper preparations have been made

The procurement organisation has a high degree of credibility and works

actively to build confidence

The procurement organisation and purchasing group display commitmentthroughout the entire technology procurement process.

Carl Bro (2006) also points out that the limitation whereby a grant recipient canonly receive €100,000 over a three-year period means that the most committed and

knowledgeable purchasers take part for a time, but that their interest then wanes as

they do not see the same incentive for belonging to a purchasing network, for ex-

ample.

COST-EFFECTIVENESS AND DYNAMIC EFFICIENCY

It is difficult to evaluate the impact of market launch grants from a cost-

effectiveness viewpoint. Calculation of cost-effectiveness in evaluations does not

always include the cost of energy efficiency improvements.




105

Grants for launching new technology on the market can be a highly cost-effective

measure. A grant may be essential to break into the market and to gain the experi-

ence of operations needed to develop the product into a cheaper/technically better

version so that it can ultimately survive in the market without financial support.The emissions trading scheme, the electricity certificate scheme and the above-

mentioned taxes and grants primarily encourage greater use of relatively mature

technology, not the launch of new technology on the market.

AGENCY COMMENTS

The grant scheme can be justified on the basis of the economic theory of learning

curves: If a new technology is to gain a foothold in a market, it must often achieve

a critical mass in that market, with a learning period, during which the product is

developed and becomes even more efficient/effective/cheaper, before finally being

able to stand "on its own two feet", without support. Not all economists agree onthis, however. One reason given for state intervention is also the high level of po-

litical risk in the energy sector. In recent decades a feature of Swedish energy pol-

icy has been changes in objectives and new instruments that are difficult to predict.

Doubts as to future policy can result in a lower level of investment than is socio-

economically efficient.

As mentioned above, a key factor determining whether a market launch grantwill be cost-effective may be the structure of technological development and the

way in which a technology is commercialised: at what stage is financial support

given? Is input received from knowledgeable purchasers? Perhaps it should be

examined whether grants for market launch and technology procurement should beextended to parts of the energy sector other than improved energy efficiency.


and strategies

The tables below list multi-sectoral economic instruments. They also describe the

relationship between the instruments and the environmental objectives and three

action strategies.




106

Table 11 Relationship between the multi-sectoral instruments and the environmental objectives

Reduced ClimateImpact

A Non-ToxicEnviron-

ment

Zero

Eutrophication

SustainableForests

Other objectives

Energy tax on fossilfuels

Use of fossil fuels isindirectly mitigated.

Differentialpetrol taxhelps.

Nitrogen oxideemissions are indi-rectly mitigated.

Fiscal.

Energy systemtransition.

Lower rate taxes forindustrial policyreasons

Consumption tax onelectricity

Presupposes thatmarginal electricityproduction uses fossilfuels. But in the shortterm emissions are notaffected under the EU

emissions tradingscheme*

Presupposes thatmarginal electricityproduction producesnitrogen oxideemissions.

Fiscal.

Lower rate taxes forindustrial and re-gional policy rea-sons.

Energy system

transition.

Carbon dioxide tax Mitigates/reducescarbon dioxide emis-sions.

Nitrogen oxideemissions are indi-rectly limited.

Indirectly coun-terproductive ifbiofuels are notabstracted sus-tainably.

Fiscal.

Lower rate taxes forindustrial policyreasons.

Sulphur tax

Klimp The aim of the pro-gramme is to bringabout measures toreduce greenhousegas emissions.

Grants for marketlaunch of energy-efficient technology.

Encourages the intro-duction of better tech-nology.

*During the current trading period (in the EU emissions trading scheme) reduced emis-sions in the electricity production sector in one country allow a potential increase in emis-sions in another country.

Table 12 Relationship between multi-sectoral instruments and the three action strategies.

More efficient energy useand transport


Management of land,water and the built envi-

ronment

Energy tax on fossil fuels Greater energy efficiency. Resource-efficient cyclicalsystems.

Consumption tax on electricity Greater energy efficiency. Resource-efficient cyclicalsystems.

Carbon dioxide tax Greater use of renewable en-ergy. Counterproductive ifgreater use of renewable en-ergy reduces energy-efficiency.

Indirectly encourages re-source-efficient consump-tion.

Scope for greater use ofrenewable energy.

Counterproductive if biofu-els are abstracted non-sustainably.

Sulphur tax Lower sulphur emissions.

Klimp For specific projects. For specific projects.

Grants for market launch ofenergy-efficient technology

Encourages energy-efficienttechnology.

Encourages resource-efficient technology.




107

5.2 Manufacturing industry and energyproduction

MANUFACTURING INDUSTRY

Figure 6 shows energy consumption in manufacturing industry in 2003 and 2004,

broken down into the various kinds of energy. The chart does not include fuels

(petrol and diesel) mainly used to operate motor vehicles.

Figure 6. Energy consumption in manufacturing industry (SNI 10-37) in 2003 and 2004, by energytype, in terajoules (1 TJ = 3.6 GWh).

Source: Statistics Sweden.

The various fuels offer varying scope for substitution. Technically speaking, it is

fairly easy to substitute the various types of oil (EO 1 and EO 2-5), LP gas andnatural gas for each other in the production process. Natural gas and LP gas are

cleaner fuels and thus give rise to lower particulate emissions, both in the boiler

and in the environment. These fuel types are also preferable from a global warming

viewpoint, since they emit less carbon dioxide than does oil, for example. But LPgas is more expensive than heating oil, and there is a limited supply of natural gas.

So it cannot be expected that all operators will change over to these fuels.By far the largest industrial energy consumer is the pulp and paper industry.

This industry sometimes makes use of up to three kinds of boiler, depending on

whether the mill is integral (with pulp and paper production at the same mill) or

not, and also depending on the type of pulp that is produced (mechanical or chemi-

cal pulp). Biofuel boilers are operated almost continuously using waste from pulp

and paper production. The industry changes between electric and oil-fired boilers,

however, depending on the relative prices of oil and electricity. When the price of

one rises, the industry can quickly change over to heat production using the

0

50,000

100,000

150,000

200,000

250,000

C o al

C ok

e

E O1

E O2 - 5

L P

g a s

N a t ur al

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,

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Types of energy

TJ2003

2004

P el l e

t s , b r i q

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108

cheaper energy form. The food industry employs a similar system, albeit in on a

much smaller scale.

But there are limitations on the substitutability of fuels. For example, coal and

coke used in blast furnaces in the iron and steel industry cannot be substituted.Substitution is possible in subsequent processing of the raw steel, however. In the

1970s oil was fairly heavily contaminated with particles compared with LP gas,

which was the reason for using LP gas in industrial heating ovens and heat treat-

ment ovens. Nowadays oil is cleaner, however, and could be used as a substitute

for LP gas. The reason this is not done is that oil burning produces particularlylarge quantities of nitrogen oxides, which are subject to the NOx charge. Moreover,

LP gas is easier to handle than oil. It would also be easy to replace LP gas with

natural gas. The constraining factor on increased use of natural gas is the availabil-

ity of this fuel. It would also be possible to substitute the fossil fuels used to fire

heating ovens with electricity. This is not done because both the investment costand the operating costs of electric ovens are too high. It may thus be seen that tech-nical as well as economic reasons prevent industry from simply choosing not to use

any kind of fossil fuels.

THE ENERGY PRODUCTION SECTOR

Figure 7 shows Sweden's electricity production. The expansion of nuclear power

in the 1970s can be clearly seen from the graph. Hydropower, on the other hand,

has remained constant. Combined heat and power production has remained fairly

stable, notwithstanding constantly growing use of district heating. However, energy

and carbon dioxide tax were lowered in 2004, following introduction of the elec-tricity certificate scheme in May 2003. As a result of these changes, production atcombined heat and power plants has risen in recent years, although this cannot be

seen from the graph.

Figure 7. Sweden's energy supply 1970 - 2004, not including net electricity exports.

Source: Swedish Energy Agency (2005d).

20

40

60

80

100

120

140

160

180

1 9 7

0

1 9 7 2

1 9 7 4

1 9 7

6

1 9 7

8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

Year

TWh

Condensation power

Combined heat and power

Combined heat and power in industry

Nuclear power

Hydropower and wind power




109

0

10

20

30

40

50

60

1 9 7

0

1 9 7 2

1 9 7 4

1 9 7

6

1 9 7

8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

Year

TWh

Waste heat etc

Heat pumps

Electric boilers

Biofuels, waste, peat etc

Coal, inc. smelter gas

Natural gas, inc. LP gas

Oil

Figure 8 shows fuel consumption trends in the district heating sector. Oil use in

this sector fell dramatically following the oil crisis of 1979 – 1980, being replaced

initially by coal, electric boilers and heat pumps at district heating plants. Sincethen, biofuels, waste and peat have taken over as the main fuels, whereas electric

boilers and to some extent coal, have declined substantially.

Figure 8. Energy input - district heating 1970 - 2004.

Source: Swedish Energy Agency (2005d).

5.2.1 Energy and carbon dioxide tax and their lower rates

There are broad exemptions from both carbon dioxide tax and en-ergy tax on fuels and electricity for manufacturing industry.

The total tax burden borne by manufacturing industry when account

is taken of the tax on fuel and on carbon dioxide is now lower than

the energy tax paid by industry in 1990 before the introduction of

carbon dioxide tax. Industrial carbon dioxide emissions have fluctuated since 1990 and

are not generally lower now than they were in 1990.

When the impact of the tax on industry is evaluated, it is important

to include the international dimension, particularly the likelihood of

carbon dioxide leakage.

It is also important to analyse the combined instruments, including

the EU emissions trading scheme and the electricity certificatescheme.

Several studies have concluded that efficiency is lost by retaining the

carbon dioxide tax in sectors covered by the EU emissions trading




110

scheme since 2005. However, it was suggested during Kontrollsta-

tion 2004 ("Checkpoint 2004") that the carbon dioxide tax should

remain on pure heat production in the interests of energy system

transition, rather than to combat global warming. Model calculations suggest that the Government's tax policy has

played a significant role in the transition from fossil fuels to biofuels

in district heat production

Raising the energy and carbon dioxide tax paid by industries not

covered by the EU emissions trading scheme should be analysed.

The impact analysis should cover the environmental effects as well

as the impact on corporate competitiveness.

TAX EXEMPTIONS AND LOWER-RATE TAX

As may be seen from Table 13, manufacturing industry has been exempted fromenergy tax on fuel, with the exception of petrol, raw tall oil and certain high-taxed

oils. Manufacturing industry pays a reduced-rate carbon dioxide tax at 21 per centof the standard rate.

Table 13. Partial or full exemption from fuel and carbon dioxide tax.

Degree of exemption fromPurpose: Non-exempt fuels

Fuel tax Carbondioxide tax

1. Use for purposes other than as a motor fuelor for heating or in a process where the fuel is

essentially used as a motor fuel or for heating.

100% 100%

6. Use for the manufacture of mineral oil prod-ucts, coal-based fuels, petroleum coke or otherproducts for which the manufacturer is liable totax.

100% 100%

7. Use in the manufacture of taxable electricpower, subject to certain limitations.

High-taxed oils1 100% 100%

8. Use in metallurgical processes2 Fuels except for coal-basedfuels and petroleum coke

100% 100%

9. Use for purposes other than operation ofmotor vehicles in a manufacturing process inindustrial operations

2

Petrol, raw tall oil, high-taxed oils1

100% 79%

13. Use in a manufacturing process in mining

operations for operation of motor vehicles otherthan automobiles, trucks and buses

Fuels except for high-taxed

oils

1100% 79%

1 Heating oil, diesel fuel oil, paraffin etc. without added marking agents and producingat least 85 per cent distillate by volume at 350°C.2 Unless exempt from tax under previous items.

Source: Act of Parliament (2005:1189).

Manufacturing industry also has the "0.8 per cent rule": If, despite the reduction of

carbon dioxide tax to 21 per cent of the standard rate, any company still pays more

than 0.8 per cent of the value of the products it manufactures and sells in carbon

dioxide tax, that company is entitled to a further tax reduction.Tax relief under the "0.8 per cent rule" requires a decision by the Swedish Tax

Agency in each case. The rule applies to fuel and fuel used for certain types of heat




111

supply in industrial manufacturing processes. However, the rule does not apply to

petrol or heating oil, diesel fuel oil, paraffin etc. that does not have an added mark-

ing agent and produces at least 85 per cent distillate by volume at 350°C. Nor is

there is any tax reduction for fuels used to operate motor vehicles.The "0.8 per cent rule" is subject to certain restrictions, however, as regards re-

duction of the carbon dioxide tax. These restrictions are a result of the EU mini-

mum tax requirement. Hence, the carbon dioxide tax cannot be lowered more than

the equivalent of SEK 195/m3 diesel fuel oil or paraffin. The carbon dioxide tax

must also be at least SEK 130/m3 on heating oil, SEK 375/1000 kg LP gas used to

operate stationary engines, SEK 50/1000 m3 natural gas and SEK 40/1000 kg coal-

based fuels and petroleum coke. On average, the reduced-rate tax must always be

at least equal to the minimum tax levels for the fuels concerned.According to the Swedish Tax Agency, 39 industrial companies were granted

reduced-rate tax under the "0.8 per cent rule" in 2004. Figure 9 shows the sectors towhich they belong according to their main 2002 code. Most of these companies

thus represent manufacture of non-metallic mineral products (53 per cent of all

companies in manufacturing industry). Just under 750 companies were granted

reduced-rate carbon dioxide tax in 2004 under the "0.8 per cent rule", of which themajority (around 700) are engaged in greenhouse cultivation.

Figure 9. Number of manufacturing companies (SNI 10 – 37) that have been granted exemptionfrom carbon dioxide tax under the "0.8 per cent rule", 2004.

Source: Swedish Tax Agency

13%

10%

10%

5%

3%

53%

3%

3%

14 Utvinning av mineral

15 Livsmedels- och

dryckesvaruframställning

17 Textilvarutillverkning

21 Massa-, pappers- ochpappersvarutillverkning

24 Tillverkning av kemikalier och kemiska produkter

26 Tillverkning av icke-metalliska mineraliskaprodukter 29 Tillverkning av maskiner som ej ingår i annanunderavdelning37 Återvinning

14=Mineral abstraction, 15=Food and drinks manufacture, 17=Textile manufacture, 21=Pulp,

paper and paper goods manufacture, 24=Manufacture of chemicals and chemical products,

26=Manufacture of non-metallic mineral products, 29=Manufacture of machinery not included

in any other sub-category, 37=Recycling




112

Industrial manufacture of products from mineral substances other than metals is

subject to the "1.2 per cent rule", which supplements the "0.8 per cent rule". How-

ever, the rule does not apply to fuels taxed as mineral oil products. Companies and

fuels eligible for the rule are subject to an absolute maximum carbon dioxide tax of1.2 per cent of the value of the products manufactured and sold. Tax relief is pri-

marily designed to cover coal burning in the lime and cement industry. According

to the Tax Agency, four companies were allowed a reduction of their carbon diox-

ide tax under this rule in 2004.

Specific tax relief provisions also apply to combined heat and power. Since 1January 2004 the entire energy tax and 79 per cent of the carbon dioxide tax on fuel

used for heat production may be treated as an allowable business cost. There is thus

the same tax relief for combined heat and power as for industrial manufacturing

processes.

In addition, several products are exempt from energy and carbon dioxide taxes.These include methane produced by biological processes. Synthetically producedmethane is not exempt, however. Wood fuels sold or used to run engines with si-

multaneous production of heat and electric power at a combined heat and power

plant are also exempt from the tax. Raw tall oil is not exempt. Rape methyl ester

(RME) and ethanol are exempt from energy tax at present.

Tax exemption is virtually ruled out for some fuels. These are petrol and "high-

taxed" oil, viz., heating oil, diesel fuel oil, paraffin and others.

Electricity used for chemical reduction or in electrolytic processes is exemptfrom electricity tax. Other exemptions include electricity used in the manufacture

of mineral oil products, coal-based fuels, petroleum coke etc, electricity consumedduring transfer of electric power on the electricity grid performed by the operator

responsible for grid management in order to maintain grid function, and use in

metallurgical processes or in the manufacture of mineral products, provided that

the materials used in the process have been chemically changed or their inner

physical structure altered. Power consumed by the taxable entity's industrial manu-

facturing process, if the entity is taking part in a PFE energy-efficiency programmefor energy-intensive industry, or power received by a tax-exempt user, is exempt

from the rule.

THE ADMINISTRATIVE BURDEN OF TAX RELIEF AND EXEMPTION

Tax refunds are generally the most resource-demanding aspect of administering theenergy and carbon dioxide tax. See Appendix 1 "Tax Agency Memorandum" for

more information.

Nutek (2005) has estimated the administrative burden for companies applying

for exemption from the energy and carbon dioxide tax. However, compared with

the general administration demanded of companies by the tax system, which is

illustrated in Table 8, the cost of administering tax exemption is relatively low.




113

EVALUATIONS

Numerous evaluations of the taxes on fuel, electricity and carbon dioxide are dis-

cussed in section 5.1.1, and that discussion is not repeated here. However, several

of the evaluation reports particularly address the industrial and energy conversionsectors. The results of those analyses are presented below.

The Swedish EPA (2003f) provides summary data on carbon dioxide emissions

in the energy supply and industrial sectors in the 1990s and early 2000s. Carbon

dioxide emissions from energy production have fluctuated sharply during the pe-

riod, and have exceeded the level in 1990 more years than not. The report also

analyses the impact that instruments to combat global warming may have on en-ergy supply and on energy-intensive industry. Among other things, it concludes

that both the use of biofuels and energy consumption by these industries will con-

tinue to increase. But it is worth noting that a number of changes in instrumentshave been introduced since 2003. Thus, the Energy Agency (2005c) has analysed

what impact the instruments in place in 2005, and particularly the carbon dioxide

tax, have on fuel choice and production volumes in combined heat and power pro-duction. MARKAL model calculations suggest a substantial rise in combined heat

and power production under the system of instruments in 2005, as compared with

the 2002 system, and that fossil fuel use will increase. However, the outcome is

entirely dependent on the assumed price of fossil fuels, biofuels and emission al-

lowances. Both the electricity certificate scheme and the EU emissions trading

scheme promote the use of bioenergy, and the report therefore does not consider

that the carbon dioxide tax is having any short-term impact on the use of biofuelsin combined heat and power production. In the long term it is thought that the car-

bon dioxide tax will increase the use of biofuels somewhat.MARKAL-Nordic model calculations indicate that the carbon dioxide tax has

not reduced industrial emissions as compared with 1990, since the energy tax in

place in 1990 was somewhat higher than the current reduced-rate carbon dioxide

tax. But when the impact of the tax on industry is evaluated, it is important to in-

clude the international dimension, particularly the likelihood of carbon dioxide

leakage, which means that a higher tax rate and hence lower emissions in Swedenresult in a corresponding rise (or higher/lower emissions, depending on the envi-

ronmental performance of the industrial operations) abroad. In practice, this meansthat production will be relocated abroad. Model calculations made by the Energy

Agency (2006a) also suggest that prevailing fiscal policy has played a major part in

the transition from fossil to biofuels in district heat production. But it is not clear

whether the same result could have been achieved using the instruments in place in1990. Tax policy has also brought about a changeover from fossil fuels to biofuels

at combined heat and power plants.

A substantial number of studies conclude that there is a loss of efficiency in re-

taining the carbon dioxide tax for the sectors covered by the EU emissions trading

scheme. According to a study by Hill et al. (2005), calculations show that the gain

made by abolishing the carbon dioxide tax would be greater than the loss of taxrevenue. Brännlund et al. (2005) conclude that introduction of emission allowances




114

and retention of the carbon dioxide tax will increase production costs, which will in

turn reduce the use of other raw materials and add to unemployment. That study

also draws attention to the fact that higher electricity prices resulting from the EU

emissions trading scheme are the main cause of cost increases in the pulp and paperindustry, for example. "Checkpoint 2004", Interim Report 2, reached the same

conclusion. However, it was said there that further use of instruments in the sectors

covered by emissions trading can be justified by the fact that other societal goals

will also be fulfilled. One such goal is the energy policy objective of increasing the

percentage of energy from renewable resources in the Swedish energy system. Thereport therefore also proposes that the carbon dioxide tax be abolished for manu-

facturing industry and retained for pure heat production. It is proposed that the

carbon dioxide tax also be abolished for combined heat and electricity production,

on certain conditions. A study by the National Institute for Economic Research

(2003) also concludes that there is a societal gain to be derived by changing overfrom a national carbon dioxide tax to an international carbon dioxide emissionstrading scheme.

Finally, Luleå University of Technology and the National Institute for Economic

Research (2005a) have analysed the cost-effectiveness of the carbon dioxide tax in

light of the fact that the tax is differentiated for different sectors. Manufacturing

industry in particular pays a lower rate of tax. The analysis concludes that, al-

though it is difficult to determine the cost-effectiveness of an instrument with abso-

lute certainty, the carbon dioxide tax appears to be a cost-effective instrument.

There is scope for improvement, however. One recommendation made by the au-thors is to adhere to the "one end, one means" principle, which they argue reduces

uncertainties about the instruments used to combat global warming, which can in

turn be expected to increase investment made to reduce carbon dioxide emissions.

There may also be a need for additional instruments to encourage technical devel-

opment.

AGENCY COMMENTS

In addition to environmental impacts, these taxes may play a key fiscal role. Before

abolishing the carbon dioxide tax in the sectors (or part-sectors) covered by the EU

emissions trading scheme, it must first be ascertained how the loss of tax revenuecan be financed so as to cause the fewest possible additional distortive effects in

the economy. The ideal solution would be to auction off emission allowances to the

companies covered by the trading scheme. This is not possible under current EUregulations, however.

The electricity tax is considered to work satisfactorily. The tax does not have

an explicitly environmental purpose. Insofar as electricity consumption may be

said to give rise to negative external effects, e.g. in the form of doubts that supply

will be able to meet demand, or pressure to resort to non-environmentally friendly

electricity production to meet increasing demand, the tax is not distortive. If, on theother hand, the tax is raised more than is justified from an environmental view-

point, then, like all other taxes, it too will result in further distortion of the




115

economy. It is the demand elasticity of electricity in relation to labour, for example,

that determines whether tax on electricity or tax on employment causes the greatest

distortion of the economy. This is an empirical issue, which could be further stud-

ied.




116

5.2.2 Financial support for wind power, including theenvironmental bonus

In addition to the electricity certificate scheme, financial support isavailable for wind power (market launch grants and environmental

bonus for wind power).

The purpose of this funding is to promote the market development

of wind power in Sweden.

The funding has not been evaluated.

However, the overall view of the agencies is that this funding does

not make an appreciable contribution to cost-effectiveness in rela-tion to environmental objectives or the aim to increase the use of

electricity from renewable sources. It does improve dynamic effi-

ciency, however. But since this support exists solely for wind power, it has an adverse impact on cost-effectiveness.

HISTORY AND PURPOSE

When the electricity certificate scheme was introduced, it was realised that specific

measures were needed for wind power. During the committee stage of the Energy

Policy Bill (2001/02:143, bet. 2001/02:NU3, rskr. 2001/02:113) a number of spe-

cific measures for wind power were adopted. These covered market launch of wind

power, a wind power planning target and operating support for wind power, knownas the "environmental bonus". The first and last of these measures are to be re-

garded as economic instruments.

DESIGN OF INSTRUMENTS

The purpose of grants for technical development and market launch of wind

power is to work with industry ultimately to reduce the cost of starting wind power

operations at sea and in mountain regions where there is great wind power poten-

tial. The grant scheme was introduced in 2003, with funding of SEK 350 million

allocated over a five-year period. Grants are intended to substantially increase pro-

duction of electricity from wind power. Enactment of the Wind Power Bill

(2005/06:143, bet. 2005/06:NU21, rskr 2005/06:362) has extended the grant period

to 2008 – 2012, with funding of a further SEK 350 million.Operating grants for small-scale electricity production and the environmental

bonus for wind power have supplemented investment programmes since

1994.When the electricity certificate scheme was introduced, the environmental

bonus was retained as transitional support. The environmental bonus is designed in

the form of tax relief available to those engaged in the commercial supply of elec-tric power generated by a wind turbine. Tax relief ends when total electricity gen-

erated by the wind turbine(s) reaches 20,000 kilowatt hours per installed kilowatt

according to the rated output of the generator.




117

When the environmental bonus for wind power was retained in 2003, it was SEK

0.181/kWh. However, it was decided that the bonus would be tapered. Tapering

began in 2004, with a reduction to SEK 0.12 /kWh for terrestrial wind power and

SEK 0.17/kWh for marine wind farms. In 2005 the support was SEK 0.09 and SEK0.16/kWh, respectively. Parliament has decided that the environmental bonus for

terrestrial wind power is to be phased out completely by 2009, by which time the

environmental bonus for marine wind farms will be SEK 0.12/kWh.

EVALUATIONS

Grants for technical development and market launch have not been evaluated, nor

has the environmental bonus.

AGENCY COMMENTS

A planning target of 10 TWh electricity from wind power by 2015 has been

adopted by Parliament, although there is no production target. Support is given to

renewable electricity production (for which there is a consumption target) underthe electricity certificate scheme. The agencies' view is that the extra financial

support available for wind power means that this form of electricity generation

probably entails a greater cost to society than other electricity production from

renewable sources. It is difficult to identify an environmental objective that can

only be achieved with the help of wind power, and the cost-effectiveness of wind

power in relation to the climate objective, for instance, is doubtful. Goal achieve-ment of the climate objective is also dubious, since this form of support does not

limit greenhouse gases, which are the real problem in the environmental objective.Market launch grants, on the other hand, are clearly aimed to promote new

technology, which has a positive effect on their dynamic efficiency. But since the

grants are not available for technologies other than wind power, there is a great risk

of spending too much on wind power in comparison with other technologies, whichis negative in cost-effectiveness terms.

5.2.3 Programme for improved energy efficiency (PFE)

One aim of PFE is to maintain competitiveness – not to burden Swedish

industry with higher tax than other countries.

Another aim of PFE is to improve the efficiency of electricity use by participating companies.

The direct environmental effects of PFE may be assumed to be limited incomparison with other economic instruments (taxes, emissions trading

and electricity certificates).

The environmental impact of PFE has not been evaluated.

The loss of tax revenue (reduced-rate electricity tax) totals some SEK

150 million. The economic effects on competitiveness are limited, but

nonetheless constitute a degree of compensation. The impact on competi-tiveness has not been evaluated.

Early studies point out that cost-effectiveness can be questioned if the




118

objective is to improve overall energy efficiency.

The design of the programme, with the same required return for all nec-

essary measures (Payback < 3 years), does give some cost-effectiveness

improvements at participating companies, however . Participating companies consider that PFE sharpens the focus on meas-

ures to improve energy efficiency.

The agencies' view is that PFE is not a cost-effective way of achieving

the Reduced Climate Impact objective. It is also difficult to estimate thedegree to which PFE helps to achieve this goal. But the fact that PFE

helps to improve energy efficiency is very much in line with Swedish en-

ergy policy. Measures taken under PFE and the EU emissions trading

scheme can complement one another. No conclusive assessment of the

impact of the programme can be made since it has not yet been evalu-

ated.

HISTORY AND PURPOSE

The reasons for using long-term (voluntary) agreements as an instrument have

changed during the time that Sweden has employed this instrument. The focus hasshifted from improved energy efficiency and abatement of greenhouse gas emis-

sions to greater efficiency in electricity use while maintaining competitiveness.

When the Ministry of the Environment (then the Ministry of Trade and Indus-

try) proposed long-term agreements in 2001, the emphasis was on improved energy

efficiency and other measures to reduce greenhouse gas emissions. The aim of the

programme was to cost-effectively reduce greenhouse gas emissions and therebyhelp to achieve the Swedish climate objective.

Following the Energy Tax Directive and the review of the state subsidy of en-

ergy taxation of industrial operations, the emphasis of the proposed programme for

improved energy efficiency at energy-intensive companies shifted to measures to

achieve better efficiency in the industrial use of electricity. This change of direc-

tion happened partly because the emissions trading scheme was expected to be an

effective instrument of climate policy, and also because use of the right to exemp-tion from the minimum tax rate on electricity stipulated by the directive should

primarily be combined with requirements for measures capable of increasing the

efficiency with which energy-intensive companies use electricity.The reasons eventually given for introducing PFE (the programme for im-

proved energy efficiency) in the act (2003/04:170, bet. 2004/05:NU7, rskr.

2004/05:90) were that introduction and implementation of energy managementsystems, introduction of other practices to improve energy efficiency in day-to-day

operations and more extensive action going beyond what is feasible in terms of

corporate profitability, require economic incentives. These were created by exemp-

tion from the electricity tax of SEK 0.005 /kWh. A further reasons was that many

of the Swedish companies concerned operate in a global market, with competitors

in the EU and elsewhere.




119

DESIGN OF INSTRUMENTS

The programme for improved energy efficiency, which began in 2005, is aimed at

manufacturing companies that are energy-intensive, use electricity in their produc-

tion processes and may be presumed to be able to implement the measures required by the programme. A company is defined as energy-intensive if it meets at least

one of the following two criteria:

1) The cost of energy purchased from external sources or generated inter-

nally totals at least three per cent of the value of the products manufac-

tured by the company.2) The company's energy, carbon dioxide and sulphur taxes total at least

0.5 per cent of the company's value added.

All or part of a company may participate in the scheme.

The programme for improved energy efficiency lasts for five years. Over the first

two years the company must:

introduce and be certified in accordance with a standard energy manage-

ment system;

carry out a survey and analysis in greater depth than that described in thestandard for energy management, and use it as a basis for drawing up a

list of measures to be taken to improve energy efficiency and efficiency

of electricity use. Measures with a payback time shorter than three years

must be implemented. The list is submitted to the Energy Agency; implement procedures for purchasing equipment with high electricity

consumption (more than 30MW/year). When new equipment is pur-

chased, the company must tend more to choose energy-efficient productsand make purchases based on calculation of life cycle cost (LCC);

introduce procedures for planning, modification and renovation for

analysis and evaluation of the impact of various solutions on the com-

pany's energy consumption.

Over the following three years the company must:

implement the measures on the list submitted to the Energy Agency;

continue to apply the energy management system that has been intro-

duced and the purchasing and planning procedures;

demonstrate the effect the purchasing procedure has had at the company;and

assess the impact the planning procedure has had.

The measures to improve electricity efficiency should yield an efficiency im-

provement essentially equivalent to that which the company would have achieved

if a minimum tax rate in the region of €0.5/MWh had applied instead. Although the

programme concerns electricity, a general assessment of the company's energy

performance will be made. All companies must implement and be certified for an




120

energy management system, which requires that companies take account of all

energy aspects. The certification body ascertains that all types of energy are

checked.

ADMINISTRATION

PFE is administered by the Energy Agency, which deploys about five of its staff on

PFE, equivalent to 2.5 full-time positions. The agency is the regulatory authority

for PFE and is responsible for

Drafting regulations

Providing information about PFE

Accepting and processing applications and deciding on participation inthe programme

Accepting and scrutinising reports submitted by companies

Monitoring the results of the programme Exercising regulatory control

The cost to the agency of administering PFE in 2004 totalled approximately SEK

9.4 million; the cost in 2006 is expected to be about SEK 3.5 million.

PFE also entails administrative work for participating companies. Four of the

companies interviewed by the Energy Agency have taken part in PFE. Three of

them thought that participation entailed substantial administration (particularly the

part concerning certification of the energy management system). Administration isexpected to diminish following certification.

Participating companies

In February 2006 there were 126 participating companies, operating at 270 produc-

tion sites. Most of the companies belong to the pulp and paper industry or run

sawmills and other timber operations, as may be seen from Figure 10.The Energy Agency has had an analysis performed of the number of companies

that are eligible for participation in PFE, i.e. that are energy-intensive according to

the PFE definition, and the sectors in which they operate. The analysis shows that

between 1,150 and 1,300 companies are eligible to participate in the programme

for improved energy efficiency. They represent about 2.4 per cent of all industrial

companies in Sweden. Together they consume approximately 42 TWh of electric-ity each year, which represents about 75 per cent of all electricity used by industry.

Many of the companies belonging to PFE also take part in emissions trading.




121

Participating companies by sector

47

27

19

9

7

76 4

Pulp and paper manufacture

Sawmills and manufacture of wood products

Manufacture of chemicals, chemical

products and plastics

Food and drinks manufacture

Steel and metal production

Mining, ore refining

Other

Mineral products

0

5

10

15

20

25

30

35

40

45

1 2 3

Companies

participating in PFE

account for 29.4 TWh

of the electricity

taxed at the minimum

rate. The lower rate tax

on electricity represents

SEK 147 Million per year.

Electricity taxed at standard rate2.1 TWh

Tax revenues approx. SEK 500 million/yr

Electricity taxed at minimum rate

34.9 TWh


Tax-exempt electricity

5.3 TWh


Figure 10 Number of companies participating in PFE, by sector

Experience

The electricity consumption of companies eligible to take part in PFE is shown in

Figure 11. The chart breaks down electricity consumption into different electricity

tax bands. Companies taking part in PFE must take certain action to improve the

efficiency with which they use electricity that is taxed at the minimum rate, i.e. the

electricity used in manufacturing processes. Measures taken to reduce the use ofelectricity taxed at the standard rate, i.e. electricity used in offices, warehouses etc,

do not quality as PFE measures. Action taken to improve the efficiency of electric-

ity use that is tax exempt is not included in PFE either. Tax-exempt electricity is

mainly that which is used for chemical reduction, electrolytic or metallurgical

processes, or for certain manufacture of mineral products.

The companies participating in PFE use 29.4 TWh of electricity taxed at theminimum rate. The total electricity consumption eligible for PFE at companies

eligible for PFE was 34.9 TWh in 2002. This means that PFE reaches 84 per cent

of electricity taxed at the minimum rate, which suggests that a good proportion of

eligible companies have joined the programme.

Figure 11 Total electricity consumption at companies eligible for PFE, broken down into tax rates,2002.




122

Electricity consumption by sector

21.7

0.8

2.3

0.4

1.1

2.3

0.3

0.5

Pulp and paper manufacture

Sawmills and manufacture of woodproducts

Manufacture of chemicals, chemicalproducts and plastic products

Food and drinks manufacture

Steel and metal roduction

Mining, ore refining

Other

Mineral products

By far the largest proportion of the electricity consumed by participating compa-

nies (see Figure 12), is accounted for by the pulp and paper industry: 21.7 TWh of

electricity taxed at the minimum rate. The chemicals industry uses 2.3 TWh of

electricity; mineral abstraction accounts for 2.3 TWh.The state loses tax revenue from the companies of around SEK 150 million per

year.

Figure 12 Electricity taxed at the minimum rate used by companies participating in PFE, by sector.

EVALUATIONS

PFE started in January 2005 and so no evaluations have been made of the outcome

of the programme. In addition to official explanatory notes in the legislation, thereis a certain amount of documentation concerning what may be expected of the

programme, however.

The Energy Agency engaged Luleå University of Technology and the National

Institute of Economic Research to study the cost-effectiveness of instruments used

in furtherance of Swedish climate policy. PFE was an empirical application in the

study. The Energy Agency (2005) has primarily viewed PFE as a way of bridging

asymmetries in information within companies, in the sense that engineers and com-

pany management do not communicate sufficiently, but also as a way of compen-sating for the communal nature of information. By this is meant that the incentive

for companies to improve efficiency is too weak, since implementation of newtechnology (at a cost) is also a learning process, from which other companies can

benefit without paying anything to the first company.

The authors also find that even if, as is likely, companies eligible to join PFE

already do a great deal to use electricity more efficiently, PFE can still offer some-thing extra. Aside from the increased focus on measures to improve energy effi-

ciency, account is also taken of the conditions under which participating energy-

intensive companies have to compete. However, it is not clear that the most cost-

effective energy efficiency improvements are the ones that result from the pro-

gramme. Doubts arise because it is generally companies with high anticipated elec-

tricity tax costs that take part in the programme, companies that have most likely




123

already taken a considerable number of inexpensive energy-saving steps. So there

is a risk of inexpensive measures taken by non-participating companies with low

anticipated electricity tax costs not being discovered. At the same time, the uniform

required return results in a cost-effective allocation of measures between participat-ing companies.

The Energy Agency will be making a follow-up study of the energy-saving ef-

fect of all measures reported by companies, as stipulated in the programme regula-

tions. The aim is to gain an impression of the amount of improved energy effi-

ciency (in terms of energy saving) achieved. All measures are classified as "addi-tional" under the programme. In practice, however, there are numerous other fac-

tors affecting the scope and impact of measures to improve energy efficiency on a

company's total energy consumption. Examples are:

Changes in production volumes Changes in product type and quality Structural changes, e.g. company takeovers.

Key figures are reported to the Energy Agency. These are not specified by the

agency; the companies themselves are able to define their key figures. The speci-

fied key figure selected after two years will continue to be reported after the end of

the project period. An example of a key figure is electricity per tonne of paper

produced. Changes in the key figure are to be reported at the end of the period.

Hence, the key figure makes it possible to monitor changes in electricity use in a

given process, company division etc during the course of the programme. Eachcompany is evaluated in light of the conditions under which it operates.

5.2.4 Property tax on hydropower and wind power

Property tax on hydropower has been raised from 0.5 to 1.7 per cent

of the taxable value.

0.5 percentage points of the raise are temporary, and are intended to

fund grants for conversion from heating systems using oil and direct

electricity.

Another reason for the raise is that emissions trading has led to

higher electricity prices and larger profits for electric power compa-nies.

It is proposed that property tax on wind power be lowered from 0.5

till 0.22 per cent of the taxable value.

The main purpose of property tax is fiscal, and its environmental

impact has not been evaluated.

HISTORY AND PURPOSE

Property tax is essentially fiscal, and is levied on properties in the housing and

service sectors, as well as industry. The tax on industrial properties is 0.5 per cent

of the taxable value of the property. The taxable value is set at 75 per cent of the




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notional market value of the property. Property tax assessment takes the form of a

general tax assessment, simplified property tax assessment and special property tax

assessment. The general property tax assessment is carried out every six years for

each class of property. The Finance Bill 2006 (2005/06:1) proposed increasing property tax on wind power. The Wind Power Bill (2005/06:143, bet.

2005/06:NU21, rskr 2005:06:362) lowered property tax on wind power.

PROPERTY TAX ON INDUSTRIAL PROPERTIES

Property tax is levied on industrial properties. "Electricity generation facilities" is a

collective term for taxable properties comprising hydropower plants and undevel-

oped hydropower resources, part-power and substitute power or heat plants and

wind power plants. Industrial back-pressure facilities are not classified as electric-

ity generation facilities; they are declared under "industry".

Property tax on hydropower plants was raised in 2006 by 0.5 per cent to 1.2 percent, with an additional temporary 0.5 point increase from 1.2 per cent to 1.7 per

cent. The temporary increase will remain during financial years 2006 – 2010, and

is intended to fund investment grants for conversion from direct electric and oil-

fired heating systems.

The reason given by the Government for the increase was that hydropower is

cheap to produce. Since large-scale hydropower was developed during the period1945 – 1980, investments have been largely written off and production costs are

low. The rise in property tax constitutes taxation of the "scarcity interest" of eco-

nomically valuable natural resources existing in limited quantities. The Govern-

ment also said that the emissions trading scheme that began in early 2005 hasraised electricity prices and thus boosted power company profits. The Government

determined that neither consumer prices nor power company investment decisionsregarding improved efficiency, environment and safety would be affected by the

change.

It is estimated that the rise in property tax on hydropower will increase state

revenue by SEK 1.43 billion in 2006.

In the Wind Power Bill 2006 the Government also proposed lowering property

tax on wind power from 0.5 to 0.2 per cent of the taxable value. The reason for this proposal was that property tax on wind farms, as with other energy generation

facilities, is based on power output. For financial year 2000, the Tax Agency rec-ommended that wind power should be valued at SEK 6,400 per installed kW. This

results in high property tax on wind farms as compared with other power plants. At

present only nuclear power plants have been allocated a higher value per installed

kW. Since wind farms cannot produce energy continuously, they are treated lessfavourably than other power plants. Reduced-rate property tax is seen as a limited

subsidy.

EVALUATIONS

We have not identified any evaluations of the environmental impact of property

tax.




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AGENCY VIEWS

Although property tax is not specifically intended to have an environmental impact,

it is nonetheless clearly linked to other environmental instruments. Moreover, it

probably has an indirect effect on energy production and hence its environmentalimpact. The main purpose of property tax is to generate income for the state. How-

ever, insofar as the tax is not levied uniformly on different sectors of industry, it

has an environmental effect. Differentiation of property tax gives cause to study its

effects in detail. However, property tax appears essentially to be a "blunt instru-

ment" for achieving environmental objectives as long as the causal link between

the tax rate and potential environmental harm/benefit is not clear.

5.2.5 Tax on nuclear power output

The power output tax on nuclear power plants has been raised fromSEK 5,514/MW and month to SEK 10,200/MW and month, an in-

crease of 85%.

The increase is part of the green tax shift, although another reasongiven is that emissions trading has raised electricity prices and hence

power company profits.

The environmental impact of the power output tax has not been

evaluated.

HISTORY AND PURPOSE

The Tax on Thermal Power Output of Nuclear Power Reactors Act (2000:466) wasamended (2005:963) with effect as of 1 January 2006. On that date the tax was

raised from SEK 5,514 per megawatt and month to SEK 10,200 per megawatt and

month, an increase of 85 per cent.

The tax increase is part of the green tax shift. Another reason given for raising

the tax on nuclear power plants was that electricity price rises resulting from the

emissions trading scheme have also boosted the profits of nuclear power producers.

(Bill 2005/06:1)

Generation of electricity at nuclear power plants relates to the Safe Radiation

Environment objective, particularly in the event of an accident or increased operat-

ing emissions, for example.

DESIGN OF THE TAX ON NUCLEAR POWER OUTPUT

The power output tax is a fixed tax per megawatt, unrelated to the total quantity of

electricity generated using nuclear power. The tax is instead based on the thermal

power output of a nuclear reactor. This basis was chosen instead of electric power

output because the operating permits for nuclear reactors issued by the Government

specify thermal power output.Although the tax is supposed to bear no relation to total output, a rebate of SEK

335 per megawatt thermal power output is given if a nuclear reactor has been non-

operational for a continuous period of more than 90 days. Otherwise the




126

consequences would have been too serious for reactors that are shut down for

lengthy periods.

The Government considers a fixed tax to be preferable, since this means that

tax revenues are not dependent on production. The Government also prefers not to pass the tax on to consumers, which suggests that it does not think the tax has any

effect on marginal electricity production costs. However, efficiency improvements

and increased capacity at existing reactors, which require an increase in the maxi-

mum thermal power output of a reactor, become less profitable than other invest-

ments in power generation. The tax rise is expected to have increased state reve-nues by SEK 1.39 billion in 2006.

EVALUATIONS

The output power tax on nuclear power plants has been evaluated in at least one

report, by Deloitte Consulting (2001), albeit not as a study of the environmentalimpact of the tax. The report, which was produced about one year after the output

power tax had been introduced, found that one result of the tax was that investment

could be presumed to be made in other, more profitable, projects. Diminishing

investment will cause a reduction in overall electricity generation at nuclear power

plants.

AGENCY COMMENTS

The power output tax probably renders nuclear power less competitive, since itscosts are increased. However, it is difficult to see the link between the power out-

put tax and environmental harm caused by nuclear power. There is therefore a riskthat the power output tax will be a blunt instrument for internalising the external

effects of nuclear power.

5.2.6 The NOX charge

Evaluations have shown that the NOx charge is a cost-effective component of

the charges regime, and a complement to emission conditions set in industrial

operating permits. The charge scheme has resulted in a more rapid and cheaper emission reduc-

tion than could have been achieved by means of the more static emission con-

ditions in operating permits.

Nitrogen oxide emissions from around one third of plants subject to the NOx

charge are not governed by conditions. The only factor operating to reduce ni-

trogen oxide emissions from these units has been the NOx charge. Emissions from plants subject to the NOx charge have fallen by about 40% in

relation to the quantity of energy generated since the charge was introduced.

The NOx charge has attracted great interest in other countries.




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HISTORY AND PURPOSE

1 January 1992 saw the introduction of a charge on emissions of nitrogen oxides

from energy production at stationary combustion facilities. This was done in re-

sponse to a proposal by the Environmental Charges Commission. According to theCommission, the aim was to achieve a faster reduction in nitrogen oxide emissions

than was considered possible solely on the basis of existing emission guidelines

and permit application procedures, and also to provide an incentive for cost-

effective emission reductions above and beyond those guidelines. The main reason

for reducing nitrogen oxide emissions was to combat acidification. To start with,

the charge covered boilers and gas turbines having a power input of at least 10 MWand a useful energy output of at least 50 GWh a year. The output limit was re-

moved on 1 January 1996, and the charge threshold was lowered to 40 GWh a

year. At the same time the charge was extended to include stationary combustion

engines. On 1 January 1997 the useful energy output threshold was lowered again,this time to 25 GWh a year. The charge has thus been extended to cover more and

more smaller and smaller boilers.


Under the Environmental Charge on Emissions of Nitrogen Oxides from Energy

Generation Act (SFS 1990:613), the charge is payable on nitrogen oxide emissions

from boilers, stationary combustion engines and gas turbines having a useful en-ergy output of at least 25 gigawatt hours (GWh) a year. A further criterion for li-

ability to the charge is that the energy produced is used to heat buildings, to gener-

ate electricity or in industrial processes. The Swedish EPA has issued regulations(NFS 2004:6) and general guidelines on how to measure nitrogen oxide emissions.

The charge is SEK 40 per kilo of nitrogen oxides emitted, calculated as nitrogen

dioxide, and has remained unchanged since its inception in 1992 (the inflation-adjusted value of the charge has thus fallen over time). The environmental charge

is then refunded to charge-payers in proportion to each production facility's share

of the total useful energy production. The Swedish EPA administers incoming and

outgoing payments.

Hence, under this system, the total amount of charges paid is reallocated be-

tween charge-payers. Operators with low emissions of nitrogen oxides per quantity

of useful energy receive a larger sum back than they pay in, whereas operators withhigh emissions per quantity of useful energy lose under the system. The totalamount of charges paid was SEK 597 million. There were 264 charge returns and

chargeable facilities in 2004. There were 405 production units subject to the

charge. Five of these were gas turbines; the remainder were boilers.

EVALUATIONS

Evaluations (Swedish EPA 2003c and 2004f) have shown that the NOx chargesystem is a cost-effective complement to operating permit emission conditions. The

charge system has resulted in faster and cheaper emission reductions than could

have been achieved using the more static instrument of operating permit emission




128

conditions. Emission levels at most of the facilities subject to the charge are far

below the current maximum levels stipulated in the operating permits. Nitrogen

oxide emissions from around one third of plants subject to the NOx charge are not

governed by conditions. The only factor operating to reduce nitrogen oxide emis-sions from these units has been the NOx charge. Emissions from plants subject to

the NOx charge have fallen by about 40% in relation to the quantity of energy gen-

erated since the charge was introduced. The current level and scope of the charge

keep emissions at a low level. Moreover, they are continuing to fall by around one

per cent a year. The charge has also influenced investment in new production units

and modernisation of existing ones. And it has provided an impetus for developingcheaper and better technology for reducing emissions and continual monitoring of

emissions.

The design of the nitrogen oxide charge, whereby the charges paid in are re-

funded to charge-payers in proportion to their energy production, has been criti-cised. The criticism has been the fact that operations incapable of achieving low

emission levels for various reasons are net contributors to the system in that their

money is transferred to operators with low emissions. The Swedish EPA considers

that, for competition reasons, this approach is preferable to a charge or tax, pureand simple. The system of crediting the charge to low emitters does not mean that

the difference in cost per unit of energy produced between two charge-paying op-

erators is any different from what it would have been if a conventional tax had

been payable. On the other hand, the credit system does result in a lower cost to the

charge-payer than would have been the case with a tax.

Only a small proportion of the sources of Swedish NOx emissions are subject tothe charge. The charge of SEK 40 per kilo nitrogen oxides emitted has remained

unchanged since its inception in 1992. The inflation-adjusted value of the charge

has thus been eroded over time. Nor is it thought that the interim target for emis-sions of nitrogen oxides will be achieved without further action.

The Swedish EPA has published two reports (2004f and 2005e) in which it

proposes that the charge be extended to include a larger proportion of the sources

of Swedish NOx emissions, combined with an increase in the charge.


and strategies

The tables below list economic instruments in industry. The tables also describe therelationship between the instruments and environmental objectives and action

strategies.




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Table 14 Relationship between economic instruments in industry and Swedishenvironmental objectives


A Non-Toxic

Envi-ronment

Zero

Eutrophication

SustainableForests

Other objectives

Fuel tax (largerebates formanufacturingindustry)

Use of fossil fuels isindirectly mitigated.

Nitrogen oxideemissions aremitigated.

Fiscal.

Lower rate taxes forindustrial policyreasons

Energy system tran-sition.

Electricity con-sumption tax(minimum tax onmanufacturingindustry under

the EC directive;PFE companiesare exempt)

Reduces emissionsfrom the Nordicelectricity system, butnot in the near termwithin the EU as a

whole.*

Presupposes thatmarginal electricityproduction pro-duces nitrogenoxide emissions.

Fiscal.

Tax exemptions forindustrial policyreasons.

Energy system tran-

sition.

Carbon dioxidetax (manufac-turing industry+combined heatand power 21%)

Mitigates/reducescarbon dioxide emis-sions.

Nitrogen oxideemissions areindirectly mitigated.

Indirectly coun-terproductive ifbiofuels are notabstractedsustainably.

Lower rate taxes forindustrial policyreasons.


Nitrogen oxidecharge

Nitrogen oxideemissions aremitigated from theemission sourcesincluded.

PFE Reduces emissions

from the Nordicelectricity system.

Harmonisation with

EU regulations.Maintain industrialcompetitiveness.

Operating sup-port Wind Power

Only indirectly, andprovided the electric-ity certificate schemedoes not help toachieve the objec-tive.

Technical develop-ment.


Output tax onnuclear power

Fiscal.

Property tax onindustry

Reduced-rate tax onwind farms.

Fiscal.

Flourishing Lakes

and Streams.*During the current trading period (in the EU emissions trading scheme) reduced emis-sions in the electricity production sector in one country allow a potential increase in emis-sions in another country.




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Table 15 Relationship between economic instruments in industry and the three action

strategies.

5.2.8 Combined effects of instruments in industry

THE CARBON DIOXIDE AND FUEL TAX IN COMBINATION WITH THE

EMISSIONS TRADING SCHEME AND ELECTRICITY CERTIFICATE SCHEME.

The taxes are primarily analysed on the basis of the way they interact with the EU

emissions trading scheme and the electricity certificate scheme.The main function of the carbon dioxide tax is to reduce carbon dioxide emis-

sions, and, as with the energy tax, this is achieved by reducing demand for thetaxed fuels. The trading system has the same purpose, but does not cover all sectors

of the economy. Hence, insofar as the carbon dioxide tax and the emissions trading

scheme do not overlap, they complement one another. The carbon dioxide (and

fuel) tax therefore reduce carbon dioxide emissions from the sectors outside the

emissions trading scheme, whereas the trading scheme reduces emissions from the

sectors it covers. These twin regimes may be cost-effective if other factors, such as

leakage from sectors in which there is competition, require a lower emission allow-

ance price for the trading sectors than the carbon dioxide and fuel tax rate imposes


and transport

Non-toxic and resource-efficient cyclical sys-tems

Management ofland, water and thebuilt environment

Fuel tax (large rebates formanufacturing industry)

Greater energy efficiency. Resource-efficient cyclicalsystems.

Electricity consumptiontax (minimum tax onmanufacturing industryunder the EC directive;PFE companies areexempt)

Greater energy efficiency. Resource-efficient cyclicalsystems.

Carbon dioxide tax

(manufacturing industry +combined heat and power

21%)

Greater use of renewableenergy. Counterproductive ifgreater use of renewable

energy reduces energy-efficiency.

Indirectly encouragesresource-efficient con-sumption.

Scope for greateruse of renewableenergy.

Counterproductive ifbiofuels are ab-stracted non-sustainably.

Nitrogen oxide charge Reduced eutrophication,acidification and cleaner air.

PFE More efficient use of electric-ity.

Resource-efficient cyclicalsystems.

Operating support WindPower

Only if required to ensure thatthe electricity certificatescheme helps to achieve theobjective.

Encourages resource-efficient technology.

Counterproductive ifdevelopmentcauses deteriorationof the physicalenvironment.

Output tax on nuclearpower

Property tax on industry Reduced-rate tax on windfarms.




131

on the non-trading sectors. But the existence of two instruments having the same

purpose does increase the administrative costs when it becomes necessary to estab-

lish a new administrative system for emission allowances.

However, problems arise with the twin systems in the sectors belonging to theemissions trading scheme. Emissions trading companies have not been exempted

from the carbon dioxide tax; they continue to pay the tax and they also take part in

emissions trading. The design of the emissions trading scheme means that the car-

bon dioxide tax here serves a purely fiscal purpose. True, it does help to reduce

carbon dioxide emissions from Sweden, but since this means that Swedish compa-nies can sell more emission allowances to the European market, European emis-

sions will rise correspondingly. One effect of this will be to make Swedish industry

less competitive than its European counterparts. Furthermore, the twin instruments

are not cost-effective, as Swedish companies have reduced their emissions more

than is justified on the basis of the emission allowance price, from a European perspective.

The combined effect of the electricity tax and the emissions trading scheme is

less direct. Apart from the fiscal objective, the electricity tax helps to reduce elec-

tricity consumption in Sweden. Insofar as Swedish electricity is produced using

fossil fuels, and particularly when this takes place at the margin (so that fossil fuel-

based electricity sets the market price), the emissions trading scheme increases the

cost of producing the marginal electricity. The power companies transfer some of

this cost increase to their customers, who then pay higher electricity prices. Thus,the emissions trading scheme may indirectly be said to have a similar effect to the

electricity tax, since both suppress demand. On the other hand, the trading schemeindirectly reduces the impact of the electricity tax when the proportion of the elec-

tricity price consisting of tax falls. If the emissions trading scheme results in a drop

in electricity demand, it counteracts the fiscal purpose of the electricity tax when

electricity tax revenues fall.

The interaction between the carbon dioxide and fuel tax and the electricity cer-

tificate scheme is also indirect. The carbon dioxide and fuel tax reduce demand forfossil fuels, whereas the electricity certificate scheme encourages the introduction

of energy from renewable sources. Insofar as this energy is from non-fossil

sources, the instruments complement each other's objectives.

The interaction between the electricity tax and the electricity certificate scheme

is intricate. Since the statutory demand for renewable electricity production is a

consumption restriction, then, provided it reduces demand for electricity, the elec-tricity tax may help to achieve the objective of the electricity certificate scheme.

Lastly, there is an inherent conflict between the electricity certificate scheme

and the emissions trading scheme. The conflict concerns peat, which qualifies for

electricity certificates but is also included in the trading scheme. The trading

scheme tends to reduce peat burning, and without the electricity certificate scheme,

it would be considerably less profitable to burn peat in Sweden. Another effect ofthe two schemes operating in tandem occurs via the effects of the trading scheme

on electricity prices. As with the electricity tax above, the trading scheme reduces




132

overall demand for electricity, which also serves the aim of the electricity certifi-

cate scheme, viz., to reduce consumption.

SUPPORT FOR WIND POWER IN COMBINATION WITH THE EMISSIONS

TRADING SCHEME AND THE ELECTRICITY CERTIFICATE SCHEME

Support for wind power (environmental bonus, market launch grants, reduced-rate

property tax) is additional to the support given to renewable energy production

methods under the electricity certificate scheme. In all probability this means that

wind power will grow more than it would have done without the support. The vari-

ous forms of economic support also act in combination with emissions trading,

since the trading scheme raises the price of electricity, thereby making wind powermore profitable. Higher electricity prices also mean that the price of electricity

certificates need not be as high to achieve the stated target for renewable electricity

production.

PFE IN COMBINATION WITH THE EMISSIONS TRADING SCHEME AND THE

ELECTRICITY CERTIFICATE SCHEME

In the short term it seems as though the formal part of PFE has no impact on emis-

sions, since greenhouse gas emissions from electricity production are mitigated by

the emissions trading scheme, in which emission restrictions are imposed by the

EU15. However, the combined ability of PFE and the emissions trading scheme to

further environmental objectives has not been the subject of any specific research.But the research that has been carried out suggests that investment in improving

energy efficiency is probably not a cost-effective way of achieving climate objec-tives, and so improved energy efficiency should ideally be seen as an energy policy

end in itself (Ankarhem, 2005).

The official explanatory notes on the legislation (DS 2003:51) point out that the

target group for PFE partly overlaps the emissions trading target group, but thattwo instruments rest on different bases. The trading scheme relates to carbon diox-

ide emissions by industrial operators, and their participation in the scheme is com-

pulsory. The PFE programme for improved energy efficiency is aimed at the en-

ergy consumption of industrial operators, with a view to improving energy effi-

ciency and encouraging environmentally friendly use of energy; PFE requires

companies to take action concerning their energy use. There is no statutory obliga-tion to take part in the programme. In practice, both instruments are aimed at

measures capable of complementing one another. The survey of company energy

use included in the programme provides information about potential efficiencyimprovements, which may also give the company greater scope for effective action

under the trading scheme. (Ds 2003:51).

The official explanatory notes state that the purpose of the electricity certificate

scheme differs from that of emissions trading, and that there is no evidence to sug-

gest that electricity certificates and PFE are detrimental to each other. Moreover, a

15 Any emission allowances that become available owing to efficiency improvements in electricity pro-duction will probably be sold to other countries/operators participating in the scheme.




133

large proportion of the companies belonging to the PFE target group may be pre-

sumed to be exempt from the "quota obligation", whereby a certain proportion of

electricity used must come from renewable sources. New quota regulations apply

as from. 2007. Dependency on electricity will then be determined on a company- by-company basis, not, as hitherto, by sector 16.

PROPERTY TAX IN COMBINATION WITH OTHER INSTRUMENTS

The environmental element of property tax comprises the different tax rates for

hydropower and wind power. The tax is likely to influence behaviour, since it is

not levied uniformly on all sectors.

The purpose of raising property tax on hydropower was to fund the investment

grants introduced for conversion of direct electric and oil-fired heating systems in

residential properties. Another reason mentioned was to claw back some of the

profits made by power companies owing to the emissions trading scheme. TheGovernment does not consider that investment decisions at the power companies

with regard to improved efficiency, environment and safety are influenced by the

tax. If this is true, the tax increase does not act in combination with any of the envi-

ronmental instruments; it may be regarded as a purely fiscal tax. The aim in lower-

ing tax on wind power was to adjust property tax on wind power to take account of

the fact that wind turbines are idle for part of the time. It seems likely that this hasa positive effect on the profitability of wind power, so the lower-rate property tax

acts in the same direction as the other instruments having a favourable effect on

wind power outlined above.

THE OUTPUT TAX ON NUCLEAR POWER IN COMBINATION WITH OTHER

INSTRUMENTS

The output tax on nuclear power is intended to offset the effects of the profits for

the power companies generated by the emissions trading scheme. It may thus be

said that nuclear power is not as profitable as compared with fossil electricity pro-

duction as emissions trading would otherwise have made it.

THE NOX CHARGE IN COMBINATION WITH OTHER INSTRUMENTS

In addition to the NOx charge, the permit application procedure under the Environ-

mental Protection Act or Environmental Code acts as an instrument to reduce NOx

emissions. According to the Swedish EPA (2003c), two thirds of boilers subject to

the NOx charge are also subject to operating permit conditions for NOx. A Swedish

EPA report (2003c) concluded that the charge system quite clearly impacts on the

operations and sectors primarily engaged in energy generation, combined heat and

power and waste incineration. Emissions in these sectors are usually far below thelevels stipulated in operating permits. The permit conditions establish a floor, but

the charge encourages further action. Yet it is difficult to say with absolute

16 Companies using more than 60 MWh el/SEK 1 million in sales value will be completely exempt from

the quota obligation. Gradually rising part-exemption from the quota obligation is given upwards of 40MWh electricity/SEK 1 million sales.




134

certainty that the NOx charge system or the operating permits conditions for NOx

have had the greatest impact on behaviour in other sectors.

5.2.9 Company interviews

The Energy Agency has conducted interviews with five companies representingmanufacturing industry and two companies representing (municipal) energy pro-

duction. The companies represent different sectors and are energy-intensive to

varying degrees. The interview study does not meet scientific selection or represen-

tativeness criteria. However, the views expressed are supported by previous deal-

ings between the Energy Agency and companies in other contexts. The interview-

ees were asked about their company's general energy situation and the instrumentshaving a bearing on their operations. Other questions focused on the impact of

prices and of instruments (energy taxes, emissions trading, the electricity certificate

scheme, PFE Klimp), combined effects and administration, as well as their company's view of future use of instruments.

MANUFACTURING INDUSTRY

The manufacturing companies are major multinationals consuming fairly large

quantities of energy and mainly falling under the following SNI sector codes: 21,

24, 26, 27 or 34. Energy as a percentage of total production costs varies sharply,

from 4 – 5 per cent up to 60 – 70 per cent. Companies for which energy accounted

for a greater share of production costs thought it was more important to reduceenergy consumption in production. Energy costs, particularly those prevailing in

2005 and 2006, were important to all the companies interviewed, however.The energy form most commonly used in production at the companies inter-

viewed is electricity. Other forms of energy used include LP gas, natural gas, oil,

coal, biofuels and district heat. Some companies have changed over to biofuels

(and waste) from coal and oil in recent years. Natural gas might also be of interestto several companies if the distribution network were improved.

Some companies produce a certain amount of electricity themselves; others are

entirely dependent on external suppliers. Most of them sell waste heat to the mu-

nicipal district heating network, or would like to.

Most of the companies do not think they are able to reduce either their energy

consumption in processes or their carbon dioxide emissions to any appreciableextent. Several companies stated that technological breakthroughs are needed forthis to happen in their industry.

The responses to questions on instruments revealed a multitude of viewpoints,

often specific to a given company. A company that makes products that consume

energy has different factors to take into account than a company with energy-

intensive production of products that do not themselves use energy. Some compa-

nies operate in markets where competition is global, some where it is European.

Some do not face much competition. Factors like these influence perceptions of

instruments and the measures that can be taken. Yet most of those interviewed

agreed on the following.




135

Electricity prices currently have the greatest impact on profitability, earn-

ings and investment plans of all energy-related costs. Several companies

point to the link between emissions trading and electricity prices, which

constitute a transfer of wealth from electricity consumers (including in-dustry) to power companies.

Several companies emphasise indirect effects, such as the impact of high

prices for coal, oil and emission allowances on electricity prices, the im-

pact of high electricity prices on development of alternatives, and the im-

pact of the electricity certificate scheme on the price of biomass. Taxes are included via fuel prices in optimisation calculations when

companies are taking production and investment decisions. But several

companies find it difficult to see the logic of "duplicate" instruments such

as emissions trading and the carbon dioxide tax, for example. Taxes are

national and hence disadvantageous to operations in Sweden. Ideally, instruments to tackle climate change should be global. Aside

from the fact that it is limited to the EU, companies were essentially in

favour of the emissions trading scheme, although some were dissatisfied

with the principles governing allocation. Allocation under the emissions

trading scheme should be uniform throughout the EU, and should not pe-

nalise those who have made investments earlier, e.g. in changing over to

alternative fuels or improving energy efficiency.

Several companies said they had thought of relocating production fromSweden to countries with lower energy prices. They did not think that

this would happen overnight, because of the major fixed investments thathave been made. They thought that it would be a gradual process, taking

place over the next 5 – 20 years. Most of those interviewed suggested

this to be indirect consequence of new investments made in countries

other than Sweden. National instruments affect Swedish competitiveness

vis-à-vis other countries, including those in Europe, whereas European

instruments affect global competition. The electricity certificate scheme has little impact on corporate profits. A

degree of competition over raw materials was identified, however, as was

the risk of distorting competition by use of the "quota obligation" to use a

certain proportion of renewable energy.

Companies participating in PFE said that the programme helped to focus

attention on energy use at the company, and that a more structured approach was adopted; in some cases investment finance has also been al-

located. But the overall impression is that energy-intensive companies

had already been endeavouring to improve energy efficiency, and had al-

ready taken the best cost-saving measures.

There appears to be more administration of instruments in the form of

grants, such as Klimp (few companies have the resources to make an application) and PFE during the initial phase. Lobbying accounts for a large

part of the administration of instruments.




136

Fewer rather than more instruments would be preferable; "a single end

and a single means" was also recommended, as were simplifications and

a reasonably predictable route map.

POWER COMPANIES

The companies interviewed mainly produce district heat, as well as a certain

amount of electricity. A view shared by the companies was that instruments have a

great influence over operations (particularly heat production), but that the instru-

ments and objectives had changed over time. The conclusions drawn from this and

the choice of measures differed between the two companies, however. Both com-

panies monitor long-term political developments to gain an idea of the directionthat instruments will take. And the design of instruments seems to have a bearing

on decisions in the nearer term. The electricity tax does not have a pronounced

impact on these companies' operations; its main effect is to reduce electricity de-mand in the Swedish market. Biofuels are not taxed, which gives them a competi-

tive edge over other fuels. The carbon dioxide tax, on the other hand, constitutes a

sizeable portion of the companies' investment calculations, e.g. when investing in

hot water production using fossil fuels. The tax completely rules out an investment

of this kind. Emissions trading and the electricity certificate scheme are key in-

struments from the viewpoint of the power companies.

The two companies' comments included the following. The revision of the carbon dioxide tax in 2004 on the heat portion of

combined heat and power production has affected decisions on fossilfuel-fired combined heat and power.

The previous carbon dioxide and fuel tax regime affected decisions on

investment in new biofuel-fired boilers about five years ago, and in-

creased peat burning about three years ago. These investments reducedcoal use.

The electricity tax (and high electricity prices) restrict the use of heat

pumps to produce district heat.

One effect of the emissions trading scheme is that plans are being made

for biogas production/combustion in the long term.

The trading scheme has affected peat burning. If peat had not been eligible for electricity certificates, peat burning would have ended when the

emissions trading scheme was introduced. Peat burning continues, how-

ever.

Electricity certificates have a positive impact on renewable electricity,

but it is difficult to predict the price, which makes calculations difficult.

Electricity producers are not eligible for PFE. LIP/Klimp grants have given the companies an incentive for investing in

biogas projects.

"A single end and a single means" is recommended. National targets for

companies operating in a European market are not considered justified

unless the environmental problems are local. A long-term approach,




137

predictability and logic increase confidence in the instrument so that it

can play a part in environmental improvements.

5.3 Housing and services etc

The energy and carbon dioxide taxes are cost-effective, since they exert

an influence by putting the same price tag on emissions. One reason the taxes have had such a great impact is that there is consid-

erable scope for substitution, particularly in the long term.

The new instruments introduced to increase the pace of conversion from

oil do just that; they probably do not encourage more people to convert in

the long term.

The grant regime has also created uncertainty in the market, which is tothe detriment of producers, suppliers and fitters of heating systems. There

is also a risk that consumers do not derive the full benefit of the subsidy

because producers/suppliers/installation firms take a share by raising

their prices.

OFFROT energy conversion grants may to some extent improve the use

to which tax revenues are put, but are unfair to actors at the forefront,who have already taken action. Many measures may be cost-effective for

companies. From a socio-economic viewpoint, these should be taken

without subsidies.

Energy consumption in the housing and services sector totalled around 151 TWh in2004. This figure represents some 37 per cent of Sweden's total end use of energy.

The housing and services sector comprises homes, commercial and office premises,

holiday homes, agriculture and fisheries and other services, including the construc-

tion industry, street and road lighting sewage and water treatment plants, electricity

plants and waterworks (Statistics Sweden, 2005a).

In 2004 some 88 TWh of electricity was used in home and commercial prem-ises for heating and hot water, while around 43 TWh was used to operate appli-

ances and installations.




138

8%9%

1%

33%32%

17%

Biofuels

Oil

Gas

District heating

Household and

Operating electricity

Electric heating

Figure 13 Energy consumption in 2004 in housing and commercial premises, with percentagebreakdown into energy carriers.

Source: Statistics Sweden EN16SM

Other services used 7 TWh, of which approximately half was oil and half electric-

ity. Holiday homes used 3 TWh of which most was electricity (Statistics Sweden

2005a, 2005b).

The distribution between energy carriers has changed a great deal over time. In

2004 consumption of fossil fuels in the housing and services sector totalled 22TWh, compared with 119 TWh in 1970. The decline of fossil fuels is largely due to

a changeover from oil to electricity and district heat for heating purposes (Energy

Agency 2005d).

Carbon dioxide emissions have fallen over the last 15 years. This is due to a

dramatic decline in the use of oil. This decrease in oil use has in turn led to lower

emissions of sulphur dioxide, nitrogen oxides and VOCs (volatile organic compounds). As a result of wood burning, the housing and services sector is responsi-

ble for a large proportion of particulate emissions. The emissions to which electric-

ity and district heat use indirectly give rise via the production of electricity and

district heat are not included in the emissions reported for housing and services;

they fall under the energy conversion sector.

5.3.1 The energy and carbon dioxide tax in the housing andservices sector

It may be assumed that taxes have had a pronounced impact on energyuse for heating, since there is considerable scope for substitution, particu-

larly in the long term. The instruments can be regarded as cost-effective,

since the taxes exert influence by putting the same price tag on emissions

throughout the sector (although not in all sectors as a whole). The energy

tax on fuels and the carbon dioxide tax complement emissions trading

and the electricity certificate scheme.




139

The energy tax on electricity is losing its impact as an environmental

instrument (decreased energy use may reduce emissions from electricity

production) within each commitment period of the EU emissions tradingscheme. But the prime purposes of the energy tax are fiscal and energysystem transition (encouraging the use of more energy-efficient technol-

ogy).

The housing and services sector pays full carbon dioxide and energy tax, except for

certain companies serving the agricultural sector that are included in the servicessector because they are wholesalers or distributors (SNI Code 52). Lantmännen is

one company serving the agricultural sectors whose operations of this kind are

subject to the same tax regime as agriculture and fisheries; see chapter 5.5.10.

EVALUATIONS

The energy tax on fuel and the carbon dioxide tax are considered to be the most

effective instruments in the housing and services sector to discourage the use offossil fuels. The impact of taxes on energy consumption in the sector may clearly

be seen. Brink and Erlandsson (2004) estimate that price rises in electrical energy

and fuels due to tax increases reduced energy consumption by approximately five

per cent between 1991 and 2001.

An Energy Agency report (2006a) considers that even with a lower tax level

than at present, it is financially beneficial to install non-oil-fired heating systems.

The increases in carbon dioxide tax over the last few years are thought mainly toaccelerate the pace of conversion.

AGENCY COMMENTS

Since the inception of the emissions trading scheme the energy tax on electricity nolonger has the same environmental impact. This is because a reduction in carbon

dioxide emissions from electricity production in one place in the EU can be pre-

sumed to increase emissions correspondingly somewhere else in the Union. The

reason for this is that, all things being equal, an emission reduction releases emis-

sion allowances, which can be sold to another player in the trading system. How-

ever, in the long term, the tax may make it easier to reduce the allocation of emis-sion allowances to Sweden. The energy tax on electricity may help to achieve other

energy policy objectives by reducing demand for electricity, such as supply secu-

rity (lower electricity use in Sweden) and the phase-out of Swedish nuclear power.




140

5.3.2 Tax relief for installation of biofuel units as the main heating

source in new houses, and for installation of energy-efficient windows

in houses

Tax relief provides an incentive for more widespread installation of bio-

fuel boilers and energy-efficient windows.

Tax relief for energy-efficient windows has been the most-used form of

relief

Householders who would have made the investment even without tax

relief are also entitled to relief, which means that the tax revenues used in

this way do not reduce the use of electricity or fossil fuels.

The large number of rejected tax relief applications suggests that infor-

mation about the relief may need to be improved.

The purpose of tax relief for installation of biofuel units as the main heating source

in new houses and for installation of energy-efficient windows is to encourage

environmentally-friendly action in permanent dwellings. The precise delineation ofthe modifications that would be eligible for tax relief took account of environ-

mental benefit, improved energy efficiency and the extent to which measures

would help to reduce peak demand. The tax relief is 30 per cent of the cost exceed-

ing SEK 10,000, the maximum relief granted being SEK 15,000 per house. The

heating system must be waterborne and an accumulator tank of a certain size must

be connected to the boiler. Householders who change to energy-efficient windows

(with a maximum "U-value" of 1.2) are also eligible for tax relief. The relief is 30 per cent of the cost exceeding SEK 10,000, the maximum relief granted being SEK

10,000 per house. This statutory relief ran from 1 January 2004 to 31 December

2006. Funds of SEK 150 million were allocated for these forms of relief. Parlia-

ment has decided that subsidies will be available for a further two years with a

budget of SEK 50 million a year, this time with a tax credit for replacing windows,

rather than tax relief.

EVALUATIONS

No evaluations have been made. The Board of Housing, Building and Planning will

be evaluating the schemes in 2008/2009, and also after the end of the schemes in2011/2012.

A follow-up study of the schemes shows that some SEK 28 million of tax relief

was granted in 2004 for energy efficient windows and approximately SEK 500,000

for installation of biofuel boilers. Few householders have been granted relief for

the latter.




141

Table 16 Applications for tax relief, income year 2004.

Income year 2004

Number registered Number granted Number rejected

Windows Heating Windows Heating Windows Heating9,569 757 5,331 61 4,235 696


The Energy Agency has conducted a series of interviews about the schemes with10 house manufacturers and 10 window manufacturers. The interviews reveal that

most windows sold by the manufacturers have a U-value of 1.3. Demand for win-

dows with a U-value of 1.2 has risen somewhat since 2004. Several companies

consider the tax relief to be the deciding factor when householders choose re-

placement windows with a U-value of 1.2. The general view, however, is that en-

ergy prices are the factor having the greatest impact on demand. Many believe thatdemand would have been greater among housing cooperatives if they had been able

to apply for a grant for the whole building, instead of the present situation, where

each member is obliged to apply for his or her apartment.

Many of the window manufacturers do not think that the tax relief has led to

the development of more energy-efficient windows, since windows with a U-value

of 1.2 were already on the market. But the largest manufacturer, ELIT-fönster,considers that "1.2" windows would not have been produced without the tax relief.

Yet several of the companies stated that they advised their customers not to buy

"1.2" windows owing to the risk of frost formation and condensation under certain

weather conditions.

The interviews with house manufacturers revealed widespread ignorance

among customers and manufacturers of the grants available for solar heating and biofuel boilers. Companies choose materials and technologies primarily on the

basis of the statutory standards. It was also evident that customers generally attach

more importance to details of interior design than to energy costs when making

their final choice of home.

Several house manufacturers stated that they prefer to sell standard solutions

and that additional features are not actively offered. Additional features are as-sumed to make manufacture more difficult and more expensive. All those inter-

viewed said that the standard home heating system is an exhaust-air heat pump in

combination with waterborne or direct electric heating. Customer demand and building standards determine the manufacturers' choices for inclusion of products

in their standard range.

ADMINISTRATIVE COSTS

According to the Tax Agency (interview by telephone on 5 June 2006), administra-tion of the tax relief is very burdensome. Additional information is required of

applicants in nine out of ten cases. The reasons for the large number of rejected

applications are that many applicants seek relief for changing from an old heat

source to a biofuel boiler (i.e. not for installation in a new building), the accumula-

tor tank is not large enough, the replacement windows for which the applicant is




142

seeking tax relief have a U-value higher than 1.2, or that the application is for

renovation of old windows.

AGENCY COMMENTS

Energy-efficient windows with a U-value of 1.3 have been developed in the tech-nology procurement procedures that have taken place. Setting the limit for tax

relief at a U-value of 1.2 has to some extent encouraged the market launch of win-

dows not yet sold by all manufacturers. The support for energy-efficient windows

and installation of biofuel boilers may bring these technologies to the attention of

consumers. An information campaign might be a better means of achieving this,

however. The fact that so many applications have been rejected suggests that theinformation about the technologies eligible for tax relief may not have been clear

enough.

Tax relief is not generally an ideal way of reducing an external effect; see chap-ter 3.5.4. However, one problem may be that it takes a fairly long time for the two

energy improvements at issue here to repay their investment costs, which may

mean that many householders do not carry them out. Both improvements entail a

commitment stretching decades ahead, since windows are replaced about once

every fifty years, and since the heating options for new houses are often total or

part-reliance on direct electric heating, combined with an exhaust-air heat pump,which makes it fairly expensive to change over to a waterborne system at some

later date. One alternative to grants or tax relief might be a tightening of regula-

tions governing new house building and building alterations to reflect environ-

mental concerns.

5.3.3 Tax relief for improved energy efficiency and conversion in

public buildings

The tax relief may have helped to speed up the municipal decision-

making process, so that action is taken earlier than would otherwise have

been the case. But many measures eligible for relief may be commer-cially viable even without relief.

Tax relief may be unfair to the local authorities at the forefront that have

already implemented measures.

There is a heavy administrative burden There is an obvious risk of labour shortages and price rises due to over-

heating in the installation sector.

In light of Sweden's energy and environmental policy objectives, the Governmentconsidered that special tax incentives should be introduced to promote certain types

of environmental investment in public premises. The long-term vision for energy

policy is that it should ultimately be possible to base all energy supply on renew-

able sources. The tax relief has been introduced to facilitate energy efficiency im-

provements in public buildings. The measures taken should also help to increase

investment in the construction and property sector and thereby increase




143

employment. Another objective mentioned is that the public sector should take the

lead in energy conversion and set an example.

Since 15 May 2005 owners of commercial premises used primarily for public

purposes have been able to apply for tax relief on investments to improve the effi-ciency of energy use, or to convert to biofuel, district heating or a system using a

geothermal/ground/lake heat pump (OFFROT). Investments to improve energy

efficiency or conversion qualify for 30 per cent tax relief up to a maximum of SEK

10 million per building, except for investments in solar cells, which qualify for 70

per cent tax relief up to SEK 5 million per building. The budget for the scheme isSEK 2 billion, of which SEK 100 million has been earmarked for solar cells. The

Government has decided to extend the scheme, and has allocated a further SEK

500 million a year for 2007 and 2008.

The following are eligible for relief. Energy surveys.

Conversion of heating systems.

Connection to district cooling or installation of free-cooling systems.

Installation of low-energy lighting and/or ventilation systems.

Installation of equipment of efficient control, monitoring, surveillance,

regulation and operation of motors or heating systems.

Energy-efficiency improvements regarding the outer shell of buildings orheat recycling.

Installation of solar cell systems.

The following are not eligible for relief.

Measures that are profitable in the short term without tax relief.

Measures causing deterioration in the indoor environment.

Day-to-day maintenance of premises.

Normal operations on the premises. Measures required by law or other statutes.

Measures involved in erecting buildings (except for installation of solar

cell systems in the construction of "special buildings", for example).

Measures with a payback time of less than two years are considered to be profitable

in the short term.The Board of Housing, Building and Planning presented a plan for monitoring

and evaluating the results of the tax relief scheme in June 2005.

IMPACT ON OTHER SOCIETAL GOALS, THE MACRO ECONOMY AND WELFARE

DISTRIBUTION

The instrument furthers transition of the energy system (less dependence on oil,

improved energy efficiency, the scope for phasing out nuclear power etc).A report (2006) shows that 97 per cent of heating and sanitary installation

companies were finding it difficult or very difficult to recruit staff in the first quar-

ter of 2006. The tax relief scheme threatens to create an air of uncertainty in the




144

installation market, with far too much to do during the tax relief period, preceded

and followed by "dead" periods. Instead of reducing unemployment, there is thus a

danger that the scheme will have an adverse effect on employment.

EVALUATIONS

A limited preliminary evaluation of the OFFROT scheme, focusing on conversion

of heating systems has been made by the Energy Agency (2006e). According to the

agency, the sharp rise in the price of heating oil and electricity, including tax rises,

in recent years has been keenly felt by consumers with properties heated by elec-

tricity or oil. Purchase of an electric or oil-fired boiler is scarcely a viable option

for a property owner planning to invest in new heating technology.The Energy Agency (2006e) considers that one positive aspect is that tax relief

also covers energy surveys, although this is not a requirement for relief. The im-

plementation of EC Directive 2002/91/EC on the Energy Performance of Buildingscan also be expected to mean that some energy surveys will be performed even

without support. In the Energy Agency report heating industry representatives

point out that one positive feature of the OFFROT scheme is that it has given impe-

tus to conversion in public buildings and speeded up often lengthy municipal deci-

sion-making processes, since municipalities have been obliged to take account of

the tax relief in their budget processes.The Energy Agency points out that implementation of measures considered to

be profitable using the net current value method increases the scope in municipal

budgets for future spending on infrastructure improvements, schools and care of

the elderly. These measures should be taken whether or not they qualify for grantsor tax relief.

ADMINISTRATIVE ASPECTS

The county administrative boards we have contacted say that the OFFROT scheme

requires a great deal of administration. However, it is helpful that applicants are

usually local authority specialists who are used to paperwork and find it fairly easy

to fill in the forms correctly. Nonetheless, it is often necessary to ask applicants foradditional information. Moreover, applications take a long time to process because

the buildings involved are often complicated.

AGENCY COMMENTS

Taxpayers pay heating costs for public sector activities. Efficient use of public

money requires that cost-effective measures based on life-cycle analyses be taken.

Failure to take cost-effective action means that taxpayers pay a higher price for

heating and operation of devices and equipment in the long term. One effect of thetax relief may have been to bring forward profitable measures, which have then

been given priority over other spending where local authorities are working to an

investment cap.

It is difficult to evaluate the effect of the public sector leading the way in en-

ergy transition and setting a good example.




145

This form of support has a number of drawbacks, however:

If it is available at the wrong point in the economic cycle, the support may causeoverheating, labour shortages and price rises, instead of reducing unemployment.

From a wealth distribution viewpoint, the support favours local authorities that

have not addressed energy issues at the expense of those that have already improved their energy efficiency. This is contrary to the polluter pays principle. It

may be assumed that many measures are already profitable for municipalities to

carry out, and it may be thought that they should take profitable steps without sup-

port. These municipalities will then be able to free funds that they can use for other

purposes, unlike those that have already made energy-efficiency improvements and

are thus not eligible for support.

For energy-efficiency measures to be taken, it may be necessary for local au-thorities to give priority to these investments, whether or not they have an invest-

ment cap. One reason for doing this is that the investments can often yield lower

monthly/annual costs for the local authority as soon as the month or year they are

made. From a cost-effectiveness viewpoint it is often desirable that the public bod-

ies involved calculate the current value and life-cycle cost (the difference betweenincome and expenditure throughout the lifespan of the investment), rather than

payback times (how many years it will take for the investment to pay for itself), to

reduce their costs. One requirement is knowledge of what measures cost and what

savings they generated. The forthcoming energy declarations may help to provide

this information.

5.3.4 Grants for conversion in residential buildings and related

premises

With the current high oil prices, it may be assumed that many conver-

sions would have taken place even without the grant scheme, since it is

already financially advantageous.

The boom in the installation sector has created a risk of rising prices for

installation work. The grant scheme is burdensome to administer.

The prime aim of giving grants for conversion from oil for heating purposes is to

reduce greenhouse gas emissions by encouraging improved energy efficiency and

renewable energy, and to make energy supply more secure by reducing Swedish

dependence on imported oil.The aim of supporting conversion from electric heating is to reduce electricity

consumption for heating purposes and help to reduce electricity demand during

peak periods.

Owners of residential properties and related premises are able to receive a grant

of 30 per cent of the cost of materials and labour up to a maximum of SEK 30,000

per apartment for conversion from direct electric heating to systems using district




146

heating, biofuels or a geothermal/ground/lake heat pump. If a solar heating system

is installed at the same time, the owner can receive a maximum additional grant of

SEK 7,500 per apartment. Grants are available from 1 January 2006 to 31 Decem-

ber 2010. The upper limit of the grants payable during the period of the scheme isSEK 1.5 billion. Householders are also eligible for grants for converting from sys-

tems using an oil-fired boiler to district heating, biofuel or systems using a geo-

thermal /ground/lake heat pump. The grant is 30 per cent of the cost of materials

and labour up to a maximum of SEK 14,000 per home. Funding of SEK 500 mil-

lion has been allocated for this, of which SEK 400 million can be paid out in 2006,SEK 70 million in 2007 and SEK 10 million a year during 2008 – 2010.

EVALUATIONS

The Board of Housing, Building and Planning has submitted an evaluation plan for

the conversion grant scheme to the Government (Board of Housing, Building andPlanning journal number 1399-2050/2006). Follow-up studies and evaluation will

be carried out continuously during 2006 - 2012.

The Energy Agency (2006e) has also made a preliminary general evaluation of

the conversion grant scheme. The agency considers that because many oil-fired

boilers are old and the oil price (including taxes) is very high, it is already profit-

able for many people to convert from oil. The grant scheme may speed up the con-version process. However, the pace of conversion was seen to have slowed in au-

tumn 2005 as people delayed planned conversions pending the start of the grant

scheme.

The Energy Agency considers a negative feature of the grant for convertingfrom direct electric heating to be the requirement for conversion to a waterborne

system.

ADMINISTRATIVE ASPECTS

The grant scheme is perceived to entail a heavy administrative burden by the staff

we interviewed at Skåne, Västra Götaland and Kronoberg county administrative

boards. They receive numerous telephone calls about the grant scheme and mostapplicants have been asked to provide additional information. Most of the extra

information requested is not needed for deciding an application; it is required for

follow-up and evaluation purposes. Another problem with grants for convertingfrom oil mentioned as a possible explanation of incomplete application forms is

that many householders have been in a hurry to apply so as not to miss the deadline

for grant applications.It is suggested that the future administrative burden could be lessened if appli-

cations were made on-line. This would enable the agency to block submission of

applications that were incorrect or incomplete. Another way of simplifying the

process would be for householders to receive a uniform lump sum. This would

greatly simplify administration as compared with the present grant system based on

a percentage of material and labour costs.




147

AGENCY COMMENTS

The question is to what extent these instruments have reduced emissions more than

would have occurred in their absence. Even without the grant, conversion from oil

is profitable.The emissions trading scheme means that a decrease in electric heating does

not reduce emissions in the EU17. This is because the emission "bubble" is constant

in each trading period. If emissions fall in one place in the EU, they increase else-

where in the Union. Emission reductions free up emission allowances, which can

be sold to another operator at the price it is prepared to pay to increase its emis-

sions. The main aim of grants for converting from the use of direct electric heating,however, is to make energy supply more secure by reducing electricity demand

during peak periods.

There are also redistributive reasons for the grant scheme, but it is reasonable

to assume that many applicants are not dependent on the grant to carry out theconversion; they would have done so even without the grant. It may therefore be

asked whether this is a cost-effective means of redistributing wealth.

Instead of the polluter pays principle, those causing environmental problems

are financially compensated for taking action that in many cases is already profit-

able.There is a risk of the cost of conversion rising because the availability of grants

coincides with a boom in the installation industry.

5.3.5 Property taxation

Higher property tax on heat pumps and energy-efficient windows reducethe incentive for installing these energy-efficient technologies.

The tax is justifiable owing to the added value it creates.

The incentives created by the tax are distortive, however, since other

energy-efficiency improvements do not cause a corresponding rise in the

taxable value of properties. There are no socio-economic grounds for the current system whereby a

given measure results in different tax, depending on the property valua-

tion zone in which the property is located.

Since the tax reform of 1990 Swedish property tax has been designed to represent a

30 per cent tax on investment income, i.e. the return on investment. The purpose ofthe tax is fiscal and to achieve uniform taxation of investment income.

All properties except those classified as "special buildings" (premises in which

the main activities are publicly funded, such as schools and hospitals) are subject to

property tax payable by the owner of the property. The tax is one per cent of the

taxable value of the property, capped at four per cent of the income of the

17 Assuming the holder of emission allowances does not decide to retain its surplus emission allow-ances without using them.




148

household. The norm is that the taxable value should be 75 per cent of the market

value of the property.

Current property taxation is partly based on "standard points". The greater the

number of standard points a property has, the higher its taxable value and thehigher the property tax.

Environmental investments often increase the market value of a property,

which affects its taxable value and property tax. Houses currently receive extra

standard points for thermopane (insulated glass) windows or a heating system pri-

marily consisting of, or combined with, a heat pump. The total extra cost to house-holders of these extra standard points is approximately SEK 180 million a year.

EVALUATION

A Board of Housing, Building and Planning report (2005a) concludes that improv-

ing energy efficiency in one or two ways (energy-efficient windows and/or a heat pump) raises property tax costs. Depending on the property valuation zone, an

increase of one standard point raises property tax by SEK 60 - 420 a year. Depend-

ing on the property valuation zone, an increase of two standard points raises prop-

erty tax by SEK 100 - 840 a year. The Board of Housing, Building and Planning

does not consider that the increased tax makes much difference to the individual

property owner; the tax implications are more of symbolic importance.A number of reports have proposed that certain investments should not affect

the taxable value of real property (e.g. Energy Agency 2005) . The Government has

taken no decision on this issue. However, the "ROT" scheme (tax relief for home

improvements), which allows tax relief for investment in energy-efficient win-dows, has partly compensated for the increased property tax in these cases. This

form of tax relief is costly to administer, however.

AGENCY COMMENTS

The number of extra standard points is the same whether energy-efficient windows,

a geothermal/ground/lake heat pump or a smaller heat pump is installed, even

though these systems offer varying degrees of energy saving potential. Measuressuch as supplementary insulation may be presumed to raise the value of a house

just as much as energy-efficient windows, but do not raise the number of standard

points. This causes distortion between incentives. It may also be asked why thesame measure should be taxed differently depending on the valuation zone in

which the property is located. When a house is sold, it may be assumed that a pur-

chaser does not value identical energy-efficient windows or heat pumps differentlydepending on whether the house is located in a higher or lower valuation zone.




149

5.3.6 Solar heating and solar cell grants

The main aim of these grants is to promote little-used technologies.

Solar heating grants

Since 2000 government grants have been available for the installation of

solar heating systems in houses, apartment buildings and some other

premises.

Grants of some SEK 50 million had been approved by the end of 2005.

The Board of Housing, Building and Planning presented certain conclu-

sions about the effects of the solar heating grant when it submitted its

proposals for a new form of support. They were that: (i) the area of solar

collectors should not be restricted; (ii), the grant should also be available

for new buildings; and (iii) there should be no requirements as to the ex-

isting heating system. Solar cell grants:

From 2005 to 2007 government grants are available for installation of

solar cells in public buildings under the OFFROT environmental building

improvement scheme.

Just over SEK 50 million had been approved by the end of February

2006.

Chalmers University of Technology will be performing an evaluation ofthe market support scheme for solar cells in public buildings during 2006

and 2007.

HISTORY AND PURPOSE

The purpose of the scheme is to promote use of the technology and encourage effi-cient and sustainable use of energy.

The Energy Agency and its predecessor have given grants for Swedish research

and development into solar cells since 1977. An account of the solar heating grant,

which began in 2000, and the solar cell grant, which did not start until 2005, should

be seen in this light.

DESIGN OF THE GRANTS

Solar heating grant 18

Government grants for installation of solar heating systems in houses, apartment

buildings and certain other premises have been available since 2000. The aim is to promote the use of solar heating technology for heating certain kinds of premises

(SFS 2000:287). The size of the grant depends on the estimated energy generated

18 Solar heating systems can be divided into two types: hot water systems and combination systems. In

a hot water system the solar collector is connected to a water heater containing a built-in solar heating

element. Hot water systems are particularly suitable for houses with direct electric heating. Combination

systems store heat in an accumulator tank. The solar heat is supplemented by a wood-fired boiler, for

example, which gives a flexible system; combination systems are currently the most common systemsinstalled in houses.




150

annually by the solar collector, and equals SEK 2.50 per kilowatt hour.19 Grants are

subject to budget constraints, which means that grants will be awarded only as long

as budgeted funds remain. The grant cannot be combined with other government or

municipal grants for the same project. Grant applications are submitted to thecounty administrative board. Grants are paid out when the system has been in-

stalled. The Board of Housing, Building and Planning administers grant payment

and exercises regulatory control. SEK 50 million had been approved (during 2000

– 2005) by the end of 2005. The vast majority (93 per cent) of the sums disbursed

have been for systems installed in houses. The remainder has gone to apartment buildings (a very small proportion to other premises).

In 2006 Parliament approved a supplementary solar heating grant for other

premises, effective as of 1 July 2006 (SEK 10 million per year 2006 – 2010).

Solar cell grantsDuring the period 2005 to 2007 government grants are available for installation of

solar cells20 in public buildings (as part of the OFFROT scheme). The purpose of

the grants is to promote efficient and sustainable energy use. The grant is 70 per

cent of the investment cost up to a maximum of SEK 5 million per building. Appli-cations are made to the county administrative board and received in the form of

credit in the recipient's "tax account". Total funding of SEK 100 million has been

allocated for these grants. The Finance Bill 2006 proposed that funding be in-

creased to SEK 150 million. Just over SEK 50 million had been approved (during

2005 – 2006) by the end of February 2006.

This is the first Swedish grant scheme for the solar cell market. There are plansfor some form of continued support for solar cells to take over at the end of the first

grant period.

Solar heating grants

Each month the Board of Housing, Building and Planning produces statistics on

current grants. This gives an accurate picture of grants applied for and approved.

The Energy Agency has evaluated the research and development programme for

solar heating. However, the programme concerns development of cost-effective

solar heating solutions by awarding grants to research teams and industry, and no

evaluation has been made of the impact of the solar heating grant.In its letter of instruction for 2006 the Board of Housing, Building and Plan-

ning was given until 15 March 2006 to present proposals for a supplementary grant

scheme for installation of solar cell systems. The proposed grants will be available

in parallel with the present grants for solar heating under the State Grants for In-

stallation of Solar Heating Ordinance (2000:287). The board's proposals are largely

based on experience gained from present grant forms.

19 The grant may never exceed SEK 7,500 per home/apartment in houses or SEK 5,000 per apartment

in apartment buildings or related premises.

20 There are two main kinds of solar cell systems: systems connected to the electricity grid and non-

connected systems powered by batteries. Most Swedish solar cell systems (around 90 per cent) are ofthe latter kind. Holiday homes and lighthouses are two examples of applications.




151

Electricity

Oil

Solid fuelsDistrict heat, gas

(not defined)

The board's main views on the present grant system may be summarised as follows

(Board of Housing, Building and Planning 2005b):

At present solar heating grants are governed by two ordinances: the StateGrants for Installation of Solar Heating Ordinance (2000:287) and the

Grants for Investment in Improved Energy Efficiency and Conversion to

Renewable Energy in Premises Used for Public Sector Activities Ordi-

nance. It is therefore essential that these two ordinances be harmonised

with each other as far as possible.

Although neither the solar heating grant nor the conversion grant ex- pressly restricts the area of solar collectors, the design and size of the

grant do in fact limit the area. In practice, this means that the grant is

only available for private dwelling houses at present. To qualify as technology support, the solar heating grant would have to

include new buildings. For conversion from one kind of energy to an-

other, there should be no requirement that the existing heating system beof a certain kind.

A simple follow-up study of the effects of the solar heating grant can be made by

processing the information submitted by grant applicants on their application

forms. These include information on the kind of energy to be replaced by solar

heat, and the type of solar collector eligible for a grant. Electricity accounts for 51

per cent of the energy replaced by solar heat. Most applicants state that solar heat-

ing will be used for hot water and heating purposes. Flat factory-fitted solar collec-

tors are by far the most common type used for solar heating.

Figure 14 Types of energy replaced by solar heating.

Source: Board of Housing, Building and Planning

The Board of Housing, Building and Planning in consultation with the Energy

Agency and the analysis team created jointly with the industry has been charged




152

with the task of monitoring and evaluating the grant scheme for installation of solar

heating. Following consultation with the Energy Agency, the board is to submit

proposals for a coherent approach to continued support for small and large-scale

applications from 2008, and a draft long-term strategy for market launch of solarheating. Proposals for coordinating the existing grant schemes for installation of

solar heating were also to be submitted. A report was to be submitted to the Gov-

ernment by 31 December 2006.

Solar cell grants

Each month the Board of Housing, Building and Planning produces statistics on

current grants. This gives an accurate picture of grants applied for and approved. If

all the SEK 100 million allocated for grants for solar cells in public buildings is

used, it is estimated that installed output will almost double. Before the grant

scheme started, there was just under 4 MW of installed solar power output in Swe-den. If all grant funding is used, output will have risen to nearly 7 MW within two

and a half years. The first step to enabling this rapid growth is that all those in-

volved have access to information about the grant and are aware how solar cells

can be used in buildings (Energy Agency and Board of Housing, Building andPlanning, 2005).

The grant schemes for solar cells work together in that grants are not available

in combination with other government grants. They also interact with the electricity

certificate scheme, since solar cells are eligible for electricity certificates. In paral-

lel with the grant scheme, the Government has reached agreement with the industry

on a number of steps to promote development of the market. It is hoped contactwill be established with stakeholders in the heating, ventilation and sanitation in-

dustry by arranging information and training sessions. Key players such as installa-

tion companies, energy advisers, power companies, consultants, architects and

trade associations are all covered by the campaign. These information campaigns

also target property owners and the general public (www.solklart-solvarme.nu).

In 2006 and 2007 Chalmers University of Technology will be performing anevaluation of the market support scheme for solar cells in public buildings. The

evaluation will principally analyse the extent to which the grants and the installa-

tions made create scope for further growth in manufacture and use of solar cells in

Sweden. The specific objectives of the evaluation are to:

Analyse the impact of the grants for installation of solar cells in buildings

where public sector activities are performed on the design of a Swedishinnovation system for solar cells.

Develop an understanding of how a new innovation system emerges.

Use that understanding as an aid to developing a potential new grant

scheme for solar cells to follow on from the one currently being studied.

It is hoped that evaluation of the grant scheme while it is still in progress will help

in the development of the next generation of grant schemes.




153

AGENCY COMMENTS

Both schemes aim to promote the technology by getting it onto the market. They

have not been designed to drive technical developments in the manufacture of solar

power products. No real evaluation of the schemes has been carried out. If theschemes are to be more socio-economically efficient, we believe they should be

designed to drive technical developments more by being restricted to technologies

that are in the market launch phase. Also, the aim should not merely be to increase

use; it should also focus on Sweden's prospects of developing competitive industry

in the solar technology field.


and strategies

The tables below list economic instruments in the housing sector. They also de-

scribe the relationship between the instruments and environmental objectives andaction strategies.

Table 17 Relationship between economic instruments in the housing sector and Swedishenvironmental objectives

Reduced Climate

Impact

A Non-Toxic

Environment

Zero

Eutrophication

Sustainable

Forests

Other

objectives

Energy tax The energy tax is only levied

on fossil fuels and raises

their price relative to biofuels

and electricity.

Nitrogen oxide emis-

sions are

mitigated.

Fiscal.

Energy system

transition.

Electricity con-

sumption tax

Reduces emissions from the

Nordic electricity system, but

not in the near term within

the EU as a whole.*

Fiscal.

Energy system

transition.

Carbon dioxide

tax

The relative price of fossil

fuels rises in comparison

with biofuels and electricity.


sions are

indirectly mitigated.

Indirectly counter-

productive if biofu-

els are not ab-

stracted sustaina-

bly.

Fiscal.

Energy system

transition.

Tax relief for

energy-efficient

windows and

biofuel systems


and support for renewable

energy.


sions are

indirectly mitigated.

Compensation

for higher

property tax.

Tax relief for

improved energyefficiency and

conversion in

public buildings

Support for reduced use of

fossil fuels.


sions are indirectlymitigated.

Employment.

Conversion

grants for apart-

ment buildings

Reduces oil use. Nitrogen oxide emis-

sions are indirectly

mitigated.

Energy

system transition.

Property taxation May act counter to environ-

mental investments in prop-

erties


sions are indirectly

mitigated.

Energy

system transtion.

Grants for solar

heating/solar

cells

Encourages the use of new

technology.




154

*During the current trading period (in the EU emissions trading scheme) reduced emissionsin the electricity production sector in one country allow a potential increase in emissions inanother country.

Table 18 Relationship between economic instruments in the housing sector and the threeaction strategies.



Management of land,water and the built

environment

Energy tax Incentive for improved energyefficiency and conversion to re-newable energy.

Increased used of districtheating helps towardsresource-efficient cyclicalsystems.

Increases use ofrenewable energy.

Counterproductive ifbiofuels are abstractednon-sustainably.

Electricityconsumption tax

Incentive for improved energyefficiency and conversion to re-newable energy.

Increased used of districtheating and low energyappliances help towards

resource-efficient cyclicalsystems.


Counterproductive if

biofuels are abstractednon-sustainably.

Carbon dioxide tax Incentive for improved energyefficiency and conversion to re-newable energy.




Tax relief for energy-efficient windowsand biofuel systems


Insulated glass windowshelp towards resource-efficient cyclical systems.

Tax relief for im-proved energy effi-ciency and conver-sion in public build-ings



Conversion grantsfor apartment build-ings

Incentive for improved energyefficiency (heat pumps) and con-version to renewable energy.


Counterproductive ifdevelopment causesdeterioration of the physi-cal environment.

Property taxation May be counteractive; see above.

Grants for solarheating/solar cells

Improved energy efficiency andrenewable energy.

Helps towards resource-efficient cyclical systems.

5.3.8 Interaction between instruments in the housing sector and their

effects in combination with the EU emissions trading scheme

For the sectors participating in emissions trading, the carbon dioxide tax comple-ments emissions trading by ensuring a high relative price for fossil fuels in those

sectors. The carbon dioxide tax also complements the electricity certificate scheme

and electricity tax by raising the price of fossil fuels, while the others increase the

relative price of electricity in the housing and service sectors. The support available

for improved energy efficiency and conversion to renewable and more energy-

efficient heating can be seen as acting in combination, and also as very much over-lapping. There are already incentives for converting from oil, even without the

additional support now on offer. Many energy efficiency improvements are also

financially advantageous without grants or tax relief.




155

The emissions trading scheme means that the EU emissions "bubble" remains

constant. If various grant schemes reduce CO2 emissions at the margin, someone

else within the emissions trading scheme will use the scope for increased emissions

created because overall emissions in the EU remain constant throughout each trad-ing period.

5.4 The transport sectorDevelopments in the transport sector are largely influenced by economic and popu-

lations trends, the business climate and employment levels.Domestic passenger traffic has risen by around 12 per cent since 1990. During

the same period economic growth measured as GDP (fixed prices) increased by 25

per cent. Road transport accounts for approximately 90 per cent of all transport.

Railway travel has increased most in percentage terms since 1990. Foreign travelhas become more frequent, and the distance travelled in "person kilometres" has

risen by 80 per cent since 1995. Holidays, which make up one quarter of foreigntravel, account for the largest increase.

The current increase in passenger traffic is expected to continue. We are ex-

pected to travel further and more per person in the future. Between 2001 and 2020

it is estimated that total Swedish travel will increase by 27 per cent (see Figure 15).

0

50

100

150

200

1980 1985 1990 1995 2000 2005 2010 2015 2020

Pkm billions

Automobiles

Other

Total

Figure 15 Increase in passenger transport in Sweden (forecast for 2001 - 2020)

Source: SIKA 2006

In volume terms, the majority of Swedish goods transport comprises imported

energy commodities and export products from the mining industry and forestry. As

before, low value-added goods are mainly transported by rail or sea. New high-

value transport flows go mainly by road haulage, however. This has reduced the

relative importance of rail and sea transport over time. Total goods transport inSweden increased by 14 per cent between 1990 and 2002. Road freight increased

by 25 per cent, which is on a par with the rise in Swedish GDP. The sharp increase

in goods transport is due to a growing geographical dispersal of goods production




156

and increasingly globalised consumer markets, which means that goods are trans-

ported further and further from where they were made. Another factor is that road

freight costs represent a shrinking proportion of the value of the goods transported.

Most foreign goods transport takes place by sea. More than 80 per cent of thetotal goods tonnage arrives or departs by cargo ship. In value terms, however, road

freight is the most important transport mode in Swedish foreign trade. Between 50

and 60 per cent of foreign trade in cash terms is transported by road.

Between 2001 and 2020 it is estimated that the volume of goods transport,

measured in tonnes, will rise by 17 per cent, but will almost double in value terms.Most of this growth will be in transport of steel products, chemicals and high-value

goods. Goods flows between Sweden and other countries are expected to increase

more rapidly than domestic goods transport (Figure 16).

0

20

40

60

80

100

120

140

1980 1985 1990 1995 2000 2005 2010 2015 2020

Tonne km billions

Road

rail

Shipping

Total

Figure 16 Transport (tonne kilometres) in Sweden between 1980 and 2001, and projected trendbetween 2001 and 2020.

Source: SIKA 2006

In 2003 road traffic in Sweden consumed a total of 5.2 million m3 of petrol and 2.6

million m3 of diesel fuel. Petrol consumption has remained steady since the early

1990s. The Svenska Petroleum Institute has reported a four per cent drop in con-sumption for the first quarter of 2006, as compared with the same period in 2005.

However, consumption of diesel fuel in the transport sector has risen by 65 - 70 percent since 1990, and by 35 per cent since 2000. Heavy-duty trucks account for

most of the increase in diesel fuel consumption. Interest in bioethanol as a motor

fuel has risen since 2000, with a volume increase of almost 600 per cent between

2001 and 2004. Yet only a tiny quantity of ethanol was used in 2004 as comparedwith conventional motor fuels. Expressed in energy terms, 1.6 TWh was produced

from bioethanol, compared with 48 TWh from petrol and 35 TWh from diesel

(Figure 17). 85 per cent of the ethanol used was used as a low-percentage (5 per

cent) additive in petrol. Use of RME (biodiesel) has also increased, but this fuel is

far behind bioethanol.




157

0

10

20

30

40

50

60

70

80

90

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

T W h

Ethanol

Diesel oil

Petrol

Figure 17 Consumption of petrol, diesel and ethanol in the transport sector

Source: Energy Agency, Energiläget i siffror ("Energy Consumption in Figures") 2005

5.4.1 Energy and carbon dioxide tax on motor fuels

Energy and carbon dioxide taxes on motor fuels are a cost-effective

means of mitigating carbon dioxide emissions from transport, although

they will not suffice to achieve the emission target for the sector.

We consider the evaluations made of the environmental impact and

socio-economic consequences of the motor fuel tax to be of good quality,

showing that the level of the tax has significant implications for fuel con-sumption, particularly for cars.

As far as motor fuels are concerned, the carbon dioxide tax increases of

recent years have been largely weighed up by simultaneous cuts in the

energy tax.

Raising the tax on motor fuels creates socio-economic costs in the formof car journeys not made, journeys performed by alternative means, in-

creased transport costs, lower employment rates in the automobile indus-

try etc. These socio-economic costs must be weighed up against the so-

cietal gains (welfare gains in the form of environmental benefits) created

by motor fuel taxes.

If revenues from motor fuel tax rises are used to lower other taxes corre-spondingly, which is the idea behind green taxation, the socio-economic

costs of the motor fuel tax are lessened at the same time as the tax gener-

ates a socio-economic environmental gain.

The original purpose of the energy tax was fiscal, whereas there were

environmental reasons for the carbon dioxide tax. However, in practice,

the energy tax and the carbon dioxide tax both act to reduce use of fossil

fuels.

Carbon dioxide emissions from cars are estimated to have fallen by 1.5 –

3.2 Mtonnes/year (2005) as a result of the motor fuel tax rises imposed

since 1990.




158

To decouple economic growth from increased carbon dioxide emissions

from traffic, tax on motor fuels must take account of both prices and in-

comes trends if it is to retain its environmental impact. Annual indexation

of energy and carbon dioxide taxes in line with real changes in GDP, inaddition to the current consumer prices indexation, should be examined.

HISTORY AND PURPOSE

Petrol and diesel are subject to energy tax, carbon dioxide tax and value added tax

(VAT). The energy and carbon dioxide tax rates on petrol and diesel have been

indexed upwards annually in line with the Swedish consumer prices index (KPI)

since the late 1990s. The energy tax on petrol and diesel is differentiated dependingon the environmental class to which the fuel belongs. The environmental classifica-

tion is based on the effects of the fuel on health and the Clean Air environmentalobjective. Petrol is classified as environmental class 1 or 2, with a special tax rate

for alkylate petrol. Diesel motor fuel is divided into environmental classes 1 to 3.

The account of taxation presented below is based on the tax level for environ-

mental class 1; historical tax levels refer to the best environmental class. In everycase the fuel in the best environmental class has been the fuel predominantly used

in the transport sector (for more information about the environmental classification

of fuels, see section 5.4.4).Current tax rates are shown in

Table 19 and tax changes since 1990 in current prices are shown in Figure 18

and Figure 19. The increase in the carbon dioxide tax since 2000, over and aboveindexation in line with KPI, has largely been weighed up by a simultaneous lower-

ing of the energy tax.

Table 19 Energy tax and carbon dioxide tax on fuels as of 1 January 2006 (SEK per litre).

Energy tax Carbon dioxidetax

Petrol (environmental class 1) 2.86 2.13

Diesel (environmental class 1) 1.042 2.623

The original purpose of the energy tax was fiscal, whereas the carbon dioxide tax

was introduced for environmental reasons, i.e. to reduce carbon dioxide emissionsfrom fossil fuels. The energy tax on motor fuels has subsequently been seen as an

internalisation of the external effects of traffic (air pollution, road wear, noise, time

costs, traffic accidents).

The largest tax rise on petrol since 1990 took place in 1993. The energy tax on

diesel was raised markedly in the mid-1990s, combined with abolition of the kilo-

metre tax in effect at that time.




159

0

1000

2000

3000

4000

5000

6000

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

S E K / m 3 Energy tax

Carbon dioxide tax

Total

Figure 18 Energy tax and carbon dioxide tax on petrol 1990 - 2005. VAT is levied in addition(23.45% in 1990 and 1991, 25% from 1992.

Source: Swedish Tax Agency.

0

1000

2000

3000

4000

5000

6000

1990 1992 1994 1996 1998 2000 2002 2004

S E K / m 3 Energy tax

carbon dioxide tax

Total

Figure 19 Energy tax and carbon dioxide tax on diesel (MK 2 until 1996, thereafter MK1) 1990 -2005.


Figure 20 shows the inflation-adjusted trend for tax ( 2005 prices) on petrol since

1924. Historically, seen over a long period, current taxes on petrol, including thecarbon dioxide tax, are not exceptionally high; taxes were higher (in real terms)

during, and to some extent immediately after, the Second World War. Adjusted for

inflation, the tax on petrol has remained fairly constant from 1998 to the present.

0

1

2

3

4

5

6

7

89

1 9 2 4

1 9 2 9

1 9 3 4

1 9 3 9

1 9 4 4

1 9 4 9

1 9 5 4

1 9 5 9

1 9 6 4

1 9 6 9

1 9 7 4

1 9 7 9

1 9 8 4

1 9 8 9

1 9 9 4

1 9 9 9

2 0 0 4

Year

T a x S E K / l i t r e

Energy/CO2 tax Petrol/energy tax

Figure 20 Historical tax rates on petrol, 1924 – 2006, (2005 prices). Tax rate on 1 January eachyear. (Prices have been adjusted in line with 2005 prices using Statistics Sweden's historicalconsumer prices index (KPI).

Source: Swedish Tax Agency.




160

In practice, the energy tax and carbon dioxide tax have the same impact on motor

fuel consumption. These taxes reduce fuel consumption by increasing the price of

petrol and diesel. It is possible to adapt to the fuel price rises in many ways, e.g. by

not travelling, by using public transport instead of the car, by ecodriving or bychoosing a more fuel-efficient car. These adaptations, which are made to avoid

additional travel costs, help to reduce climate impact.

Adaptations like these improve the energy-efficiency of vehicles on the roads

and also reduce traffic. Traffic-reducing measures also help to reduce exhaust

emissions, noise and the need for more land to disappear under infrastructure de-velopment.

IMPACT ON OTHER SOCIETAL GOALS, THE MACRO ECONOMY AND WELFARE

DISTRIBUTION

Energy and carbon dioxide tax on motor fuel limits traffic growth and therebyimproves road safety to some extent. Raising the tax on motor fuel has a socio-

economic cost. The cost of raising motor fuel tax by SEK 0.50 is estimated to be

approximately SEK 25 million a year in the form of journeys not made, journeys

made by alternative means, increased transport costs, lower employment in the

automobile industry etc (Swedish Institute for Transport and Communications

Analysis - SIKA, 2004b). However, when determining the socio-economic basisfor raising tax on motor fuel, these costs should be weighed up against the socio-

economic gains (environmental benefits and tax revenues) generated by the tax. If

tax revenues from raising motor fuel tax are used to lower other taxes correspond-

ingly, which is the idea behind green taxation, the socio-economic cost can bereduced.

The energy and carbon dioxide taxes generated total tax revenues of just overSEK 60 billion in 2004, of which the tax on petrol was just over SEK 25 billion. In

our opinion, the administrative burden is low in relation to the large tax revenues.

EVALUATIONS

Evaluations of the effect of motor fuel taxes in lowering fuel consumption have been made in various studies by comparing the statistical correlation between his-

torical changes in motor fuel use with changes in petrol and diesel prices (price

elasticity). The consensus figure in international research is a price elasticity for petrol consumption of -0.7 till -0.8. (Long-term price elasticity of -0.8 means that a

petrol price rise of 10 per cent reduces long-term petrol consumption by eight per

cent.) The price elasticity for diesel use is much lower (SIKA, 2004a). In the shortterm petrol is estimated to have a price elasticity of -0.2 to -0.3 (Swedish EPA,

2006c).

Based on customary price elasticities, the Swedish Institute for Transport and

Communications Analysis (SIKA) has estimated the impact of the overall tax rises

on petrol and diesel between 1990 and 2005 on fuel consumption and carbon diox-

ide emissions from motor vehicles. Future effects by 2010, 2015 and 2020 have

also been estimated (SIKA, 2005). SIKA chose to estimate the impact of tax rises




161

for two levels of price elasticity (-0.8 for petrol and -0.2 for diesel/-0.4 for petrol

and -0.1 for diesel). SIKA considered there to be signs that price elasticity in Swe-

den for petrol and diesel in the road traffic sector was lower than the international

average of -0.8, and so the international average was halved and used to perform asupplementary sensitivity analysis.

From the calculations it was concluded that carbon dioxide emissions from mo-

tor vehicles in 2005 had been reduced by 1.5 – 3.2 Mtonnes/year 21 owing to the tax

rises on motor fuels imposed between 1990 and 2005, as compared with retention

of the motor fuel tax at its nominal level in 1990.

Energy and carbon dioxide tax on motor fuels have a good level of goalachievement in relation to the Reduced Climate Impact objective. These taxes are

relatively cost-effective, since they are directly linked to use of fossil fuels in motor

vehicles and, apart from the tax rebate for renewable motor fuels, only a few appli-

cations are eligible for reduced-rate taxation (fuel for working machines and plant/work vehicles in mining, agriculture, forestry operations and aquaculture).

The taxes would theoretically be more cost-effective without these rebates, but they

are justifiable in the case of industries operating in the face of international compe-

tition.Motor fuel taxes mean that the polluter pays, and the cost of increased fuel

taxes applies both to passenger transport and goods transport. Road haulage com-

panies have said that higher taxes on diesel fuel in Sweden than in neighbouring

countries would make them less competitive. Current motor fuel taxes are more or

less on a par with the European average. Any competitive disadvantages experi-

enced by Swedish hauliers are mainly due to differences in social security and payroll costs (SIKA, 1999). Motor fuel taxes are also a dynamically efficient in-

strument, since raising the cost of fossil fuels drives development and the introduc-

tion of more energy-efficient engines and vehicles.

One change in energy and carbon dioxide tax on motor fuels that both the

Commission on Climate Change (SOU 2000:23) and VTU (SOU 2004:63) thought

should be considered was that the present annual index adjustment in line with theconsumer prices index (KOI) should also be linked to real GDP growth. This is

because there is a clear correlation between economic growth and transport growth,

and also between a country’s fuel taxes and the energy efficiency of passenger

traffic (Schipper, 1999).

21 With a price elasticity of -0.4 for petrol and -0.1 for diesel, the effect will be 1.5 Mtonnes lower CO2

emissions; with the higher price elasticity of -0.8/-0.2, the effect will be 3.2 Mtonnes lower emissions.




162

5.4.2 Tax exemption of biofuels for motor vehicles

HISTORY AND PURPOSE

Biofuel for motor vehicles is exempt from energy tax and carbon dioxide tax be-tween 2004 and 2008. The Finance Bill 2006 included a proposal to extend tax

exemption until 2013. As yet there is no general exemption under the Energy Tax

Act (1994:1776); exemption is granted to individual importers by the Ministry of

Finance. Biogas is not included in the above, since it has separate exemption from

energy tax and carbon dioxide tax.

The prime purpose of tax exemption is to reduce emissions of carbon dioxide

from the transport sector and ultimately to increase fuel supply security by support-ing production and use of biofuels for motor vehicles, particularly in the initial

phase. Domestic production is limited at present, but research and development is

in progress with a view to establishing a Swedish industrial base for manufacture

of biofuels.

EVALUATIONS

In conjunction with Kontrollstation 2004 ("Checkpoint 2004") for the Reduced

Climate Impact objective, the Swedish EPA made an evaluation of tax exemption

for biofuels (Swedish EPA, 2004g). One year later the evaluation was updated

slightly as part of a follow-up study on achievement of the climate objective.(Swedish Energy Agency and Swedish EPA, 2005). This was coordinated with

another government-instigated study, which included assessing the impact of the

proposals contained in the Finance Bill 2006. No other evaluations are known.

Central conclusions of the Swedish EPA report (2004g) were:

Tax exemption is a blunt instrument, which heavily over-subsidises ethanol as alow-percentage additive in petrol. The oil companies are estimated to make a profit

of SEK 2.00 – 2.50 per litre of ethanol. On the other hand, tax exemption appears

to result in a reasonable price level to encourage the use of pure ethanol or E85 (85

per cent ethanol and 15 per cent petrol). Tax exemption in itself probably does not

Tax exemption of biofuels for motor vehicles acts in combination with a number of other instruments. The aim is to promote the introduction of new fuels.

Developments are very rapid in the biofuel field.

There seems to be a lack of real coordination of instruments as a coherent strat-

egy for eco-cars and biofuels.

Few instruments have been impact-assessed, and instruments have only been

evaluated to a limited extent.

We consider there to be a need for evaluation, not only of tax exemption, but of

the entire complex of instruments exerting an influence over use of biofuels and

eco-cars.

There is also an urgent need to evaluate the rate of customs duty on ethanol.




163

result in any Swedish manufacture or any significant increase in biofuel expertise.

Instead, the result is the import of tropical ethanol, from Brazil in particular. It is

first and foremost the high level of cost-effectiveness of tropical ethanol, equiva-

lent to SEK 0.2 – 0.4 /kg CO2 that makes for the overall cost-effective performanceof low-percentage ethanol additives. The cost of current Swedish production of

ethanol from grain is over SEK 2/kg CO2. But these figures do not give the whole

picture, since investment in biofuels for motor vehicles yields other benefits that

are never seen in the calculations of cost-effectiveness. These include developing

know-how that may ultimately lower costs, the value of supply security, potential

regional policy advantages in establishing biofuel production facilities in sparsely populated areas, for example, and the signal to the world around us that Sweden is

taking the problems caused by the impact of growing traffic on climate very seri-

ously.

The subsequent impact analysis stated as follows.

The impact of the proposal to extend tax exemption until 2013 can be assessed provided it is assumed that tax exemption is a prerequisite for virtually all use of

biofuels for motor vehicles. This means that ending tax exemption would also putan end to use of biofuels to drive motor vehicles. The calculations are based on

existing instruments working in combination, e.g. discounted benefit taxation of

company eco-cars. As a result, the proposal will potentially reduce annual direct

carbon dioxide emissions by approximately 800 – 1,200 thousand tonnes between

2009 and 2013. The uncertainties are considerable.

A government report entitled "Introduction of Renewable Motor Fuels" (SOU2004:133) concluded that tax exemption should end in 2008, to be replaced by

other instruments, the main one of which would be "green certificates". This stance

derives from the drawbacks described above and the fact that other instruments

may give the same result but with the cost being covered by fuel users instead of

taxpayers (which would be more in line with the polluter pays principle). The

committee's remit included examining green certificates as an instrument, but itfaltered half way owing to the considerable problems in designing the instrument to

work in practice.

Biofuels are developing very rapidly indeed. The evaluations referred to above

are fairly recent, but have already been overtaken by events to a certain extent.

Recent developments include the following.

The price of Brazilian ethanol more than doubled between spring 2005

and spring 2006. This was due to the rise in the price of crude oil and asharp increase in demand from the US and other countries.

A high level of import duty on ethanol intended for use as a low-

percentage additive was imposed (approximately SEK 1.90/l) on 1 Janu-

ary 2006. The aim is to establish a Swedish ethanol industry and increase

supply security.

Imports from Brazil virtually ceased in 2006 owing to a combination of

price rises and the import duty. Imports have been replaced by ethanol




164

from southern Europe. This will probably have an adverse environmental

impact, since European ethanol is much less energy efficient than Brazil-

ian ethanol produced from raw sugar cane. The rate at which the sale of eco-cars is rising has exceeded all expecta-

tions.

Sweden is in the process of introducing a statutory requirement that all

large petrol stations must supply biofuel.

The EU Commission has altered its stance on whether to allow 10 per

cent admixture of ethanol in petrol. It seems likely that this will be al-lowed.

It is very difficult to make projections of fuel use, since it is hard to predict the

price of biofuels and their substitutes. Assumptions on crude oil prices are critical

to forecasts of biofuel use.We consider it necessary to evaluate not only tax exemption, but the entire

complex of existing instruments for biofuels and eco-cars. The individual instru-

ments are effective to varying degrees; the synergies are substantial, and the over-

all effect of the instruments should be analysed. Tax exemption causes a sizeable

loss in revenue to the state, money that, if it were used in some other way, might

have a substantially greater impact in reducing carbon dioxide emissions.

Import duty on ethanol is controversial. It has a significant effect on the cost of

biofuels, on international trade and on the willingness to invest in Swedish re-

search, development and demonstration and in Swedish production facilities. We

consider evaluation of the effects of import duty to be an urgent priority.

5.4.3 Vehicle tax

The main purpose of vehicle tax is fiscal, although it is also used to

serve environmental objectives.

Petrol and diesel-driven cars on Swedish roads and new cars in Sweden

have the highest average carbon dioxide emissions in Europe.

1 May 2006 saw the introduction of a carbon dioxide differentiated

vehicle tax for new cars of model year 2006 and for cars belonging to

environmental class 2005 (electric and hybrid). This provides an incen-

tive for new car buyers to choose more energy-efficient cars. Vehicle tax is a fixed annual cost and has no marked environmental

effect on existing vehicles. Studies show that carbon dioxide differenti-

ated tax on cars could be designed to have far greater environmental

impact without raising the overall tax take.

Since 1989 differentiation of vehicle tax according to the car's envi-

ronmental classification has helped to reduce vehicular emissions ofcarbon dioxide, nitrogen oxides, hydrocarbons and particulates.

For carbon dioxide differentiation of vehicle tax to have a significant

impact, it must be relatively sharp. Reductions of up to four per cent in

carbon dioxide emissions from new cars in Sweden can be achieved in




165

the near term.

There is a pressing need to increase energy efficiency and reduce car-

bon dioxide emissions from cars in Sweden. The consequences and en-

vironmental impact of the 2006 vehicle tax reform and introduction of atax rebate for new diesel-driven cars with particulate filters should beevaluated together with an impact analysis of a further tightening of

this regime.

HISTORY AND PURPOSE

Vehicle tax is levied on cars, trucks, buses, motorcycles, tractors, motorisedequipment and certain heavy-duty off-road vehicles and trailers if they are, or

should be, entered in the vehicles register and have not been taken off the road.

Vehicle tax varies, depending on type and weight of vehicle, motor fuel used and

number of wheel axles (trucks and buses). Motorcycles, cars, buses and trucks thatare not subject to the road charge and that are 30 years old or more are exempt

from vehicle tax.The original aim of vehicle tax was purely fiscal. It was introduced in 1922 to

fund road maintenance and repairs necessary owing to damage caused by vehicles.

Nowadays vehicle tax can be seen as a charge for the right to use public roads

(Swedish Tax Agency, 2005), and as part-funding of the cost of investing in and

maintaining road infrastructure.

The tax on cars is differentiated according to fuel and the weight of the vehicleor its carbon dioxide emissions. Tax on cars of model year 2006 and cars qualify-

ing for environmental class 2005 (electric and hybrid) is determined by the car'semissions of carbon dioxide. Tax on other cars depends on the fuel they use and

their weight (heavier vehicles are taxed more heavily). Tax on petrol-driven cars

averages around SEK 1,500 a year. Diesel-driven cars are taxed much more heavily

than petrol-driven ones, the reason being that diesel fuel is subject to lower energy

tax than petrol. Vehicle tax is lower on cars in certain rural areas. The Government

has decided that diesel cars with low particulate emissions should qualify for an

annual vehicle tax rebate.The tax on heavy-duty vehicles varies depending on the number of wheel axles,

vehicle configuration and weight. A road charge is also payable for certain trucks

using the Swedish road network and whose total weight exceeds 12 tonnes. Thevehicle tax on trucks and trailers is reduced by the amount of the road charge (see

the section on road charge for trucks). Government Bill on Tax Relief for Cars in

Certain Environmental Classes (2005/06:167) proposes a temporary rebate on ve-hicle tax for heavy-duty vehicles and buses meeting the exhaust emission standards

that will become compulsory on 1 October 2006 or better. The purpose of this

move is to improve the competitiveness of Swedish road hauliers and increase the

environmental impact of vehicle taxation on heavy-duty vehicles. The proposed

change is expected to increase the use of heavy-duty vehicles with lower exhaust

emissions, and provide an incentive for bringing forward the purchase of newheavy-duty vehicles with even better environmental performance. The Government

is working to implement the new provisions with effect from 1 October 2006.




166

See below for further details on changes in vehicle taxation.

Vehicle tax on cars from model year 2006 and environmental class 2005 (electric and hybrid)On 1 May 2006 changes took effect in vehicle tax on new cars of model year 2006 and cars in

environmental class 2005 (electric and hybrid). Vehicle tax on these cars is based on three ele-

ments:

1) A basic fiscal tax of SEK 360 on all cars.

2) A carbon dioxide component of SEK 15/gram carbon dioxide emissions per kilometreexceeding 100 gram/km.

3) An environmental factor of 1.3 and a fuel factor of 2.7, i.e. 3.5 in total (1.3 x 2.7) for

diesel cars, to be multiplied by components 1 and 2. The environmental factor is a

surcharge for the higher emissions of particulates and nitrogen oxides from diesel

cars compared with petrol cars. The fuel factor is a surcharge for the lower-rate en-ergy tax on diesel compared with petrol.

Flexible fuel vehicles)qualify for a SEK 5/gram reduction of the carbon dioxide component.

Tax rebate for diesel cars with particulate filters

Government Bill on Tax Relief for Cars in Certain Environmental Classes (2005/06:167) pro-

poses a tax rebate for new diesel-driven cars, light buses and light commercial vehicles with low

particulate emissions. A new environmental class (2005 PM) will be created for these cars. To

qualify for tax relief, the vehicle must have particulate emissions no greater than 5 mg/km.

These cars will probably be fitted with particulate filters. The total tax rebate is SEK 6,000 and

applies to all new cars until the end of 2007. After that there is not considered to be any reasonfor a tax rebate, since more stringent standards for particulate emissions from new cars will take

effect. The proposal is due to take effect on 1 July 2006.

Vehicle tax on heavy-duty vehicles belonging to environmental class 2006

Government Bill on Tax Relief for Cars in Certain Environmental Classes (2005/06:167) pro-

poses a rebate on vehicle tax for heavy-duty vehicles and buses meeting the exhaust emissionstandards that will become compulsory on 1 October 2006 or better. In the Government's view,

only cars in environmental classes meeting current compulsory exhaust emission standards or

better can qualify for a lower rate of vehicle tax. When the next environmental class 2008 be-

comes compulsory on 1 October 2009, only those cars qualifying for that environmental class or better should have lower vehicle tax. It is proposed that the tax on vehicles in environmental

classes meeting the criteria for lower vehicle tax should be the minimum tax levels agreed in theEU. The minimum taxes vary depending on type, configuration and weight of vehicle, which

means that the size of the tax rebate will also vary depending on type and weight. At present the

tax varies from SEK 2,500 for the lightest vehicles to SEK 40,000 for the heaviest. On average,

the proposed new level will reduce the tax by just over SEK 200 for the lightest vehicles and by

SEK 20,000 for the largest and heaviest vehicles.

Vehicle tax revenues in 2003 totalled just under SEK 8 billion (Statistics Sweden

website, green taxes ). The tax has a marginal socio-economic impact and little




167

effect on trade and industry. Vehicle tax is levied on vehicles that must be regis-

tered in Sweden. It generates revenues for the state at low administrative cost.

EVALUATIONS

Vehicle tax on cars

The main evaluation of vehicle taxation as an instrument of environmental policy

was made by the Road Tax Commission (VTU) between 2002 and 2004 (SOU

2002:64, SOU 2004:63). The commission concluded that vehicle tax had little

environmental impact and suggested that it should be differentiated for cars accord-ing to their emissions of carbon dioxide to provide an incentive for choosing a new

car with low carbon dioxide emissions. The VTU proposal formed the basis for the

changes in vehicle taxation implemented in 2006. No impact analysis was made of

the proposal with regard to lower carbon dioxide emissions from new cars or othersocietal consequences.

The idea of increasing the environmental impact of vehicle tax on cars to improve the fuel efficiency of cars on the road had been discussed even before VTU

presented its vehicle tax reform proposals. Countries such as Denmark and Britain

had already introduced carbon dioxide differentiated vehicle tax. The Swedish EPA

and the Energy Agency had previously proposed that vehicle tax should be differ-

ential in relation to carbon dioxide emissions (Swedish Energy Agency and Swed-

ish EPA, 2004b, Swedish EPA, 2004b). The carbon dioxide differentiation proposed at that time was sharper than that introduced on 1 May 2006. The differentia-

tion actually introduced was estimated by the Swedish EPA and the EnergyAgency to have only a marginal effect on choice of new car (a maximum 0.5 per

cent reduction in carbon dioxide emissions from new cars).

To obtain data on the societal consequences of a carbon dioxide differentiated

vehicle tax, the EPA commissioned a study in 2001 for this purpose (SwedishEPA, 2002b). There is also an EU Commission study on the implications for car-

bon dioxide emissions of introducing a carbon dioxide differentiated vehicle tax in

EU-15 (EU-Commission, DG Environment, 2002). The conclusions from the study

were that the carbon dioxide differentiation per gram of carbon dioxide emitted

must be fairly pronounced to have a significant effect. Introduction of carbon diox-

ide differentiated vehicle tax would make it possible to reduce carbon dioxideemissions from new cars by up to four per cent without any major negative conse-

quences for Swedish trade and industry. A carbon dioxide differentiated vehicle tax

would be socio-economically beneficial.

Vehicle tax on heavy-duty vehicles

The proposed changes in the vehicle tax on heavy-duty vehicles proposed in Bill

2005/06:167, taking effect on 1 October 2006, are based on the VTU proposals. An

analysis of the proposals commissioned by the Swedish EPA concluded that thesame environmental effects could have been achieved by introducing a kilometre




168

tax for trucks by differentiating the kilometre tax according to environmental clas-

sification, which was also in line with VTU's final report (Swedish EPA, 2003e).

Effectiveness of the instrument

The main purpose of vehicle tax is fiscal. Environmental differentiation that re-

duces carbon dioxide emissions without lowering tax revenues would be highlycost-effective and help to achieve the climate objective, although it is difficult to

determine exactly how much it would help to reduce emissions. Greater differentia-

tion would increase the dynamic efficiency of the instrument by stimulating de-

mand for energy-efficient cars, but since Sweden is only a small market for car

manufacturers, this effect is likely to be marginal. This instrument should ideally

be internationally harmonised to achieve a greater impact.

5.4.4 Environmental classification of motor fuels and tax

differentiation

Environmental classification of motor fuels forms the basis for tax differ-

entiation according to the environmental characteristics of the various

fuel qualities Nowadays almost all petrol and diesel sold is of the best quality.

There is not currently considered to be a pressing need to evaluate the

environmental classification, with the possible exception of the tax dif-

ference between diesel in environmental classes 1 and 3, respectively.

HISTORY AND PURPOSE

Motor fuels have been environmentally classified since the early 1980s. This clas-

sification forms the basis for tax differentiation according to the environmental

characteristics of the various fuel qualities. The system consists of requirement

specifications (a table showing a number of parameters, such as maximum sulphur

content, density, and so on) for the various environmental classes of petrol and

diesel in the Exhaust Gas Treatment and Fuels Act, and a table showing the various

tax rates in the Energy Tax Act.Tax on the best environmental class of petrol (MK 1) is SEK 4.99 per litre. Tax

on MK2 is SEK 5.02 per litre. Tax on diesel is SEK 3.66 and SEK 4.23 per litre,

i.e. a much greater difference.

There are only five refineries in the world, all of them in the Nordic region, ca-

pable of manufacturing MK1 diesel. Considerable investment in dearomatisation is

required to be able to produce low-aromatic fuels such as MK1 diesel. This has

some effect on the balance of trade, probably positive.

EVALUATIONS

The instrument has been a highly effective means of increasing the use of moreenvironmental friendly fuels. In recent years virtually all fuel sold has belonged to

the best environmental classes. One reason for this is that it is rarely possible for oil




169

companies to distribute more than one quality of diesel or of 95 and 98 octane

petrol – they do not have the distribution capacity. Hence, they are obliged to

choose one quality, and have chosen Environmental Class 1.

The requirement specifications used in environmental classification of both petrol and diesel have changed. The latest changes in petrol classification were

small, and no evaluation of the entire system was made at that time. Changes have

now been made in diesel classification, and these were preceded by three govern-

ment-instigated studies by the Swedish EPA and the Swedish Road Administration,

respectively. These studies did not include evaluating the entire classification (i.e.all parameters), although the agencies did to some extent address these issues. The

aim of changing diesel classification was to allow the same tax on various biofuels

as on MK1 instead of the higher tax payable on MK3, and to allow low-level ad-

mixture of RME (rape methyl ester) in MK1 diesel.

All in all, it may be said that no comprehensive evaluation has ever been made, but that the classification changes made over time have entailed a degree of reviewof the way these systems have worked.

With the exception mentioned below, we do not consider at present there to be

an urgent need to evaluate environmental classification and the accompanying fuel

specifications.

One issue of current importance is the intermittent shortage of diesel of the best

environmental class – MK 1. Over the last year some companies have sometimes

been obliged to sell "European diesel" at fuel stations instead of MK 1. "Europeandiesel" belongs to environmental class 3 and the tax on it is therefore SEK 0.55

higher than the tax on MK1.Over the past decade MK1 diesel has probably been very positive for Swedish

urban air quality because exhaust particulates are less harmful thanks to much

lower aromatic and PAH concentrations in the fuel. More energy is required to

manufacture low aromatic fuel, however.

Some commentators believe that the exhaust particulate problem is solved by

fitting vehicles with particulate traps, and so there is no longer a need for MK 1diesel.

This is possibly an area for further study. There may also be reason to review

the levels of diesel tax differentiation and whether MK 2 should still be sold. There

has been no analysis of the size of the tax differentiation, which has remained static

since the introduction of environmental classification. The current differences are

based on the additional cost of manufacturing the better qualities. The idea was thatit should not be more costly for the oil companies to supply fuels with better envi-

ronmental performance. At present the difference between the tax on diesel quali-

ties is much greater than the additional cost incurred by the oil companies. A re-

view of tax differentiation levels may be called for.

It is not a self-evident principle that the size of the tax differentiation should be

determined by the additional cost of producing the better fuel qualities. From aneconomic viewpoint, it would be more appropriate to base the difference on a

valuation of the external effects caused by each environmental class. However, a




170

lack of knowledge about health effects and methods of evaluating them renders it

impossible to make an evaluation of this kind.

5.4.5 Taxation of company cars and free motor fuel

Essentially speaking, the rules on taxation of company cars have no envi-

ronmental purpose; they are instead intended to promote the sale of

heavy, powerful cars with above average fuel consumption. The tax rules

on the benefit of free fuel favour greater mileage. An estimated 25 per cent of all new cars are company cars, so the com-

pany car tax rules play a major part in determining the energy efficiency

of cars on the road in Sweden.

The beneficial environmental effects of introducing carbon dioxide-

related vehicle taxes in Sweden are counteracted by the company cartaxation regime.

The adjustment of the company car tax regulations in 1997 have not

affected the fuel efficiency of company cars. On the other hand, the deci-

sion to treat free fuel as a taxable benefit is estimated to have reduced

CO2 emissions by 0.2 million tonnes and nitrogen oxide emissions by

around 200 tonnes.

The reduction in the benefit value of company cars capable of using al-

ternative fuels has boosted sales of eco-cars.

It is considered that carbon dioxide differentiation of car benefit values

similar to that introduced in Britain could help to reduce climate impact. The definition of an eco-car should be revised, since it does not accord

with the definition used for public procurement purposes.

HISTORY AND PURPOSE

The benefit of free access to a company car for private use is subject to income tax

and social security contributions. Essentially speaking, the car benefit taxation

rules have no environmental purpose; they were introduced to compensate for the

tax advantages gained from having a company car. The car benefit rules are con-

sidered to have increased sales of large, heavy vehicles with above-average fuelconsumption. The tax rules on the benefit of free fuel also favour greater mileage.

The rules have been revised by interdepartmental working groups a number of

times, most recently in 1993 and 1997 (Ds 1993:53 and Ds 1996:34.). On both

occasions, the groups were charged with the task of drawing up proposals linking

taxation more closely to the actual mileage of each company car.

Since 1997 the benefit of a company car has been calculated using a formularymethod, not including fuel, as follows:




171

Benefit value = 0.3 x base amount* + 0.75 x interest rate on government bonds x

new car price + 0.09 x new car price + 0.2 x new car price exceeding 7.5 base

amount*

*The "base amount" is an index figure for social security and many other purposes, set bythe Government from year to year. In 2006 the base amount was SEK 39,700.

Since the benefit of company car is based partly on the "base amount" and on the

government bond rate, the taxable increment of a higher new car price is fairlylimited, which results in low price sensitivity for company car purchases.

Where a company car includes free fuel, the taxable benefit is the value of the

free fuel used multiplied by a factor of 1.2. The tax rules on the benefit of free fuel

mean that recipients of this benefit only pay only 60 per cent of the fuel cost paid

by other car drivers.

One change introduced in1999 was to lower the benefit value of cars that are orcan be run using alternative engine technology or alternative fuels (eco-cars) to

equal the benefit value of equivalent conventional cars. This adjustment was ex-

tended in 2002 so that the benefit value of electric and hybrid cars was lowered to

60 per cent of the benefit value of comparable conventional cars, subject to a

maximum of SEK 16,000 for a full year. In addition, the benefit value of cars ca-

pable of running on alcohol or gas was lowered to 80 per cent of the benefit value

of comparable conventional cars, subject to a maximum of SEK 8,000 for a full

year. The benefit value of gas cars was adjusted upwards to 60 per cent as of 1

January 2006. Under the car benefit taxation rules, the definition of "eco-car" in-cludes no energy-efficiency requirement, and therefore differs from the definition

formulated by the Swedish Roads Administration, which applies to public pro-curement of eco-cars.

IMPACT ON OTHER SOCIETAL GOALS, THE MACRO ECONOMY AND

WELFARE DISTRIBUTION

Implications for other societal goals such as GDP growth, employment, industrial

competitiveness, Swedish energy supply etc are thought to be marginal. Since the

company car taxation rules result in low price sensitivity for company car pur-

chases, company cars tend to be heavier and more powerful than the average new

car. This may favour car manufacturers such as Volvo and Saab, and give some-

thing of a boost to the competitiveness of the Swedish automobile industry as compared with other manufacturers selling smaller and cheaper cars. Volvo and Saab

now also sell flexible fuel vehicles, which qualify for lower tax. The tax reductions

for eco-cars cost the state around SEK 3 – 5 million in lost tax revenues in 2003

(Swedish Energy Agency and Swedish EPA , 2004b).

EVALUATIONS

One conclusion drawn in a study on carbon dioxide differentiated vehicle tax

commissioned by the Swedish EPA in 2002 was that the positive environmental

effects of introducing carbon dioxide-related vehicle taxes in Sweden would be

substantially counteracted by the current Swedish tax rules on company cars




172

(Swedish EPA, 200b). One of the main reasons for the poor fuel economy of cars

in Sweden thus appears to be that almost 50 per cent of new bar purchases are

company cars (of which about half are for private use), and that the way car benefit

rules are designed contributes to low price sensitivity to vehicle and fuel costs. Theenvironmentally harmful effect of the company car tax rules is that the taxable

value of the car is based on a formulary calculation, which is only partly based on

the new price of the car, so that there is relatively little difference between the tax

cost of more expensive, heavy and powerful company cars and lighter cars with

low carbon dioxide emissions.An evaluation of the effects in 1997 and subsequent years' change in the tax

rules governing company cars was made by Inregia in 2005 on the instructions of

the Swedish EPA (Swedish EPA, 2004e). The primary aim of the study was to

evaluate environmental effects in the form of increased demand for more fuel-

efficient cars, eco-cars, alternative fuels and possibly a fall in private mileage.Another aim was to analyse the effects of changes in the company car tax rules toestablish a closer link with vehicle carbon dioxide emissions.

The conclusion was that the amendments to the regulations in 1997 had no ef-

fect on the fuel efficiency of company cars. However, the decision to tax the bene-

fit of free fuel in 1997 reduced the mileage of company cars by 5,000 kilometres,

which was estimated to lower carbon dioxide emissions by 0.2 million tonnes and

nitrogen oxide emissions by around 200 tonnes. On average, the total taxable bene-

fit of having a company car was lowered somewhat after the changes in the rules,accompanied by a fall in carbon dioxide emissions.

The conclusion drawn about the 1999 reduction in the benefit value of cars capable of running on alternative fuels was that the move had increased sales of eco-

cars. The Swedish Petroleum Institute estimated in 2004 that ethanol cars are run

55 per cent on E85 and gas-driven cars 60 per cent on gas. But these percentages

depend on the price of ethanol and gas relative to petrol. If the fuel cost per kilome-

tre using petrol were higher than it was using ethanol and gas, the percentage of

petrol used in these cars would probably drop. It has not been possible to distin-guish the effect of the reduction in 2002 of the benefit value of eco-cars on the

number of new eco-cars from other factors simultaneously impacting on the num-

ber of new eco-cars being purchased, such as public procurement of eco-cars, free

parking for eco-cars in some municipalities, the congestion charge trial period in

Stockholm, a greater number of manufacturers selling eco-cars and petrol and die-

sel price rises.Since company car taxation is not intended to be an environmental instrument,

it is not relevant to determine either its cost-effectiveness or the degree to which it

has achieved its prime objective. Differentiation of tax on company cars would

help to achieve the climate objective (albeit, like most instruments, only to a lim-

ited extent) and, provided that other societal goals are not adversely affected, it has

the potential to be a cost-effective instrument. As Sweden is a small market, thedynamic efficiency achieved by offering incentives to develop more carbon diox-

ide-efficient cars will be limited. Since company cars are usually new cars, changes




173

in the tax rules on company cars also have a major impact on the second-hand car

market.

5.4.6 Road charges for certain heavy-duty vehicles

HISTORY AND PURPOSE

1 February 1998 saw the introduction of a road charge for heavy-duty trucks and

trailers having a total weight of at least 12 tonnes. This means that Sweden has

acceded to the agreement on road charge schemes existing in Denmark, Belgium,

Luxembourg, the Netherlands and Germany.


Road charges paid in one of these countries also apply in other signatory states.

The road charge for Swedish-registered trucks covers the entire road network and

is payable a year at a time. Vehicle tax on these vehicles is then reduced. The road

charge for foreign vehicles is payable for using motorways and certain trunk roads

("Europe Roads") that are not motorways. The size of the charge depends on the

number of axles and the exhaust class of the vehicle. Trucks with a tow bar arealways classified as having four or more axles. The charge is stated in euros. The

sum payable in Swedish kronor is adjusted each year. The following charges are

payable in 2006.

Table: Road charges 2006. axles, exhaust classes and amounts

Number of axles Exhaust class Annual road charge (SEK)

Two or three Euro 0 8,743



Four or more Euro 0 14,117



EVALUATIONS

No evaluations have been found.

5.4.7 Subsidised public transport.

The purpose of subsidising public transport is to make public trans-

port more competitive and to help to achieve the aims of transport

policy.

Public transport costs totalled SEK 21.6 billion in 2003. Revenuesof SEK 12.3 billion accounted for 56.8 per cent of these costs, sub-

sidies for 43.2 per cent.

Many factors influence the choice between the car and public trans-

port: journey time, availability, reliability, comfort, safety, price and

information. Fares have little impact on this choice, but do affect

travel for those without the option of using a car.




174

HISTORY AND PURPOSE

The main reason for subsidising public transport is to make it more competitive.

Public transport serves the aims of transport policy: accessibility, regional devel-opment, equal opportunities, transport quality, environment and road and rail

safety. A government report (SOU 2003:679) shows that low fares mean that more

travellers choose public transport, which in turn cuts down journey times, improves

the environment and reduces accidents and congestion in the transport system.

DESIGN

According to a statistical report (SIKA Statistik 2004:8), public transport costs

totalled SEK 21.6 billion in 2003. Revenues of SEK 12.3 billion accounted for 56.8

per cent of these costs; subsidies thus made up 43.2 per cent. Operating subsidies

from local authorities and others (National Public Transport Agency, EU etc) havefluctuated over the years. Generally speaking, subsidies from county councils andothers rose throughout the period 1993 - 2003. Municipal subsidies have decreased.

Subsidies rose overall by 11 per cent during the period.

EVALUATIONS

The TØI background report to the Public Transport Commission report (SOU

2003:67) presents findings from a large number of studies into elasticity, i.e. how

travel is affected by percentage price changes. The report shows that the mean

price elasticity is -0.38. This means that a 10 per cent rise in public transport fares

reduces travel by public transport by four per cent. Car costs affect use of publictransport with an elasticity of 0.20. This means that a 10 per cent rise in fuel costs

increases public transport use by two per cent. These are short-term elasticities.

The longer-term effects may be greater. Kristinehamn Municipality carried out a

trial with zero fares during 1997 – 1999, which doubled the number of passengers

using public transport in the town. When asked how they would have travelledwithout zero fares, 45 per cent said they would have taken the bus anyway, 25 per

cent said they would have taken the car, and the remainder said they would have

walked or cycled. Trollhättan Municipality cut the price of its monthly travel card

by half in 1994. This increased public transport use by 20 per cent, but did not

reduce car traffic.Experience has generally been that cuts in public transport fares have fairly lit-

tle impact on car use. Many factors influence the choice between the car and public

transport: journey time, availability, reliability, comfort, safety, price and informa-

tion. Fares have little impact on this choice, but do affect travel for those withoutthe option of using a car. This applies in the case of fairly modest fare adjustments.

One report (TØI, 2003) summarises findings on the impact of fare reductions

and reviews a number of Norwegian and Sweden forms of price discount. The

following problems are examined: a) What affect do fares have on the demand for

public transport; b) What is the experience of various forms of fare reductions in

Norway and Sweden?




175

There is another report entitled Benefits to Society of Public Transport (SLTF

(2001) It should be noted that the main purpose of that report was to elaborate

arguments in favour of public transport. The report includes a literature study inwhich a search has been made for various analysis of the socio-economic effects

that can be linked to public transport. An attempt has also been made to establish

correlations between public transport and various societal benefits.

EFFECTIVENESS AND DEVELOPMENT POTENTIAL OF THE INSTRUMENT

Report SOU 2003:67 points out that it is not possible to make all reasons for subsi-

dising public transport visible in a socio-economic calculation. This means that the

cost of the subsidy, i.e. the operating loss made by transport, cannot be weighed up

by corresponding positive effects.

WEALTH DISTRIBUTION FACTORS

One of the aims of subsidising public transport is to give everyone access to mobil-ity, including those who, for whatever reason, are unable to travel by car. Hence,

public transport may be said to favour the less well-off, women, handicapped peo-

ple and the young. The instrument thus has the express aim of redistributing

wealth.

5.4.8 Car tyre charges

The aim of the recycling charge is to funded SDAB's administration

of the recycling system for end-of-life tyres. Almost 100% of tyres are now collected and recycled.

The environmental impact of the charge is minimal. Producer re-

sponsibility has dictated behaviour, but if the charge did not exist,

collection and recycling would have to be funded in some other

way.

HISTORY AND PURPOSE

The provisions of the Producer Responsibility for Tyres Ordinance (1994:1236)

apply to all those importing, producing or selling tyres. The aim of producer re-sponsibility is to recover or recycle products in the most environmentally friendly

way. At least 80 per cent of all returned tyres are to be disposed of some way other

than landfill. The aim of the recycling charge is to fund the operations of SDAB

(Svensk däckåtervinning - Swedish Tyre Recycling) in administering the recycling

system for end-of-life tyres. SDAB is not run for the purposes of profit.

DESIGN

Tyre producers must accept end-of-life tyres and ensure that they are recycled, the

materials recycled, used for energy purposes or disposed of in some other envi-

ronmentally compatible way. Producers must provide information about returning




176

end-of-life tyres and facilitate their return. Consumers pay a recycling charge when

they buy new tyres.

Tyre charges are:

Type of tyre Charge, SEK

Car and motorcycle tyres 13

Swedish retread car tyres 8

Construction machinery and large tractor tyres 350

Construction machinery tyres larger than 29" 800

Truck tyres 80

Source: SDAB

EVALUATIONS Nearly 100 per cent of tyres are now collected and recycled (Source: SDAB). In

the first half of 2005 34,000 tonnes of tyres were collected, of which 33,000 tonnes

were recycled in some way. 58 per cent were used as fuel and 19 per cent for mate-

rials recycling (Source SDAB's newsletter "Aktuell", October 2005).

According to SDAB, the charge provides sufficient funding for its operations,

i.e. the company is able to "make ends meet" financially. Almost 100 per cent of

tyres are collected. In the first half of 2005 97 per cent of tyres were recycled.

Chalmers Industriteknik (CIT) in Gothenburg carried out a study in 2004 to

compare the total environmental burden caused by three recycling options. Parame-

ters included heavy metal emissions to water and the greenhouse effect. The subject of study was the use of tyre chips as a fuel in a cement furnace, coarse shred-

dings as a drainage layer in a final landfill cover and granulated tyres as an under-

lay for an artificial grass playing field. The findings were that in all three cases it is

environmentally better to use recycled rubber than virgin manufactured material.

The rubber granule underlay for an artificial playing field performed best in thecomparison. In second place came use as a fuel instead of lump coal in the cement

industry. This is the largest single use to which recycled tyres are put. One infer-

ence from the study is that the greater the environmental impact caused by manu-

facture of the material replaced, the better recycled rubber performs in comparison.

5.4.9 The car scrapping premium

The car scrapping premium has been fairly thoroughly evaluated and

analysed.

The car scrapping premium scheme is due to end on 1 January 2007,

when implementation of producer responsibility assigns responsibility

for end-of-life cars to the manufacturers.

The idea of sharply increasing the premium to speed up the rate at which

elderly vehicles with poor emission performance are scrapped is mootedat regular intervals. However, it is essentially more dynamically efficient

to raise the vehicle tax on old cars instead of encouraging people to scrap

them by offering a financial incentive.




177

HISTORY AND PURPOSE

The car scrapping premium was introduced on 1 January 1976. The aim was to

increase the incentives to take vehicles to scrap yards instead of abandoning them

in the countryside. A further objective was added in 1992 – to accelerate the scrapping of elderly vehicles with poorer exhaust emissions treatment. The car scrapping

premium is payable when a car is taken to an authorised car scrap yard.

EVALUATIONS

A fairly large number of evaluations and analyses of the scrapping premium have

been performed. The latter include one carried out by Inregia at the instigation of

the Swedish EPA. This was an in-depth analysis of the effect of increasing the car

scrapping premium to increase the rate at which old cars are taken to the scrap yard

(Swedish EPA 2004d).

The car scrapping premium scheme will be abolished on 1 January 2007, to bereplaced by producer responsibility for end-of-life vehicles. One issue currently

being examined is the purpose to which surplus cash in the car scrapping fund can

be put. One idea is to use the money to pay temporary premiums for scrapping of

the very oldest cars producing the worst exhaust emissions.

We do not consider it necessary to evaluate the car scrapping premium again.

5.4.10 Congestion tax

HISTORY AND PURPOSE

The tax is intended to reduce congestion on the roads and streets in and around

central Stockholm, and reduce emissions of pollutants that are harmful to health

and the environment. The tax also has a fiscal purpose in that it has been said that

most of the revenues should go to investment in public transport. Eco-cars are ex-empt from the tax, which serves as an incentive for buying them. The tax forms

part of the "Stockholm Trial", which ran from 22 August 2005 to 31 July 2006.

A large and complicated technical system is used to register all vehicle move-

ments into and out of the congestion zone. The administrative costs are fairly high.

EVALUATIONS

The Stockholm Trial was evaluated continuously while it was in progress; the final

comprehensive evaluations have now been completed and are available at

://www.stockholmsforsoket.se/.

The congestion tax trial seems to have been successful in the sense that there

was less traffic during the trial period, which ought to have reduced congestion,noise levels and concentrations of particulates and other harmful substances in the

air in the city centre. Emissions of greenhouse gases are reduced. Acceptance of

the tax increased markedly during the trial period.

The congestion tax trial in Stockholm is over and has been the subject of extensive

evaluation.




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5.4.11 Transport support

HISTORY AND PURPOSETransport grants have been introduced in furtherance of regional policy aims and

are paid for road, rail and lake transport undertaken by companies in certain indus-

tries in the four northernmost counties in Sweden.


Since 2000 grants have been confined to transport of raw materials and semi-finished goods sent for processing, outbound transport of finished or semi-finished

goods that have been processed, and unprocessed timber. The transport distance

must be at least 400 kilometres. Where goods are transported into or out of Swe-

den, grants are only available for the segment within Sweden. The grant is a per-centage of the transport cost and increases the further north the company is located.

Annual grants totalled approximately SEK 306 million in 2006. Just over 70 percent was paid for road freight, 20 per cent for freight on rail, and just under 10 per

cent for transport by ship. One third of grants are paid to the wood products indus-

try.

EVALUATIONS

Based on a case study of the impact of transport grants on ecological sustainability

(National Audit Office, 1998a), it is considered difficult to conclusively determine

the environmental effects of transport support, since these grants are intended to provide a stimulus for transport-intensive industry in the support area, which in-

crease the amount of transport. But the refinement/processing requirement also

encourages processing of local raw materials, which reduces transport. On balance,the environmental impact of the current transport support is considered to be mar-

ginal. A Swedish EPA report (2004b) has proposed a study into whether transport

support could be revised so that a greater proportion of transport is undertaken by

rail and sea.

It is difficult to conclusively determine the environmental effects of trans-

port support, since these grants are intended to provide a stimulus for

transport-intensive industry in the support area, which increase the

amount of transport. But the refinement/processing requirement also en-

courages processing of local raw materials, which reduces transport. On balance, the environmental impact of the current transport support is con-

sidered to be marginal.

It is not a priority at present to examine whether transport support can be

revised or should be abolished.




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OVERALL ASSESSMENT

The National Audit Office (1998) concluded that the environmental effects of

transport grants are probably marginal. Hence, it is not a current priority to exam-

ine whether transport support can be revised or should be abolished.

5.4.12 Tax reduction for alkylate petrol

The tax on alkylate petrol has been lowered by SEK 1.50/litre to encour-

age its use in simple two-stroke engines (e.g. outboard motors, snowmo-

biles and mopeds).

The instrument has not been evaluated. There is still very little use of alkylate petrol in the leisure craft sector.

This is probably due to a lack of information available to boat owners.

Demand has turned out to be very low, even in areas where the fuel has been readily available and the price has not been higher than that of nor-

mal petrol.

There is much greater interest in using the fuel in snowmobiles.

HISTORY AND PURPOSE

The purpose of lowering tax on alkylate petrol is to encourage the use of this fuel

instead of 98 octane petrol in two-stroke engines (outboard motors, snowmobiles,mopeds, chain saws etc), and also in lawn mowers, which usually have very simple

four-stroke engines. The tax is SEK 1.50 per litre lower than the tax on 95 octane

petrol.

Two-stroke engines, particularly older ones, generally have very poor envi-

ronmental performance. Around a quarter of the fuel is released unburnt, and com-

bustion is also incomplete, which means that exhaust gases are heavily laden with pollutants. If alkylate petrol is used in these engines instead of normal petrol, emis-

sions of the most hazardous category, PAHs – polycyclic aromatic hydrocarbons,

are reduced by 80 – 90 per cent.

EVALUATIONS

This instrument has not been evaluated. Sales for use in outboard motors are negli-gible, whereas use of alkylate petrol in snowmobiles has increased markedly in

recent years, which is very positive. Before tax exemption was introduced in 2002,

the Swedish EPA had been instructed to examine the scope for exemption (Swed-

ish EPA, 2002a). A forecast of the effect of lowering the tax on sales was made at

that time. Current sales are only a fraction of the forecast quantity. This is probably because of a lack of information about the advantages of alkylate petrol. A broad

information campaign could play a key role in increasing the use of alkylate petrol.

This applies particularly to its use in outboard motors. Alkylate petrol is now read-

ily available throughout the Stockholm archipelago, yet very few people choose to

refill their tanks with this fuel, even though the price is often only marginally

higher than, or sometimes even the same as, the price of ordinary petrol.




180

At present, there is virtually no data on the de facto environmental benefit of

using alkylate petrol in boat engines, or on the extent to which use of petrol in two-

stroke engines is responsible for the decline in stocks of many fish species in the

Baltic Sea and elsewhere. It is quite possible that actual discharges of PAHs (whichare reduced by 80 – 90 per cent using alkylate petrol) in shallow bays during fish

spawning have an enormous impact on the reproductive capacity of certain fish

species. We consider that it would be of value to examine this issue.

Nor has the instrument been sufficiently evaluated with regard to the size of the

tax reduction. The study mentioned above included comprehensive analyses todetermine an appropriate level for the tax reduction. The situation has changed

since then, in that alkylate petrol is now more in demand in Europe as an additive

to raise the quality of ordinary petrol. The price of raw alkylate has risen at the

same time as the price of 95 octane petrol has also changed. The appropriate tax

reduction may therefore now be different.The terms of reference for the 2002 study into the tax reduction placed great

emphasis on the importance of ensuring that low-tax alkylate petrol was not used in

cars. This meant that the Swedish EPA could not then propose a larger tax reduc-

tion that might allow petrol stations to sell low-tax alkylate petrol cheaper thanfull-tax 95 octane. There seems to be no doubt that a further tax reduction would

substantially increase use of this fuel to power leisure craft.

5.4.13 Aviation tax

Aviation tax has been decided on, but not yet approved by the EU. Aviation fuel is not taxed at present, and the introduction of aviation tax

is designed to reduce emissions of greenhouse gases from avaition, and to

generate revenue for the state.

The environmental impact of the tax is considered to be low in compari-

son with the potential effect of a tax on aviation fuel. A fuel tax should be

international, but there is little support for the idea.

HISTORY AND PURPOSE

The aim of aviation tax is to reduce greenhouse gas emissions from commercial

aviation, and to generate revenue for the state. Aviation as a whole is lightly taxedat present. There is no tax at all on aviation fuel even though air travel has a con-

siderably greater climate impact per person kilometre than all other forms of trans-

port. Carbon dioxide emissions are substantial, but emissions of nitrogen dioxides

and other pollutants when flying at cruising altitude on long-haul routes make for atotal climate impact that is 1.6 – 3 times greater than that produced by carbon diox-

ide alone.

A view commonly expressed by environmental protection authorities is that it is

absolutely essential not to give aviation competitive advantages by exempting it

from bearing the cost of the external effects it causes.




181

EVALUATIONS

No evaluations have been made, since the instrument has not yet been imple-

mented. The Swedish Civil Aviation Authority and SIKA have made certain ex

ante studies to try to forecast the effects on passenger numbers and, for SIKA's part, greenhouse gas emissions. (Swedish Civil Aviation Authority, 2005)

The proposal was heavily criticised when released by the Ministry of Finance

in the consultative phase. A view repeatedly expressed was that the implications of

the proposal for travel, greenhouse gas emissions and various stakeholders had not

been analysed.

Another central criticism was that aviation tax is a fairly blunt instrument forchanging environmental behaviour, since it is not linked to emissions and does not

reward fuel-efficient aircraft, for example. Some referral bodies even say that the

tax may have the opposite effect to that intended, because it will cause many pas-sengers to choose departures from airports outside Sweden, and that the number of

empty seats will rise, thus increasing emissions per person kilometre.

The Ministry of Finance proposals include a discussion of these drawbacks or"problems". The ministry argues that the tax is more in the nature of a transitional

solution, pending the introduction of more effective environmental instruments.

This refers to either a (European) aviation fuel tax or inclusion of aviation in the

emissions trading scheme. A fuel tax is an instrument that would provide a substan-

tially greater incentive for saving fuel and also, to some extent, technical develop-

ment.

5.4.14 Environmental shipping lane dues

Shipping lane dues are differentiated on the basis of the sulphur

content of the ship's bunker oil, and also whether or not the ship has

nitrogen oxide removal equipment.

The ship fuels sold in Sweden produce sulphur emissions almosttwice as great as terrestrial emissions. Nitrogen oxide emissions are

also sizeable – about two-thirds of those on land.

All in all, there is a need to evaluate shipping lane dues as an in-

strument, and also the scope for eventual introduction of new, probably international, instruments to combat the high emissions

produced by shipping.

HISTORY AND PURPOSE

Shipping lane dues were revised at the end of 2004 to increase the economic incen-

tive for reducing emissions of sulphur and nitrogen oxides. Ships that only use

bunker oil having a sulphur content not exceeding 0.5 or 1.0 per cent by weight

qualify for discounted shipping lane dues.

Shipping lane dues are split in two. One part is based on the gross tonnage of

the ship; the other is based on loaded and unloaded goods. The first part of the dues




182

is differentiated according to sulphur and NOX emissions. The goods-based dues

are only levied on loaded goods for traffic in Swedish waters. The maximum num-

ber of dockings for which gross tonnage-based dues are payable is five per calen-

dar month for passenger ships, and two for other vessels. Cruise traffic was for-merly exempt from shipping lane dues, but is now being phased into the system.

(Ministry of Industry, Employment and Communications, 2003).

EVALUATIONS

The Swedish Maritime Administration sector report for 2005 (2004b) presents its

experience of the first year of the new shipping lane dues. According to the ad-

ministration, there has not yet been any written evaluation of the environmental

impact of the new dues

At present there is no documented information on the extent to which the ship-

ping lane dues helps to reduce NOX and SOX emissions.

AGENCY COMMENTS

At present there are no effective instruments capable of mitigating the very high

emissions of sulphur dioxide and nitrogen oxides from shipping. Sulphur emissions

from this source, which have previously been underestimated, are greater than all

terrestrial emissions together. This is because international shipping is still able to

use heavy, sulphur-rich oils as fuel. Nitrogen oxide emissions from shipping are

also very high; emissions from ship fuel sold in Sweden equal approximately two-thirds of emissions on land. Emissions have in fact risen rather than fallen in recent

years.The lack of environmental instruments governing shipping is partly necessi-

tated by the fact that the industry operates in the face of international competition.

National regulations and instruments have a limited effect, and exacting Swedish

standards result in flagging out and hence even less opportunity to exert an influ-ence over emissions. Moreover, there are no instruments providing an incentive to

save fuel and reduce carbon dioxide emissions. Bunker oil is tax-exempt, and there

is fairly little motivation for shipping companies to reduce their fuel consumption,

as compared with road freight, for example.

Altogether, there is a need to evaluate shipping lane dues as an instrument, and

also the scope for eventually implementing new, probably international, instru-ments to mitigate the high emissions from shipping. The availability of emissions

data and the effectiveness of regulatory control may also be appropriate subjects

for examination.

The instrument is too weak to internalise the external effects. There is some

doubt as to how to calculate the internalisation ratio for shipping. Customary mod-

els only take account of the external effects arising in Swedish territory (and terri-

torial waters), whereas the majority of effects occur outside this area. The internali-

sation ratio will thereby be stated to be much higher than it is in reality.




183

5.4.15 Grants for disposal of oil waste from ships

The aim of these grants is to make it easier for harbour operators to

meet their waste disposal obligations, even where very large quanti-ties come into port on a single occasion.

Grants are available for harbour operators to dispose of oil waste

and other hazardous residues.

No evaluations of the scheme have been found.

Since very few grant applications have been received, it may be

suspected that the scheme is no longer needed, and that harbour re-

ception facilities have sufficient capacity.

HISTORY AND PURPOSE

The purpose of the grant scheme is to make it easier for harbour operators to meettheir waste disposal obligations, even where very large quantities come into port on

a single occasion.

Under the Waste Ordinance, municipalities must arrange for the disposal ofwaste at facilities for the reception of waste from ships in harbour. The waste in

question is oil waste, toilet waste, solid waste and other hazardous residues whose

discharge is banned under the Measures to Prevent Pollution from Ships Act. This

does not include ballast water or tank washings containing oil.


Grants are available for harbour operators to dispose of oil waste and other hazard-

ous residues that must be accepted and disposed of under section 22 of the Waste

Ordinance (2001:1063).

Grants may be paid to harbour operators to cover the cost of disposing of waste

that exceeds three per cent of the harbour's income from unloading and harbourfees or similar fees or income. However, grant eligibility requires that more waste

has been received than there has been reason to expect, bearing in mind the empha-

sis of operations at the harbour and the turnover of goods there. Grants have been

paid out only a few times over the last few years, the most recent example being

five years ago. It is highly unusual for the quantity of waste arriving to be so large

that it cannot be disposed of without financial support.

EVALUATIONS

We have not been able to find any evaluations of the instrument.




184

5.4.16 Environmental landing charges

Landing charges are differentiated on the basis of the emissions

of nitrogen oxides and hydrocarbons from the aircraft.

At present landing charges are payable in Sweden, Switzerlandand at Heathrow and Gatwick in London. Germany and the

Netherlands are contemplating introducing similar charges.

Landing charges in Sweden alone are not an effective instrument.

Their environmental impact is heavily dependent on the number

of countries that have introduced charges, and will be considera-

bly greater if and when the instrument is used in more EU coun-tries.

It is difficult to evaluate the effectiveness of the instrument.

We consider that it may be appropriate to wait for a time beforemaking any further evaluations.

HISTORY AND PURPOSE

Exhaust gas-related landing charges were introduced at Swedish state-owned air-

ports in 1998. Sweden and Switzerland were the first countries in the world to

introduce environmental landing charges. The charge is levied on the LTO cycle

(Landing and Take Off) and is thus based on local emissions (LFV Group (for-merly the Civil Aviation Administration), 1998). The effects on climate caused by

emissions of nitrogen oxides at high altitude are not taken into account.The charges scheme was modified in 2004. The charges are largely dependent

on the volume of nitrogen oxides emitted by individual aircraft, although some

account is also taken of hydrocarbon emissions. Charges for nitrogen oxides are

based on estimates of the environmental costs they cause.

At present landing charges are payable in Sweden, Switzerland and at Heath-

row and Gatwick in London. Germany and the Netherlands are contemplating in-

troducing similar charges. Since each aircraft lands at a large number of airports,the effect of the instrument of airlines' choice of aircraft is entirely dependent on

the number of airports and countries that introduce charges.

EVALUATIONS

LFV Group (Swedish Airports and Air Navigation Services) has made an evalua-

tion (LFV 2005) showing that landing charges have not resulted in lower emissions

at Swedish airports than elsewhere, since the aircraft are the same ones that land at

other airports. On the other hand, it has been found that airlines have sometimes

chosen to buy new aircraft with better emission performance as a consequence of

differential landing charges (since they are also imposed at a few of Europe's larg-

est airports). But it is not possible to quantify this effect because there are alwaysnumerous variables influencing an airline's choice of aircraft type.




185

A working group under ICAO is currently performing an evaluation, which will be

completed in the latter part of 2006. The Swedish Civil Aviation Authority is in-

volved in the evaluation. The report forms part of the background material for a

meeting of the ICAO Committee on Environmental Protection in February 2007.The Swedish Meteorological and Hydrological Institute (SMHI) (2004) de-

scribes NOX emissions, but not how they are affected by landing charges.

According to the Swedish Civil Aviation Authority22 airlines and aero engine

manufacturers consider the charges to have very little impact, whereas the authority

believes that they may actually have considerable effect, but that this naturally

depends on how many countries introduce them. Sweden is pressing for their wideruse in the EU. The authority considers there to be very little interest in landing

charges outside Europe.

We are of the view that, as things stand , pending the ICAO report mentioned

above and also bearing in mind that this instrument will probably be introduced inmore countries, it may be appropriate to wait for a time before making any further

evaluations. There is considerable difficulty in isolating the effect of this specific

instrument from other factors influencing the airlines' choice of aircraft models and

engines. We consider that the charges are not sufficiently differentiated, and thattoo few countries have implemented similar charges for them to be effective. How-

ever, differentiation does have the virtue of helping to internalise the external ef-

fects of aviation, and also of driving technical developments to a certain degree.

22 Conversation with Karin Sjölin, Swedish Civil Aviation Authority, 9 May 2006.




186

5.4.17 Relationship between instruments and environmental

objectives and strategies

Table 20 Relationship between economic instruments in the transport sector and Swed-ish environmental objectives


A Non-ToxicEnviron-ment

Zero

Eutrophication

SustainableForests

Other objectives

Energy tax The used of fossilfuels is indirectlylimited.

Differentialpetrol taxhelps.

Nitrogen oxideemissions areindirectly miti-gated.

Nitrogen oxideemissions areindirectly miti-gated.

Clean Air and aGood Built Envi-ronment. Fiscallysignificant.

Carbon dioxidetax

Carbon dioxideemissions are miti-gated/reduced.

Nitrogen oxideemissions areindirectly miti-

gated.

Nitrogen oxideemissions areindirectly miti-

gated.Counterproduc-tive if biofuelsare not ab-stracted sus-tainably.

Clean Air and aGood Built Envi-ronment Fiscally

significant.

Tax exemption ofbiofuels for motorvehicles

Carbon dioxideemissions are miti-gated/reduced.

Nitrogen oxideemissions aremitigated.

Counterproduc-tive if biofuelsare not ab-stracted sus-tainably.

Supply security,regional develop-ment

Carbon dioxidedifferentiatedvehicle tax

More carbon diox-ide-efficient cars.

Nitrogen oxideemissions fromheavy-duty vehi-

cles are mitigated.

Clean Air andNatural Acidifica-tion Only (exhaust

regulations forheavy-duty vehi-cles).

Tax differentiationaccording toenvironmentalclass

Counterproductive:Energy-intensivefuel production.

Loweraromaticand PAHemissions.

Clean Air.

Taxation of com-pany cars

Counterproductive:

Encourages the saleof large, heavy carsand greater mileage(lower tax for eco-cars is positive).

Counterproduc-tive:

Indirectly in-creases nitrogenoxide emissions.

Road charges forheavy vehicles

Subsidised publictransport

Marginal decrease inroad traffic.

Car tyres charge Increasedcollectionof tyres.

Car scrappingpremium

Speeds up the rateat which old "dirty"cars are scrapped.

A cleanerenviron-ment.

Tax reduction foralkylate petrol

Loweremissionsof PAHsand un-

burnt




187

petrol.

Transport support Regional devel-opment.

Internationalshipping and

aviation

Environmentalshipping lane

dues

Reduced NOxemissions

Natural Acidifica-tion Only andClean Air.

Environmentallanding charges

Indirect impact iflanding chargesinfluence choice ofaircraft type.

Indirect impact iflanding chargesinfluence choiceof aircraft type.

Table 21 Relationship between economic instruments in the transport sector and thethree action strategies.


Non-toxic and resource-efficient cyclical sys-

tems


environment

Energy tax More efficient energy use. Resource-efficient cyclicalsystems.

Carbon dioxide tax Increased use of renewableenergy. Counterproductive ifincreased used of renewableenergy reduces energy effi-ciency.



Tax exemption of biofuelsfor motor vehicles

Increased use of renewableenergy. Counterproductive ifincreased used of renewable

energy reduces energy effi-ciency.


Taxation of company cars Counterproductive: Lessefficient vehicles and in-creased mileage.

Vehicle tax More efficient vehicles.

Tax differentiation accord-ing to environmental class

Cleaner transport. Counter-productive: More energy-intensive fuel production.

Road charges for heavyvehicles

Subsidised public trans-port

Marginal decrease in roadtraffic.

Car tyres charge Increased collection oftyres.

Car scrapping premium Speeds up the rate at whichold "dirty" cars are scrapped.

Fewer "wrecks" aban-doned in the countryside.

Tax reduction for alkylate

petrol Reduced emissions of

PAHs and unburnt petrol.

Transport support

International shipping and

aviation

Environmental shipping

lane duesReduced NOx and SOxemissions.

Environmental landing

charges

Reduced NOx emissions.




188

5.4.18 Combined effects of instruments

There are a large number of instruments in the transport sector acting in combina-

tion to a very great extent. This means that is often difficult to evaluate the effectsof the individual instruments. Several of them have fiscal and well as environ-

mental objectives.

Fuel taxes (the energy tax and the CO2 tax on fuel) have a great impact on

overall demand for transport and hence motor fuel demand. Together with certain

other instruments, they are also central to long-term improvement in the energy-

efficiency of vehicles on the Swedish roads. Among other things, regulations gov-

erning company cars and free fuel play a major part in determining the kinds of

vehicle on the roads.There are a number of instruments that have been introduced to increase the

use of biofuels for motor vehicles as well as exemption from the energy and carbondioxide taxes. These instruments act together to a high degree. They include lower

benefit taxation of eco-cars and the ordinance that stipulates that 75 per cent of

state car purchases must be eco-cars. Municipalities often provide exemption from,

or reduction of, car parking charges for these cars; some also subsidise the pur-

chase of eco-cars.Instruments that do not have an explicitly environmental purpose may also

have a marked effect on the environmental impact of traffic. One example is the

current travel allowance regime, under which, essentially speaking, only car jour-

neys qualify for the allowance.

In addition, there are other instruments that are designed to reduce urban caruse. Their objectives relate primarily to concentrations of air pollutants and conges-tion. Strictly speaking, they comprise environmental quality standards, environ-

mental zones and the congestion tax in Stockholm. From a broader viewpoint it is

also possible to include parking charges and other parking regulations, public

transport subsidies and, not least, travel allowances. These address local environ-

mental problems, and it may therefore be difficult to gain a national overview of

the instruments used or needed. There is much to suggest that levies imposed oncar use in particular affect traffic volumes as long as there are viable alternatives,

whereas subsidised public transport, for example, does not have any appreciable

effect on the amount of car traffic.

Generally speaking, aviation and shipping are taxed lightly in comparison with

road traffic. Fuels used in both sectors are untaxed, and there is a general absence

of effective means of combating emissions from these sectors. Hence, sulphuremissions from shipping, which had previously been underestimated, are greater

than all terrestrial sulphur emissions together. The overall impact of aviation on

climate is only marginally influenced by taxes. The lack of instruments aimed at

these modes of transport is very much due to the fact that they operate in interna-

tional markets. National regulations and instruments have limited effect, and strin-

gent Swedish standards result in the flagging out of Swedish ships, for example.




189

5.5 Agriculture and fisheries5.5.1 Support for creation of energy forest and for cultivation

of energy crops

Grants for the planting of energy forest on arable land have been available since

1990. The purpose of plantation grants is to increase production of renewable en-

ergy from arable land. The original grant was approximately SEK 9,000/ha over a

five-year period, together with a lump sum plantation grant of SEK 10,000. WhenSweden joined the EU the grant was reduced to SEK 5,000/ha (Board of Agricul-ture, 2006b).

In addition to plantation grants, support is available for cultivation of energy

crops. It is possible to grow energy crops on land not in use, i.e. that is lying fal-

low, and to receive the same farm support as for other arable land. This right has

existed since the system of subsidised fallow land was introduced in the early

1990s. In addition to energy forest such as Salix, crops grown for energy purposes

are hay, energy grass, grain, rape, sugar beet and hemp. Farm support is given inthe form of "support rights" to farmers, based on the area of fallow land, arable

land and pasture land, as well as the region in which it is located. Additional to

farm support is special EU "area support" of €45/ha, up to a maximum of 1.5 mil-

lion hectares, for cultivation of energy crops on arable land. If support is sought for

more than 1.5 million hectares, the support per hectare is reduced, so that everyone

receives the same support per hectare (Board of Agriculture, 2006b).Salix and reed canary grass (energy grass) are perennial energy crops, unlike

oilseeds, for example, which are annuals. Salix is harvested for the first time after

four to five years, and thereafter about every three years, over a period of 20 to 25

years in total.

This form of support has relatively little environmental impact because it

is administratively burdensome for farmers. The level of grants is probably sufficient.

Perennial energy crops give positive external effects that are not derived

from annuals. This should be taken into account when designing instru-

ments, although this is not the case at present.

Annual crops help to maintain open landscapes, which is not always true

of perennial crops. But the alternative to cultivation of perennial crops isoften spruce forest.

The extent of the positive external effects depends on where cultivationtakes place.

Instruments to reduce the farmer's exposure to risk in committing himself

to Salix (willow) cultivation for many years should be examined.

EU instruments under the Common Agricultural Policy (CAP) are themost important instruments as far as agriculture is concerned.




190

EVALUATIONS

Cultivation of perennial crops is normally better from an environmental viewpoint,

since nutrient leaching and use of pesticides are usually lower than when annual

crops are grown. The effects on biodiversity are very much dependent on what isgrown and where and how it is grown. In areas of intensive cultivation of cereal

crops perennial bioenergy crops may have a positive effect, whereas there is a risk

of limited crop rotation of annual bioenergy crops (grains and oilseeds), which will

necessitate greater use of pesticides (Energy Agency, 2003). Cultivation of energy

forest can rid arable land of cadmium.

Salix does not result in open landscapes, since it forms woodland. Reed canarygrass, which is also a perennial, helps to keep landscapes open to about the same

extent as traditional crops. When considering whether to plant Salix, however, the

options are not confined to growing some other crop that helps to maintain an open

landscape; another alternative might be spruce forest, for example (comment byErik Hedar, Energy Agency).

Energy forest production costs (not including grants) for a well-run plantationare estimated for the purposes of calculation at approximately SEK 140/MWh

(Energy Agency, 2003). The price paid by users for wood chips (free boiler) was

around SEK 140/MWh in 2004 (Energy Agency, 2005c). Cultivation of energy

crops often has positive side-effects, which means that the socio-economic cost

may be much lower. These side-effects include the ability to treat waste water and

leachate and less soil erosion, as well as lower concentrations of cadmium in soil.

Company operating costs are also affected, however. Using waste water and sew-

age as a fertiliser on Salix is an alternative that reduces costs both for the growerand the municipality (Energy Agency, 2003). But one disadvantage of using wastewater and sewage sludge on arable land is that this restricts the scope for growing

food crops later on (comment from the Ministry of Agriculture). When Salix is

grown along watercourses to reduce nutrient leaching, this makes harvesting more

expensive for the grower. Decontamination of cadmium-contaminated soil using

Salix entails extra expense for separation of cadmium from the wood ash (Energy

Agency, 2003). Cultivation of Salix also means that the farmer must have differentmachinery from that used for annual crops and reed canary grass. (Swedish Board

of Agriculture, 2006b)

Moreover, different energy crops demand differing amounts of land to produce

a given quantity of energy. Börjesson and Berndes (not yet published) show the

area of land used for heating and for electricity use in a detached house, and also

the quantity of biofuel produced per hectare and year. Börjesson and Berndes showthat Salix produces the most energy per hectare of arable land. This may be impor-

tant in terms of resource deployment, since Sweden does not have an unlimited

amount of land available for various land-use requirements.




192

Under the scheme, district heating companies would receive subsidies acting as an

incentive to offer long-term contracts to Salix growers. The subsidies could be kept

as low as possible by an auction procedure in which the district heating companies

accepting the lowest subsidies would receive support.

Administrative burden

The regulations governing both support for energy crops and the possibility of

growing crops on fallow land are numerous, and are perceived by many stake-

holders to be complicated. Applicants for EU support must be able to produce a

signed contract with a purchaser/processor. The purchaser must in turn lodge a bond with the Swedish Board of Agriculture of €60/ha, which will be refunded

when the purchaser has shown that the energy crop has been used to produce en-

ergy. Many farmers have lost out on support because they have misunderstood the

regulations. One of the main reasons that the regulations are so extensive is toavoid the risk of paying out double support. The EU also wishes to ensure that lax

controls do not allow energy crops to be used in the pulp and paper industry. TheSwedish Board of Agriculture has pointed out to the EU Commission on several

occasions that the regulations are too complicated, but has not met with a sympa-

thetic response. Many forms arriving at the Board of Agriculture have not been

correctly filled in; additional information is required. In the autumn of 2006 the

Commission will be presenting a report on support schemes for energy crops

within the framework of the CAP. Where necessary, the report may be accompa-nied by proposals.

The instrument is complemented by the energy and carbon dioxide taxes, theemissions trading scheme and the electricity certificate scheme, since these raise

the relative cost of using fossil fuels and electricity.

AGENCY COMMENTS

Cultivation and use of Salix for energy purposes gives rise to a number of positive

external effects (environmental effects). This is reason for allocating public fund-

ing for this purpose. Notwithstanding a certain amount of financial support since

1990, the area of land under Salix has not increased to any great extent. One factorinhibiting expansion of the practice is the risk that farmers are obliged to take when

they commit themselves to Salix cultivation for many years ahead. Since the areaof land used is small in relation to the energy yield derived from the crop in com-

parison with annual energy crops, and there are important positive side-effects of

growing Salix, it could be socio-economically efficient to reduce the risk taken by

farmers by introducing long-term agreements that guarantee them a minimum pricefor their energy crops or the like. It may be of interest to examine this issue further.

Salix changes the landscape, which must be weighed up against all the positive

effects it brings. As the external effects of Salix cultivation vary depending on

where it takes place, there may be socio-economic reasons for using regionally

differentiated instruments.

Reed canary grass is a perennial crop having the same positive ability to absorb

nitrogen and be fertilised with waste water and sewage sludge. The effect on the




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landscape is not as great as with Salix cultivation, and farmers need not purchase

new machinery if they already have equipment for cultivation of annual crops. It

may therefore be easier for farmers to change over to reed canary grass. The above-

mentioned positive effects of growing this crop may be reason to give it additionalsupport in relation to that available for cultivation of annual energy crops. Cultiva-

tion of reed canary grass may serve as a transitional phase towards increased Salix

cultivation.

5.5.2 Grants for conservation of nature and cultural heritage,

and deciduous forestry

Since the "forest management charge" was abolished in 1992, gov-

ernment support for forestry has diminished sharply.

The grants that remain are grants for conservation of nature andcultural heritage, and for deciduous forestry.

The Swedish Forest Agency considers that funding allocated for

renovation and restoration of valuable rural environments in forest

areas has helped to create a good local environment and to allow

opportunities for recreation and appreciation of nature in the forest

and countryside. The grants also give landowners an incentive to

take measures and improve their knowledge and understanding ofnatural assets and cultural heritage in the forest.

The grant schemes has not been the subject of comprehensive

evaluation. However, we do not see a pressing need for a specificevaluation of these schemes, since their scope is fairly limited and

they mainly serve as a complement to other instruments such as leg-

islation.

HISTORY AND PURPOSE

Government forestry grants have decreased sharply, and are now principally con-

fined to certain environmental projects. Forestry support used to be funded via the"forest management charge". Most grants ended when the charge was abolished in

1992. The largest remaining grant is the support given for deciduous forestry.

Grants for conservation of nature and cultural heritage are given priority as fol-

lows.

1) Conservation of flora and fauna, and valuable cultural heritage.

2) Landscape conservation and outdoor recreation.

Grants for deciduous forestry are primarily available for measures in existing de-ciduous forests and woods, and secondly for regeneration measures in damaged

plantations intended to create new deciduous forest. Thirdly, grants may also be

obtained for the planting of new deciduous forest on other suitable land.




194


Forestry grants are governed by the State Forestry Grants Ordinance (1993:555),

and by Swedish Forest Agency Regulations and General Guidelines on Govern-ment Forestry Grants (SKSFS 1993:1).

Grants for conservation of nature and cultural heritage totalled SEK 9 million

in 2004, broken down into the following measures.

Nature conservation measures for a specified area of land (SEK 6.9 mil-

lion).

Conservation of cultural heritage (SEK 2 million). Other measures for improving landscape and outdoor recreation (SEK

0.2 million).

The grant is 70 per cent of the approved cost.

Grants totalling approximately SEK 20 million were paid for deciduous forestry in

2004, broken down into the following measures.

Complete regeneration (SEK 6,398,000).

Supplementary measures (SEK 2,940,000). Clearing (SEK 4,384,000).

Marking-out, advisory services (SEK 6,493,000).

Grants for complete measures for creation of deciduous forest make up 80 per cent

of the approved cost. Grants for clearing saplings or thinning-out make up 60 percent of the approved cost of the measure.

EVALUATIONS

Environmental effects

One of the prime objectives of the project entitled "Evaluation by the Swedish

Forest Agency of the Effects of Forest Policy (SUS) 2001" was to assess the past

and present effects of forest policy. In its report, (2001a), the Swedish Forest

Agency writes that funds allocated for conservation of nature and cultural heritage

in forestry have helped to create a good local environment, and to give people the

chance to appreciate the countryside.A Swedish Forest Agency report (2005a) states that funding for conservation of

nature and cultural heritage was used positively in 2005, but that heritage conserva-

tion measures are still under-represented. Most grants have been awarded for

"burning", "ancient cultivated landscape and "aquatic habitats". The funding for

conservation of nature and cultural heritage has several positive effects on naturalassets and cultural heritage in the forest. Landowners are given an incentive to take

action and at the same time gain increased knowledge and understanding of these

natural assets and cultural heritage.




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5.5.3 Nature reserves

Formal protection, combined with voluntary designation and a highdegree of consideration and adaptation of forestry methods are impor-

tant elements of sustainable forestry.

Insufficient funding has been allocated for land purchase and compensa-

tion paid for land-use restrictions when nature reserves are created. Withthe current allocation and prices for forest and forest land, the interim

target for long-term protection of forest land will not be achieved until

2020, even though the allocation – at SEK 800 million for 2006 - is

more than twice the 2000 figure. Funding for land management has treb-

led since 2000, and was approximately SEK 300 million in 2006.

Financial monitoring of land management needs to be improved, amongother things as regards the cost of various management methods andtheir relative efficiency in terms of nature conservation benefits.

In-depth evaluation of the way that funding helps to conserve biodiver-

sity, cultural heritage and social assets is desirable to further increase the

utility of funding.

HISTORY AND PURPOSE

Very large areas of the Swedish land mass consist of productive forest land. The

forestry sector manages a renewable resource that is of enormous importance toman, plants and animals alike. Forestry has significant effects on the environment,

particularly as regards biodiversity in forest biotopes. Ancient, species-rich natural

forests have been replaced by highly productive, but species-poor afforestation.

Clear-cut areas and forest roads have caused extensive loss of habitat and fragmen-

tation of natural forests and other woodland worthy of protection. Just under 5 per

cent of productive forest land below sub-montane forest is worthy of protection.

Many valuable natural forests and other forest biotopes are still threatened byfelling.

The purpose of long-term projection of forest land is to help to achieve the Sus-

tainable Forests environmental objective, i.e. to protect the value of forest andforest land for biological production, and to conserve biodiversity, cultural heritage

and social assets. Between 1999 and 2005 some 94,000 hectares of forest land was

protected by designation as nature reserves, of which around 22,000 hectares were protected in 2005. The major part of these areas comprises the most biologically

valuable forest, including key biotopes, areas of natural assets and other key areas

of value. Several of the forest areas protected as nature reserves during the period

also have considerable recreational value.


Creating nature reserves involves interplay between the Swedish EPA and countyadministrative boards in consultation with the landowners concerned and other




196

stakeholders. The process entails a number of stages, including survey,

consultation, valuation, negotiation, agreement, consultative phase and decision.

These are described in detail in a report by the Swedish EPA (2006b).

Insufficient funding has been allocated for land purchase and compensation paid for land-use restrictions when nature reserves are created. With the current

allocation and prices for forest and forest land, the interim target for long-term

protection of forest land will not be achieved until 2020, even though the allocation

– at SEK 800 million for 2006 - is more than twice the 2000 figure.

Funding for land management has trebled since 2000, and was approximatelySEK 300 million in 2006. This is considered to increase the scope for county ad-

ministrative boards to raise the quality of nature reserve management.

EVALUATIONS

Environmental effectsThe Environmental Objectives Council (2006b) points out that formal protection,

voluntary designations and a high degree of consideration and adaptation of for-

estry methods are important elements of sustainable forestry. The council alsoemphasises that, on the basis of current funding and prices for forest and forest

land, it will not be possible to achieve the target until 2020.

The National Audit Office (RRV, 1998b) has tried to ascertain whether the

relevant public agencies choose the areas most deserving of protection. Its overall

conclusion was that the agencies did not at that time have the organisation and

systems necessary to choose the most deserving areas for protection. It also consid-

ered it impossible to know whether biodiversity is conserved by protecting the biotopes for which these measures are intended.

The National Audit Office has produced a report (2005) in which it examines

how a number of government agencies deal with land purchases. "Land purchases"

here means instances where the public is given access to private land for reasons of

essential public interest. In return, the landowner receives compensation for theloss he incurs as a result of restriction in land use (e.g. in a nature reserve). The

Swedish EPA was one of the agencies studied. The first question asked was

whether the agencies follow land purchase procedures that make it possible and

likely that landowners are treated fairly and equally, and ensure that internal man-

agement and controls are also satisfactory in other respects. The second questionwas whether the agencies examined provide relevant and adequate information

about land purchases to landowners and the Swedish Tax Agency.

The National Audit Office concluded that, to all intents and purposes, theSwedish EPA has established internal management documents and divided up

duties and responsibilities in a satisfactory manner. Documentation of the valua-

tions made was satisfactory, and the background data essentially provided a sound

basis for subsequent quality control. In addition to general recommendations, for

example, that valuation methods were in need of review, and that scope should be

created for systematic follow-up of land purchases, the National Audit Office rec-

ommended that, where applicable, the Swedish EPA (and other agencies) should




197

implement systems for internal follow-up of land purchase and ascertain how the

scope for negotiation is used by the respective agencies.

Since the late 1990s the Swedish EPA, the Swedish Forest Agency and the

county administrative boards have carried out extensive surveys, summaries andanalyses. As a result, there is considerable information about natural assets in for-

ests. For example, one Swedish EPA background report (2005f) has made it possi-

ble to geographically specify interim Target 1 so that county-by-county protection

area targets can be set in the national strategy for formal protection of forest

(Swedish EPA and Swedish Forest Agency, 2005). In addition to the above studies,an enormous amount has been done to improve data, documentation and guidelines

on area protection. For instance, in 2003 the Swedish EPA produced a handbook

on creation and management of nature reserves (2003i). A number of other key

documents are in production in 2006. These include revised bog protection and

national park plans, and land management guidelines for the Swedish EPA.Data is evaluated continuously, among other things as part of the in-depth

evaluation of the environmental quality objectives.

In its letter of instruction for 2006 the Swedish EPA was directed, in consulta-

tion with the Swedish Forest Agency, to analyse the additional area protection

measures that should be taken in the light of the Convention on Biological Diver-

sity working programme on protected areas and the OECD recommendations on

area protection. A report on this project is to be submitted by 1 July 2007.

In 2000 the Swedish EPA evaluated the major specific funding allocations asadministrative instruments, including management of protected areas. In its report

(2000b), the agency underlines the need to improve knowledge of the relationships between measures, effects and costs.

Socio-economic effects

The Swedish Forest Agency (2005b) has estimated the socio-economic effects and

costs to the state of achieving interim target 1 for Sustainable Forests, i.e. for all

forms of formal protection – not only nature reserves. Between 2004 and 2010 the

socio-economic costs, which are essentially the permanent loss of economic pro-duction, are estimated to be SEK 8.6 billion in forestry, and SEK 11.1 billion in

wood processing. It is estimated that the cost to the state of various forms of pro-

tection, including lower tax and charge revenues because less forest is felled (less

revenues from tax on compensation paid to landowners) will total SEK 12,853

million between 2004 and 2010.

It appears from a Swedish EPA report (2005h) that the significance of pro-tected areas for regional and local development lies partly in the ability to invest in

ecotourism and other forms of tourism with a greater degree of security and a more

long-term approach, since these areas have been designated and protected for the

future.

Cost-effectiveness of the instruments

A Swedish EPA report (2005g) shows a need for better financial analysis of man-

agement of protected areas, among other things as regards the cost of various




198

management measures and their relative cost-effectiveness, their nature conserva-

tion benefits. One way to achieve the most or the best management for the money

is to put management services out to tender – a procedure that the Swedish EPA

has recommended to county administrative boards. At present there is little comparison of results and costs between various management methods between suppli-

ers and between county administrative boards and other managers.

In April 2005 the Swedish EPA adopted guidelines for evaluating management

of protected areas. The counties of Värmland, Örebro, Östergötland, Gotland and

Jämtland were visited and evaluated in 2005. The results will be collated in 2006.

5.5.4 Nature conservation agreements and biotope protection areas

HISTORY AND PURPOSE

The aim of nature conservation agreements is to conserve and develop or create

areas of great natural value. Since protected biotopes are sometimes part of an

agricultural landscape, the man-made environment is also important in practice.

Areas covered by agreements are sometimes of importance for recreational pur-

poses.

Nature conservation agreements are legally binding contracts. These

agreements, which are concluded with the Swedish Forest Agency,are seen as part of long-term forest protection. Landowners receive

financial compensation for the restrictions in land use under the

agreement.

It has been difficult to establish these agreements at the pace and to

the extent planned by the Swedish Forest Agency. Not until 2002

was the area of land covered by nature conservation sufficient to en-able the target to be achieved.

Many forest owners consider the compensation paid under nature

conservation agreements to be too low, which renders the agree-

ments less financially attractive.

Tax legislation treats the compensation as business income, which is

unfavourable for the forest owner, who may be obliged to pay tax of60 – 70 per cent on that income because it cannot be booked using

accrual accounting principles.

Compensation for biotope protection areas is taxable under the rules

governing sale of business properties. A capital gain is calculated

and taxed at 30 per cent. The provisions are in line with those apply-

ing to nature reserves. The pace at which land is designated for protection needs to increase

if the target is to be achieved. Capital gains taxation of real property

and accrual accounting of income under nature conservation agree-ments should be reviewed, as should compensation levels (see chap-

ter 4.5.5).




199

Since 1992 the Swedish Forest Agency has been able to deploy funding in order to

conclude binding contracts in the form of nature conservation agreements for forest

biotopes. The target is that 50,000 hectares of the total area not used for forest

production by 2010 should be covered by nature conservation agreements.The law provides that the purpose of creating biotope protection areas is solely

to protect biological assets. The areas eligible for designation as biotope protection

areas are small areas of land or water that provide a habitat for endangered species

of animals or plants that are particularly worthy of protection. The target is that

30,000 hectares of the total area not used for forest production by 2010 are to have been designated as biotope protection areas.


Nature conservation agreements normally run for 50 years and never for less than

30. The agreements are seen as part of long-term forest protection. Landownersreceive a certain amount of financial compensation for the restrictions in the use of

their land imposed by the agreement. Landowners sometimes enter into agreements

without financial compensation. Title to the land and hunting rights are not af-

fected. The agreement governs the way that natural assets are to be conserved and

developed. Conservational management favouring natural assets must generally becarried out. The landowner normally performs management measures at his own

expense. The timber then accrues to the landowner. The measures are not compul-

sory. The landowner receives a lump sum payment to offset the cost of the restric-

tions in land use in the area. This is usually SEK 5,000 – 12,000 per hectare. VAT

is not payable. Compensation is taxed as business income and may not be ac-counted for using the accruals method (see above).

The target is that by 2010 there should be 50,000 ha covered by nature conser-

vation agreements and 30,000 ha of biotope protection areas. In 2004 some SEK 32

million was paid out in compensation under nature conservation agreements, and

approximately SEK 95 million for biotope protection (Swedish Forest Agency,

2006).

A biotope protection area resembles a nature reserve, but lacks regulations anda management plan. Activities of potential harm to the natural environment may

not take place in a biotope protection area. The landowner may receive compensa-

tion for restrictions in his use of the land. The decision applies in perpetuity. Com-

pensation is taxable as a capital gain on sale of a business property. A capital gain

is calculated and taxed at a current rate of 30 per cent.

EVALUATIONS

Administrative aspects

A Swedish Forest Agency report (2003) reveals that approximately 10 per cent of

the funding allocated for biotope protection is used to cover costs incurred by pub-

lic agencies for dealings with landowners, valuation, marking out etc. The propor-tion is somewhat lower for biotope protection and higher for nature conservation

agreements. This is equivalent to an average of 1.5 working days per hectare, i.e.

five days per site.




200

Cost-effectiveness of the instruments

A Swedish Forest Agency report (2003) found that it had been difficult to establish

nature conservation agreements at the pace and to the extent that it had planned.Only in 2002 was the area of land covered by nature conservation agreements suf-

ficient to allow achievement of the target. According to an Environmental Objec-

tives Council report (2006b) 14,780 hectares had been covered by nature conserva-tion agreements to 2005.

Many forest owners consider the compensation paid under nature conservation

agreements to be too low. Many stands suitable for conservation hold a great deal

of timber, and nature conservation agreements under which only very limited fi-

nancial compensation is available are not particularly financially attractive. Swed-

ish tax law treats the compensation as business income, which is unfavourable for

forest owners, who may be obliged to pay tax of 60 – 70 per cent of the income.According to an Environmental Objectives Council report (2006b), 12,007 hec-

tares of land had been covered by biotope protection by 2005. The Swedish Forest

Agency (2003) considers that the pace of designation must be increased from

around 2,000 hectares a year to 3,000 hectares a year, and that the pace of designa-

tion is a question of available resources.

5.5.5 Tax incentives in the forest sector

Tax policy is one of the most powerful forces acting on forest owners

and their forest. Current capital gains taxation provisions are an obstacle to the creation

of nature reserves. They should be revised so as to increase the pace atwhich area protection is introduced and the efficiency of the process.

The Swedish Forest Agency has said that the rules preventing accrual

accounting of income under nature conservation agreements are one of

the main problems with these agreements. The rules should be revised.

HISTORY AND PURPOSE

A report by the Swedish Forest Agency (2003) deals with a number of tax provi-

sions affecting forest owners and their forest. The purpose of these provisions var-ies. Provisions specific to the forest sector include the "forest allowance", which

speeds up structural rationalisation and provides an incentive for increased felling

on newly-acquired land, and the "forest account", which provides rollover relief for

the portion deposited in the account and reduces the incentive to fell towards the

end of a period of forest ownership.

Other general business tax provisions include the right to offset business losses

against income from employment. This reduces the incentives for felling during thefirst five years of forest ownership. The reduced tax rate (decided in 1993) makes it

more attractive to fell and to do so sooner rather than later (since interest after tax

will be higher). The reduced tax rate also makes it less attractive to take forest




201

conservation measures that will generate income far in the future. The right to ap-

portion interest gives an added incentive to fell and reduces incentives to care for

the forest. As a result, new kinds of purchasers buy forest. Tax adjustment reserves

of various kinds give further incentives for felling and less reason to conserve theforest. The regulations preventing accrual accounting of revenues make forest

owners less inclined to enter into nature conservation agreements. Capital gains

taxation impacts on the financial outcome for forest owners when nature reserves

are created.

EVALUATIONS

A report by the Swedish Forest Agency (2001b) points out that tax policy is one of

the most powerful forces acting on forest owners and their forest.

The Swedish EPA and the Swedish Forest Agency have emphasised in various

contexts that there are tax rules hindering achievement of the forest protectiontarget:

The Swedish EPA (1998, 2004b) and the Swedish Forest Agency (2003)

have in various contexts identified the current capital gains taxation rules

as an obstacle to the efforts being made to create nature reserves. Theagencies consider these rules make land purchases for nature conserva-

tion purposes more expensive, more difficult and more time-consuming.

This issue is also addressed in a Swedish government report (SOU

1998:95).

The Swedish Forest Agency has emphasised that the absence of a right toaccount for income under nature conservation agreements on an accruals

basis is one of the main problems with these agreements. Landowners

concluding agreements with the Swedish Forest Agency are often in-

volved in litigation over this issue, losing as regards the right to apply ac-

crual accounting methods.

Capitals gains taxation in conjunction with the creation of nature reservesand biotope protection areas

Under the National Income Tax Act (1947:576), capital gains tax is payable both

on purchase money and on compensation for land-use restrictions under the Envi-

ronmental Code. Capital gains tax of 30 per cent is payable on the gain, which, put

simply, is the difference between the acquisition cost for the landowner and the purchase money/compensation he receives. The reason that current capital gains

taxation provisions make land purchases for nature conservation purposes more

expensive, more difficult and more time-consuming is that landowners pay the

same tax whether the sale or compensation for land-use restrictions is voluntary in

the open market, or agreed with the state as the result of a degree of underlying

compulsion during negotiations. Many landowners are highly critical of this state

of affairs, and therefore seek to gain compensation for the capital gains tax by de-

manding a correspondingly higher purchase price/level of compensation. As well

as demanding higher compensation or a higher purchase price, some landowners




202

try to defer capital gains tax by demanding compensation in the form of land in

exchange. Some of the land swaps in which the Swedish EPA has played a part

have been instigated by landowners as a way of deferring taxation. The EPA has

said that these land swaps are sometimes disadvantageous to the agency, which isobliged to pay a high price for suitable land to offer in exchange. Sometimes the

land then has to be sold at a loss because the landowner considers that the land

soon to be designated as a nature reserve is undervalued and the replacement land

is overvalued. Negotiation and valuation require roughly double the resources

where there is a land swap. And this is accompanied by a doubling of land parcel-ling costs. Land swaps are time-consuming and costly for the state. In summary,

the Swedish EPA considers that, regardless of whether a land swap occurs, the

capital gains tax regime causes landowners to try to push the price up to obtain

compensation for the tax, which leads to long-drawn-out and difficult negotiations.

To make it easier to create nature reserves and conserve cultural heritage, therules on capital gains taxation applying to state land purchases and compensation

paid for land-use restrictions should be revised.

Accrual accounting of income under nature conservation agreements

Nature conservation agreements constitute usufruct agreements under the Land

Code. Under the provisions of Bill 2002/03:79, income under these agreements can

be accrued on a straight-line basis during the term of the agreement. However, the

conditions laid down in these agreements essentially prevent the landowner fromtaking actions on the land and limit the return on it. The agreement is not a lease.

The Accounting Standards Committee (BFN) has therefore concluded that theincome should be accounted for as income when the agreement is concluded, since

performance is then considered to have been completed. In light of BFN's state-

ment, the Swedish Tax Agency has therefore concluded that landowners must de-

clare income under nature conservation agreements that do not require performance

of any kind when they become entitled to receive the income, and that it should

therefore not be accrued over the term of the agreement.

"FOREST ACCOUNT"

The forest account allows some scope for equalising profit/loss from forestry.

Money deposited in the account and residual interest are exempt from tax until theyare taken out of the account. This possibility has existed since the 1950s. During

income years 1986 – 1991 the forest account was used as an incentive to increase

the willingness to fell forest. The forest account is a way for forest owners to roll

their income from felling ahead of them, thereby achieving more even results overthe years. It thus increases the scope for pursuing economically sustainable for-

estry, which in turn provides scope for ecologically sustainable forestry.




203

5.5.6 Tax on cadmium in artificial fertiliser

The tax on cadmium has helped to achieve the current low input of cad-

mium from artificial fertilisers to arable soils.

HISTORY AND PURPOSE

When the tax on cadmium in artificial fertiliser was introduced, the main aim was

to reduce the dispersal of cadmium on arable land, which in turn would have posi-

tive environmental effects. The idea was not that the tax rate would equal the

socio-economic cost in the form of environmental damage caused by the use of phosphate fertiliser or abstraction of phosphate.


Tax on cadmium is payable by anyone who is approved to hold a stock or whootherwise manufactures fertiliser to import it into Sweden for commercial resale or

for their own professional use within the country. The tax is SEK 30 per full gram

of cadmium in the fertiliser exceeding 5 grams per tonne of phosphorus.Revenues from the taxes on nitrogen and cadmium totalled SEK 328 million in

2005. There were 100 taxpayers.

1993 saw the introduction of a ban on sale or transfer of fertilisers containing

more than 100 grams of cadmium per tonne of phosphorus. The ban was imposed

under the Ban on Handling and Import of Chemical Products in Certain Cases

Ordinance (1998:944).

EVALUATIONS

The tax on cadmium has helped to achieve the current low input of cadmium from

artificial fertilisers to arable soils. According to a government report (SOU2003:9), the average concentration of cadmium in 1995 was approximately 25

grams of cadmium per tonne of phosphorus in fertilisers sold in Sweden. Current

concentrations average 10 grams of cadmium per tonne of phosphorus. Cadmium

input via phosphate fertiliser has fallen at the same time from 1.4 grams cadmium

per hectare in 1985 to 0.07 grams cadmium per hectare in 2002, thanks to less use

of phosphate fertiliser and lower levels of cadmium in it. Atmospheric deposition

of cadmium in southern Sweden is greater than cadmium leaving the ecosystem,which means the element accumulates in arable soils. The same report estimated

that, with current concentrations of cadmium in Swedish phosphate fertiliser, its

use will only cause a small increase of cadmium concentrations in arable soils.

However, an increase in concentrations or doses would create a growing risk of

adverse health and environmental effects.When it was introduced, the cadmium tax was SEK 0.30 per kg nitrogen. At

that time there was also a phosphorus charge of SEK 0.60 per kg. Following a

number of years of successful voluntary efforts to reduce cadmium levels in phos-

phate fertiliser, the phosphorus charge was abolished on 1 January 1994, to be

replaced by a charge on the cadmium content. Steep rises in the charges on




204

cadmium and nitrogenous fertilisers were imposed in November the same year. It

was then decided that these levies were no longer charges; they were in the nature

of taxes. They were thus formally renamed taxes on 1 April 1995, even though

there are still agreements that the money generated by the taxes should be refundedto the agricultural sector by way of information campaigns and environmental

improvements (SOU 2003:9).

In its Finance Bill 2006 the Government has decided to channel a further SEK

100 million of revenues generated by the tax on artificial fertiliser and pesticides t

the green sector. The money will mainly be invested in research and developmentto promote sustainable development of agriculture and also to help the agricultural

sector to become more competitive. It had already been decided that some of the

money from the tax on artificial fertiliser should be returned to the sector via the

Rural Development Programme. The programme is funded partly by the EU and

partly by the Government.According to a government report, the administrative cost of the taxes on pesti-

cides and artificial fertilisers (nitrogen and cadmium) totals SEK 375,000 a year,

i.e. less than one per cent of the total revenues they generate (SOU 2003:9). The

cost of administering the cadmium tax alone is thus likely to be even lower.

OVERALL ASSESSMENT

The tax on cadmium has helped to achieve the current low input of cadmium from

artificial fertilisers to arable soils.

5.5.7 Tax on nitrogen in artificial fertiliser

The tax on nitrogen has had a limited effect on sales of artificial fertil-

iser.

The nitrogen tax is estimated to reduce leaching by between 1,300 and

1,800 tonnes of nitrogen a year. Hence, the tax has had a certain direct

effect, but its indirect effects have been greater owing to funding of

measures to reduce leaching. The adverse effects of the nitrogen tax on agricultural competitiveness

are fairly moderate.

HISTORY AND PURPOSE

When the tax on nitrogen in artificial fertiliser was introduced, the main aim was to

reduce dispersal of nitrogen on arable land, which in turn would have positive envi-

ronmental effects. The idea was not that the tax rate would equal the socio-

economic cost in the form of environmental damage caused by the use of artificial

fertilisers.


Tax on nitrogen is payable by anyone who is approved to hold a stock or who oth-

erwise manufactures fertiliser to import it into Sweden for commercial resale or for




205

their own commercial use within the country. The tax is SEK 1.80 per full kilo-

gram of nitrogen in the fertiliser, provided it contains at least two per cent nitrogen.

Revenues from the taxes on nitrogen and cadmium totalled SEK 328 million in

2005. There were 100 taxpayers.

EVALUATIONS

Sales of nitrogen in artificial fertiliser remained steady at around 230,000 tonnes

N/year from the mid-1970s to the late 1980s. Sales then fell somewhat, averaging

around 200,000 tonnes N/year in the 1990s. Sales in 2000 - 2001 were 197,000

tonnes, representing 85 per cent of the total input of nitrogen in agriculture (SOU

2003:9).

Most estimates of the price elasticity of nitrogen in artificial fertiliser arrive at between –0.30 and –1.23 in different Swedish agricultural areas, and between –

0,20 and –0.40 for the country as a whole. The latter figures mean that a 10 percent rise in the price of nitrogen would reduce demand by between two and four

per cent. The current tax of SEK 1.80 /kg nitrogen makes up around 25 per cent of

the price, which suggests that it has produced a reduction of 5 - 10 per cent, with a

slightly greater effect in the long term (SOU 2003:9).

The above government report (SOU 2003:9) refers to various earlier studieswith regard to the effect of the nitrogen tax on leaching. One Board of Agriculture

report (1999) concluded that abolition of the tax would increase leaching by about

1,300 tonnes of nitrogen a year. The board's annual cost for administering the tax is

estimated at SEK 360 million plus SEK 30 million in lower contribution to cost,

i.e. SEK 300 per kg nitrogen for the individual farmer. The annual socio-economiccost has been estimated at SEK 30 million, i.e. approximately SEK 20 per kg nitro-gen in reduced nitrogen leaching. The Board of Agriculture has estimated (2000)

that abolition of the nitrogen tax would increase nitrogen leaching by around 1,800

tonnes of nitrogen a year. The cost to agriculture is estimated to be in line with that

in the earlier report. However, it was thought that leaching was greater, and the

cost to the individual farmer per unit of nitrogen reduction was estimated at SEK

217 per kg nitrogen. The socio-economic cost was estimated at SEK 17 per kgnitrogen in reduced leaching. On the basis of these studies, government report SOU

2003:9 expressed the view that abolition of the nitrogen tax would increase nitro-

gen leaching by around 1,500 tonnes of nitrogen a year. This would mean that total

leaching in Sweden would rise to 60,700 tonnes of nitrogen a year.

According to SOU 2003:9, the instrument has had a degree of indirect impact,

but much of the reduction in emissions is thought to have been achieved by ear-marking tax revenues and using them to part-fund information campaigns and ad-

visory services. Moreover, the tax is also considered to have a symbolic value in

drawing the attention of the users to the potential harmful effects of intensive use

of fertilisers.

Numerous factors affect the competitiveness of the agricultural sector, not least

EU support. According to SOU 2003:9, the tax on artificial fertiliser represents a"small proportion" of the total cost of raw materials in agriculture. Although the tax

is thought to have had some negative impact on the international competitiveness




206

of Swedish agriculture, SOU 2003:9 expresses the view that its impact has been

"fairly moderate".

OVERALL ASSESSMENT

The tax on nitrogen has a limited effect on sales of artificial fertiliser; it is esti-

mated to reduce leaching by between 1,300 and 1,800 tonnes of nitrogen per year.

But the tax has greater indirect effects because earmarked tax revenues are used to

fund measures to reduce leaching. The adverse effects of the nitrogen tax on the

competitiveness of Swedish agriculture are fairly moderate.

5.5.8 Pesticide tax

The tax is considered to have a limited impact on pesticide sales.

The tax is thought to have little impact on agricultural competitiveness. The tax has speeded up the pace at which users have changed over to

low-dose pesticides. An analysis of risk differentiation of the tax might be of interest.

HISTORY AND PURPOSE

The purpose of the tax is to reduce the use of pesticides and thereby the health and

environmental risks. The tax is intended to fund certain activities, such as advisoryservices, research and development on ways of reducing pesticide use.


The term "pesticides" means substances or preparations of pesticides or biocides

(but not wood preservatives) for prevention of damage to property or human health

hazards caused by plants, animals or viruses. The tax is SEK 30 for each full kilo-

gram of active ingredient in the pesticide and is payable by anyone who commer-

cially manufactures pesticides in the country or imports them into Sweden for

commercial resale or for their own professional use within the country. Tax is pay-able to the state on sale or use of pesticides within the country. Tax revenues to-

talled SEK 59 million in 2005. There are 41 taxpayers.

Various action programmes have had marked effects in combination with thetax. According to SOU 2003:9, both laws and action programmes have operated in

combination with pesticide tax:

Laws: Environmental Code (1999:808); Chemical Products and BiotechnologicalOrganisms Ordinance (1998:941) and the Pesticides Ordinance (1998:947). Other

legislation, such as the Work Environment Act (1977:1160) and the Transport of

Hazardous Goods Act (1982:821) may also have a bearing on pesticide handling.

Action programmes: the first action programme was decided by the Government

for the period 1987 - 1990 and included measures such as a changeover to use ofagents posing less hazard from a health and environmental viewpoint. The pro-




207

gramme also included less use of pesticides and greater health and environmental

protection. The aim was to reduce the percentage content of active ingredients to

half the average figure for 1981 – 1985, to 2,250 tonnes a year. This target was

achieved. The second action programme involved similar measures to the first programme, the target being to halve the target that had been achieved to 1,125

tonnes a year during 1991 - 1996. Annual sales in 1996 were 1,610 tonnes; annual

use was 1,450 tonnes. Use of weed killer in particular had declined. The third ac-

tion programme, which ran from 1996 to 2001, reflected a desire to further reduce

pesticide use, the target being that the ratio between the total treated area and thearea under cultivation should be reduced by 10 per cent; the proportion of the coun-

try's cultivated area not treated with pesticides should increase by 10 per cent, and

pesticide use measured as the quantity of active ingredients should be no more than

25 per cent of the average level during 1981 – 1985. In addition, the risk reduction

achieved under earlier programmes should be estimated and evaluated. The meas-ures in this programme included new dispersal regulations, a new environmentalgrant for development of alternative pest control methods and improved pesticide

handling, and to improve user knowledge about pesticides. The current and fourth

action programme (2002 – 2009) is based on the relevant environmental objectives,

particularly A Non-Toxic Environment, but also Good Quality Groundwater,

Flourishing Lakes and Streams and A Varied Agricultural Landscape. The action

programme emphasises general risk reduction and sectoral targets based on the

interim target under the Non-Toxic Environment. These are that national risk indi-cators should reflect a declining risk trend for environment and health, no pesti-

cides containing active agents meeting the criteria under interim target 3 under the Non-Toxic Environment objectives may be sold or used after the specified years,

and guide values for the presence in surface water of active agents contained in

approved pesticides should have been in place since 2003.

EVALUATIONS

In the early 1980s about 4,600 tonnes of pesticides were used each year, expressed

in tonnes of active agent. Sales then fell sharply to just over 1,600 tonnes in 1995,

except for 1994 when companies bought in stocks before the tax was raised by

SEK 20 the same year. The same thing happened in 2003, when the tax was raised

to SEK 30 per kilo of active agent. Sales since then have risen somewhat, reaching1,793 tonnes in 2001. Sales in 2005 were 1,665 tonnes. Use of weed killers espe-

cially glyphosate) in particular has increased. Factors mentioned as playing a part

in this increase are fallow land requirements, environmental grants for catch crop

cultivation, increased cultivation of autumn crops, tighter financial and efficiency

requirements, crop rotation lacking variation, growing differences between the cost

of mechanical and chemical pest control, and the introduction of new, more effi-cient products that have made pesticide use more profitable than before. However,

the overall risk indicator figures have shown a continual, albeit small, decrease.

The tax has had something of an inhibitory effect on sales, but the indirect effects

have been greater. Whether or not a tax has any effect on actors' behaviour depends

on their price sensitivity. According to SOU 2003:9, most studies suggest that




208

pesticides have relatively low price elasticity. Most of the levels recorded are in the

range –0.2 to –0.5.

The tax averages 7.5 per cent of the sale price, and pesticide use would there-

fore be between 1.5 and 3.75 per cent higher without the tax. The elasticity studieshave also found that demand for many pesticides is "step-shaped", i.e. users are

very much willing to pay when under pressure from pests or weeds, but not so

when there is low pressure, since pesticides then have little effect. Demand is

therefore inelastic except during transition from one of these situations to the other.

Natural environmental variations, such as the number of pests, may therefore beexpected to have a greater impact than price.

SOU 2003:9 also presents the Board of Agriculture's estimates of the impact of

the instrument on pesticide use. These suggest that there is little effect on the user's

profitability; the tax represents less than one per cent of the average user's total

costs per hectare. Overall, the tax is considered to have "had an indirect effect inthat it has been possible to use the tax revenues to fund measures to reduce pesti-cide use".

The report also concludes that the model best suited to act in combination with

other instruments and other measures to achieve a pronounced reduction of the

risks involved in using pesticides is one where the environmental levy is differenti-

ated according to the degree of hazard posed to health and the environment by the

agent. The report considers that preparations should be made for a changeover to

risk differentiation of the tax. As part of this process, the Swedish Chemicals In-spectorate should develop a system for classifying pesticides according to their

hazardousness.Pesticide use poses a threat to the environment and human health. Reduced

pesticide use should, in itself, have some positive effects on water, foodstuffs,

vegetables etc. However, the above-mentioned government report (SOU 2003:9)

considers that the tax has had a limited effect on the reduction.

According to SOU 2003:9, it has been emphasised on a number of occasions

that this type of system, in which the tax is based on the quantity of active agent in pesticides, has encouraged users to change over to low-dose agents, i.e. herbicides

in very low doses. This trend would probably have occurred even without the tax,

but would have been slower. Even though this development does not automatically

reduce the health and environmental risks, the report stresses that these pesticides

have many advantages from a handling point of view. But it is thought that factors

other than the tax (which accounts for a very small proportion of the price) are themain reason for the changeover.

A large number of factors influence agricultural competitiveness, not least EU

support. According to SOU 2003:9, the tax represents a "small proportion" of the

total cost of raw materials in agriculture (less than one per cent of the user's total

cost per hectare (see above). Although the tax is thought to have had some negative

impact on the international competitiveness of Swedish agriculture, SOU 2003:9considers that pesticide tax has had little impact in this respect.




209

The total cost of administering the taxes on pesticides and artificial fertiliser is

SEK 375,000 a year, which is less than one per cent of pesticide tax revenues

(SOU 2003:9).

OVERALL ASSESSMENT

Government report SOU 2003:9 concludes that the model best suited to act in

combination with other instruments and other measures to achieve a pronounced

reduction of the risks involved in using pesticides is one where the environmental

levy is differentiated according to the degree of hazard posed to health and the

environment by the agent. The report considers that preparations should be madefor a changeover to risk differentiation of the tax. As part of this process, the Swed-

ish Chemicals Inspectorate should develop a system for classifying pesticides ac-

cording to their hazardousness.

5.5.9 Agriculturally-related environmental support

Agricultural support is very extensive and has a great influence on the

environmental impact of agriculture. Agriculture impacts positively and

negatively on several environmental objectives and agricultural opera-

tions have a bearing on all three action strategies. The Board of Agricul-

ture has a permanent mandate from the Government to evaluate agricul-

tural policy in collaboration with the Swedish EPA and the NationalHeritage Board.

The present EU agricultural support regime does much to create overproduction from this sector, which very much exacerbates nutrient emis-

sions. Analysis of the effects of direct support and environmental grants

shows that positive and negative environmental effects are often inter-

linked, and that various forms of support can even counteract one an-other. Following the recent form of the CAP, many of these effects are

expected to disappear, but it is too soon to evaluate the results. The pro-

jected effects of the EU agricultural reform in 2003, implemented in

Sweden in 2005, suggest a reduction in nitrogen leaching.

HISTORY AND PURPOSE

The aims of the common agricultural policy are to:

increase productivity in the agricultural sector;

provide farmers with a reasonable standard of living;

stabilise the markets;

secure food supply; and

provide consumers with food at fair prices.


When Sweden joined the EU, the CAP was largely based on economic stimuli in

the form of price support and direct support. The purpose of price support is to




210

guarantee minimum prices for selected agricultural products – grain, oilseeds, pro-

tein crops, beef and milk. Direct support is paid in the form of cash payments based

on the area of cultivated land or the number of animals. Farming subsidies have

been dependent on leaving a certain area of land fallow or otherwise ensuring thatit is not used for food production. Environmental subsidies have led to the cultiva-

tion of large areas of pasture land.

The CAP has been reformed several times. The McSharry reform in the early

1990s led to a reduction in price support, with farmers being compensated by direct

support. The next reform, based on the Agenda 2000 proposal by the EU Commis-sion, was adopted in 1999. That reform covered the period 2000 – 2006 and en-

tailed further reduction in general price support. Direct support was increased,

however, which provided an incentive for somewhat more extensive cultivation.

Support and subsidies for environmental measures and rural development are

also included in the CAP. The Swedish environmental compensation programme,which ran from 1995 to 1999, included support for pasture land, open cultivatedlandscapes, natural environments and cultural heritage, organic production, re-

duced nitrogen leaching and wetlands. The year 2000 saw the inception of a new

programme – the Environment and Rural Development Programme, as part of

Agenda 2000.

The programme involves numerous forms and support and grants divided into two

programme areas:

I: ecologically sustainable development;II: economically and socially sustainable development in rural areas.

Funding of SEK 16 billion has been allocated for the entire programme period.

Measures under sub-area I are split up as follows.

Environmental support for agriculture (SEK 9,559 million) Compensatory payments in less favoured areas (SEK 3,420 million)

Skills development (KULM/Greener Forest) (SEK 985 million)

Environmental investments in agricultural enterprise (SEK 446 million)

Forest projects (SEK 55 million)

Project support for rural development (SEK 237 million).

The various forms of support under the Environment and Rural Development Pro-

gramme affect greenhouse gas emissions from agriculture both directly and indi-rectly. Direct effects may result from investment grants, insofar as they are made in

livestock housing and manure management facilities. The greatest indirect effects

arise as a result of environmental grants and compensatory payments, since these

play an important part in agricultural economics in forestry and mixed forestry and

agricultural areas, where much of Swedish livestock farming takes place.




211

In addition, some environmental subsidies are subject to requirements as regards

grazing or livestock farming. Moreover, environmental compensation for measures

to reduce nitrogen leaching impacts on emissions of nitrous oxide from the nitro-

gen that leaches into lakes and watercourses.In summer 2002 the EU Commission presented a Mid-Term Review of the

CAP (MTR), with proposed revisions of the reform adopted in 1999. Essentially,

further market orientation of the CAP was proposed, together with reinforcement

of the rural development programmes and stricter conditions for support as regards

environment, food safety, animal welfare and animal protection. One of the main proposals was to transfer support from the product to the producer, usually known

as "decoupling". This means that the support is based on historical payments, rather

than actual production defined, for example, as the number of animals on the farm

or cultivation of certain crops for which support is available. The EU agriculture

ministers reached a political agreement in summer 2003, and the reform wasadopted in September the same year. Its consequences include the following.

Lower intervention prices for milk and butter.

Retention of price support for cereals.

Member states keep their milk quotas until 2014/15.

The current direct support paid to farmers has been transformed into a

single payment scheme, known as "farm support", which has been de-

coupled from production.

Farm support is conditional on "cross compliance" with standards for

environment, food safety, animal welfare, plant protection and animal protection, and maintenance of land in good agricultural and environ-

mental condition.

New support of €45/ha for energy crops.

More flexible regulations governing fallow land.

One important change is that, subject to certain conditions, member states gaingreater influence over formulation of agricultural policy in their own country.

Among other things, member states can decide when the reform is to take effect –

2005, 2006 or 2007. There are also degrees of national freedom in the following

areas.

Some forms of support, mainly for beef production, can remain coupledto animal numbers.

Support can be regionalised.

It is possible to allocate 10 per cent of farm support to a "national enve-

lope" for environmental improvements, increasing the quality of agricul-

tural products or for marketing.

A gradual transfer of funds from direct support to rural development programmes, known as "modulation".




212

The reform took effect in Sweden on 1 January 2005, thereby introducing a new

kind of agricultural support in Sweden – farm support, which is essentially decoup-

led from what and how much the farmer produces. However, there are land man-

agement requirements, and the recipient of support must comply with certain regu-lations governing the environment, plant protection, public health, animal protec-

tion and animal welfare. These latter regulations are agricultural practice require-

ments under existing legislation based on EC law.

Farm support replaces a number of other forms of support, including arable

area payments, slaughter subsidies, most forms of livestock support and part of thedairy support. Support is given as a basic payment based on the area of arable land

and pasture land in accordance with the allocated support entitlement. The follow-

ing also applies in addition to the new support regulations:

A national "envelope" should be introduced for limited sales promotionmeasures from 2005; from 2007 the envelope should be designed in the

basis of identified needs.

The funds released by way of modulation, i.e. the gradual reduction in

direct support, are to be used to reinforce the rural development pro-

gramme. The funds are to be used to increase the compensatory pay-

ments for seeded grassland and pasture. An environmental subsidy for

cultivation of seeded grassland has been introduced.

In assessing environmental effects, the effect of the collective body of support

under the CAP should be assessed, since the forms of support not termed "envi-ronmental subsidies" also affect the environment to a greater or lesser degree. SEK

40 billion of EU funding was invested in Swedish agriculture during the period

1995 - 2001. SEK 11 billion went on environmental improvements, of which 50

per cent was paid via the Swedish state budget.

EVALUATIONS

The Board of Agriculture continuously evaluates environmental and other effects

of the CAP on Sweden. The agency has produced a report (2002) in which it sum-

marises the environmental effects of the CAP in Sweden between 1995 and 2001.

Analysis of the effects of direct support and environmental subsidies revealsthat the positive and negative effects are often interlinked. The various forms of

support may even counteract one another. A simple example of a goal conflict is

that pastures favouring biodiversity require grazing animals, but a greater number

of animals increases ammonia emissions.

The Board of Agriculture has published a number of reports (2004b, 2005,

2006a) in which it has estimated the environmental effects of the CAP reformadopted in 2003 and introduced in Sweden in 2005.

A report entitled "The CAP Reform 2003 – effects of decoupling production

and structural development" (Swedish Board of Agriculture 2004b) states with

regards to effects vis-à-vis the environmental quality objectives, that a number of

trends can be discernible when it comes to the pasture land issue. One tendency is




213

that the average size of dairy farms is rising rapidly, and that the proportion of

pasture is tending to decrease the larger the dairy farm is. Another trend that may

occur is for a lower number of calves to be born. This is because of a tendency for

milk yields per cow to rise and signs that dairy production may fall as an effect ofdecoupling. Calves are important production means for grazing on pasture. The

report also states that "Other relevant environmental quality objectives that may beaffected by decoupling include targets for nutrients and pesticide use. The earlier

analysis has shown that cereal production may decline. If this occurs, it is likely

that production will primarily fall in areas where yields are low. In any case, ef-

fects caused by leaching of nutrients are likely to be a problem in areas with high

yields. This means that the effects of decoupling on targets for reducing nitrogen

leaching will be limited. Nor is it likely that pesticide use, which is in fact largelyused for crops other than cereals, oilseeds and grassland, will be markedly af-

fected." The Board of Agriculture's annual report for 2005 (2006c) concludes that pro-

duction of cereals, beef and dairy products has declined, and that it may be difficult

in future to maintain the objectives regarding management of pastures. There are

measures under the environment and rural development programme that appear to

be very effective, among which the Board of Agriculture mentions support to se-

cure traditional grazing of pastures and to maintain agriculture in northern Sweden

as examples. Most of the environmental subsidies under the environment and rural

development programme have a high or very high level of goal achievement. Somesubsidies have low goal achievement. These include grants for cultural heritage in

reindeer herding areas and grants for management of wetlands and small water bodies. In its annual report, the board also reviews goal achievement for each envi-

ronmental quality objective. Progress towards achieving the interim targets under a

Varied Agricultural landscape is largely satisfactory. Under Thriving Wetlands, the

area of wetlands and small water bodies created and restored is not great enough to

achieve the interim target. The current organic production target (20 per cent of

arable land should be devoted to organically grown crops) has almost beenreached. Under a Non-Toxic Environment, the risk indicators display a positive

trend both for environment and for health risks, albeit mostly for health risks. Pes-

ticide use expressed in hectare doses has not diminished at the same rate. The

Board of Agriculture views progress in the agricultural sector towards achieving

the interim targets under Zero Eutrophication as fairly good.

5.5.10 Energy and carbon dioxide tax

The carbon dioxide tax has been reduced by 79 per cent for agriculture and fisher-

ies. This reflects concern for international competitiveness and equal tax treatment

with the rest of industry, which means there may be socio-economic justification

for the reductions.

Like manufacturing industry, agriculture and fisheries are eligible for the "0.8

per cent rule". Companies that, notwithstanding the lower-rate carbon dioxide tax(21 per cent of the standard rate), pay more than 0.8 per cent of the sales value of




214

the products they manufacture in carbon dioxide tax are entitled to an extra reduc-

tion.

Like other industrial sectors, agriculture and fisheries pay electricity tax at a

rate of SEK 0,005/kWh. See also chapter 5.2.1 on reduced-rate energy and carbondioxide taxes for industry.

5.5.11 Tax relief for light heating oil ( EO1) used in agriculture and

fisheries for purposes other than to operate motor vehicles in com-

mercial operations

Tax relief on EO1 has been introduced for industrial policy reasons.

The relief provides less incentive to change over to renewable energy

where substitutes are available for heating purposes.

The scope for using instruments to encourage greater use of energy bearers for heating purposes (while retaining competitiveness) has not been examined.

Tax relief has been available since 2000 for use of EO1 in commercial agricultureand fisheries operations for heating or to operate stationary engines. Tax relief does

not apply to fuel used to operate motor vehicles. Tax relief is available for all use

of EO1 related to hothouse cultivation. The relief corresponds to all the energy tax

and 79 per cent of the carbon dioxide tax, which is as great a reduction as that en-

joyed by manufacturing industry. The idea of tax relief is for agriculture and fisher-

ies to operate under the same conditions as manufacturing industry (Bill1999/2000:1). It may be assumed that the relief has been introduced for trade and

industry policy reasons.

Like manufacturing industry, agriculture and fisheries are eligible for the "0.8

per cent rule". Companies that, notwithstanding the lower-rate carbon dioxide tax

(21 per cent of the standard rate), pay more than 0.8 per cent of the sales value of

the products they manufacture in carbon dioxide tax are entitled to an extra reduc-tion. This applies particularly to certain hothouse cultivation businesses.

Like other industrial sectors, agriculture and fisheries pay electricity tax at a

rate of SEK 0.005/kWh. See also chapter 5.2.1 on reduced-rate energy and carbon

dioxide taxes for industry.Hothouse cultivation is highly energy-intensive. Approximately 1 TWh of the

energy used in agriculture and fisheries is used for hothouse heating. In 2005 heat-ing oil was the main fuel used to heat hothouses.




215

Oil

52%

Biofuels

6%

Coal and coke

0%

Natural gas

19%

LP gas

1%

District heat

5%

Electricity17%

Figure 22 Energy consumption in hothouses in 2005 (%)

Source: Swedish Board of Agriculture, Statistical Notice JO33SM

EVALUATIONS

No evaluations have been made. However, tax relief is available for trade and in-dustry policy reasons rather than environmental ones.

AGENCY COMMENTS

There are very highly renewable fuels capable of replacing fossil fuels for heating purposes. But since companies receive tax relief for using EO1 light heating oil,

the relative cost of using alternatives to EO1 is higher. This situation has arisen fortrade and industry policy reasons. It is possible that the current high price of oil is

already making companies convert to alternative fuels to a greater extent. The sta-

tistics we have on energy use in hothouse cultivation, which uses a great deal of

energy for heating, are from 2002, and so do not reflect developments since the rise

in oil prices.

There is great scope for substitution between various energy bearers in hot-house cultivation and for drying farm crops. This form of tax relief makes biofuel a

less competitive option for heating purposes. From an environmental viewpoint,the risk of "carbon dioxide leakage" can also be a reason for lower taxes for agri-

culture and fisheries, but no evaluation has been made of whether carbon dioxide

leakage is prevented by the tax relief.

5.5.12 Tax relief on diesel use in agriculture and fisheries

The agencies do not see it as a priority to review tax relief on diesel use

in agriculture and fisheries to achieve further environmental effects.




216

Since 1 January 2005 those using high-taxed uncoloured diesel in agriculture, for-

estry or aquaculture to operate motor vehicles and work machines pay full energy

tax but only 23 per cent of the carbon dioxide tax. This equals about SEK 2 per

litre. The aim of this tax reduction is to improve the competitiveness of Swedishenterprise in relation to the outside world, Many countries have lower-rate taxes on

diesel used in agriculture and fisheries. It was estimated that the tax reduction

would reduce tax revenues by approximately SEK 500 million in 2005 (Bill

2004/05:1).

In common with shipping, fisheries is exempt from all tax on fuel, and for thesame reason: fisheries compete in an international market, have access to untaxed

fuel and can refuel in other countries.

All things being equal, the availability of untaxed fuel has favoured large-scale

fisheries, which use active fishing gear (trawl) at the expense of small-scale fisher-

ies using passive fishing gear. Fuel costs in 2004 for vessels larger than 24 metresmainly using trawl and fishing for pelagic species (herring, sprat and mackerel)were about 40 per cent of all costs. Fuel costs in 2004 for vessels using passive

fishing gear (nets, hooks and pots) and fishing for demersal species (cod, flat fish

and crayfish) were 10 – 15 per cent of all costs.

EVALUATIONS

The update by the Energy Agency and Swedish EPA of the Kontrollstation

("Checkpoint") projections of greenhouse gas emissions estimates that the tax re-

duction may cause a slight rise in Swedish greenhouse gas emissions.

AGENCY COMMENTS

The substitution options for operation of motor vehicles are limited, partly because

of the limited number of refuelling stations. Thus, we do not consider it a priority

to analyse the effect of this form of tax relief on emissions.

5.5.13 Relationship between instruments and environmental objec-

tives and strategies

Table 22 Relationship between economic instruments in agriculture and fisheries andSwedish environmental objectives

Reduced Cli-mate Impact

A Non-ToxicEnvironment

Zero

Eutrophication

SustainableForests

Other objectives

Support for en-

ergy forestNo net emis-sions of CO2from combus-tion.

May removecadmium fromarable soils.

Reduction ineutrophying emis-sions and NOxemissions.

Natural Acidifica-tion Only.

Clean Air.

Grants for con-servation of na-ture and culturalheritage, anddeciduous for-estry

Improves biodi-versity andprotects culturalheritage

A Rich Diversity ofPlant and AnimalLife.

Tax incentives in

the forestry sector

Sustainable use

of forest land.

Fiscal.

Forestry sector




217

Counteractsconservation ofparticularlyvaluable bio-

topes.

production targets.

Nature conserva-tion agreementsand biotope pro-

tection areas

Increasedcarbon sink dueto less felling.

Some reduction innitrogen leachingowing to lessfelling.

Conserve,develop andcreate areas ofvaluable naturalassets andcultural heri-tage.


Purchase andmanagement of

forest land

Increasedcarbon sink dueto less felling.

Some reduction innitrogen leachingowing to lessfelling.

Conserve,develop andcreate areas ofvaluable naturalassets andcultural heri-

tage.


Tax on cadmiumin artificial fertil-iser

Reduces inputof cadmium toarable soils.

Good QualityGroundwater.

A Non-Toxic Envi-ronment.

Counteracts:

Agricultural com-petitiveness.

Tax on nitrogen in

artificial fertiliserReduced nitrogenleaching.

Counteracts:


Pesticide tax Reduced pesticideuse.

Flourishing Lakesand Streams.


A Varied Agricul-tural Landscape.

Counteracts:


Agriculturally-related environ-mental support

Unclear. A Varied Agricul-tural Landscape.


Tax relief on lightheating oil

Counteractive:

Increased useof EO1 in-creases CO2emissions.

Counteractive:

Incentive forincreased SO2and NOx emis-sions.

Counteractive:

Increased emis-sions of acidifyingsubstances.

Tax relief on die-

selCounteractive:

Increased useof diesel in-creases CO2emissions.

Counteractive:

Incentives in-creased use ofdiesel increaseSO2 and NOxemissions.

Competition fac-tors.

Counteractive:

Energy efficiencyand use of renew-able energy.

Clean Air andNatural Acidifica-tion Only.




218

Table 23 Relationship between economic instruments in agriculture and fisheries and thethree action strategies.


Non-toxic and resource-efficient cyclical sys-

tems


environment

Support for energy forest Reduced used of non-renewable energy.

Salix cultivation helps tocreate non-toxic andresource-efficient cyclicalsystems.

Increased biodiversity.

Grants for conservation ofnature and cultural heri-tage, and deciduous for-estry

Rich natural environmentand cultural heritage;biodiversity.

Tax incentives in the for-estry sector

Sustainable use of forestland.

Counteractive:

Reduces the potential for

conservation of particu-larly valuable biotopes.

Nature conservation agree-ments and biotope protec-tion areas

Conservation and sus-tainable use of particularlyvaluable natural environ-ments and cultural heri-tage.

Purchase and managementof forest land

Conservation and sus-tainable use of particularlyvaluable natural environ-ments and cultural heri-tage.

Tax on cadmium in artifi-cial fertiliser

Reduces toxins in terres-trial and aquatic areas.

Tax on nitrogen in artificialfertiliser

Reduces the nutrientload.

Pesticide tax Reduces toxins in terres-trial and aquatic areas.

Agriculturally-related envi-ronmental support

Unclear.

Tax relief on light heatingoil

Counteractive:

Incentive for increased use ofEO1.

Tax relief on diesel Counteractive:

Incentive for increased use ofEO1.

5.5.14 Combined effects of instruments on agriculture and fisheries

Tax relief on EO1 and diesel gives an incentive for increased use of EO1 and die-

sel, and thereby counteracts the purpose of the carbon dioxide and energy tax, viz.,

to reduce carbon dioxide emissions. Furthermore, tax relief on diesel counteracts

the purpose of tax exemption of biofuels for motor vehicles, which is to limit fueluse and replace petrol and diesel with ethanol and RME.

The purpose of grants for creation of energy forest and for cultivation of en-

ergy crops is to increase the production of renewable energy on arable land. The

support acts in combination with the electricity certificate scheme (energy crops

are eligible for electricity certificates), which is primarily a tool of energy policy




219

used to serve the aim of increasing the proportion of electricity produced from

renewable sources.The Forestry Act (1979:429) operates in combination with, among other things,

grants for conservation of natural and cultural heritage, and deciduous forestry.Under the general provisions of the Forestry Act, forest must be managed so that it

provides a sustainable high yield, while maintaining biological diversity. Decidu-

ous forest must not be changed without permission from the Swedish Forest

Agency so as to fall outside the definition. The Forest Agency can grant special

exemption from the requirement if there are particular reasons for so doing. Ex-emption may be made conditional on creation of new deciduous forest elsewhere

within the forestry unit. Permission is also required for felling for regeneration

purposes. When permission is granted, the Forest Agency can decide how regen-

eration of new deciduous forest is to be secured.

Capital gains tax regulations hinder the creation of nature reserves because thelandowner tries to extract a higher price as compensation for the tax. This leads tolong-drawn-out negotiations.

Nature conservation agreements are a complement to other forms of protection

and compensation, such as biotope protection and nature reserves. Nature conser-

vation agreements can also be combined with grants for measures to conserve the

natural environment or cultural heritage, and individual advisory services. Conclu-

sion of nature conservation agreements is made more difficult by the tax rule

whereby income under nature conservation agreements may not be accrued for

income tax purposes.

Tax on cadmium in artificial fertiliser complements the ban on sale or transferof fertilisers containing more than 100 g cadmium per tonne of phosphorus. A

number of factors additional to the tax on nitrogen in artificial fertiliser have influ-

enced its use. According to a government report (SOU 2003:9), these include

changes in income, choice of crops, purchases and price changes for raw materi-

als/commodities, such as natural gas.

According to SOU 2003:9, pesticide tax has operated in combination with leg-islation such as the Environmental Code (1999:808); the Chemical Products and

Biotechnological Organisms Ordinance (1998:941) and the Pesticides Ordinance

(1998:947). Other legislation, such as the Work Environment Act (1977:1160) and

the Transport of Hazardous Goods Act (1982:821) may also have a bearing on

pesticide handling. In addition, the tax has operated in close conjunction with sev-

eral action programmes. These programmes have included measures such as atransition to agents entailing fewer health and environmental risks, reduced pesti-

cide use, greater protection of health and the environment, development of alterna-

tive pest control methods, improved handling and improved knowledge about pes-

ticides among users.

An analysis of the effects of direct support and environmental subsidies for ag-

riculture reveals that the positive and negative environmental effects are ofteninterlinked. Different forms of support may even counteract one another. Agricul-

ture has a bearing on many environmental objectives: a Varied Agricultural Land-

scape, Good Quality Groundwater, Zero Eutrophication, Flourishing Lakes and




220

Streams and Natural Acidification Only. It also affects all three action strategies.

There is therefore a great risk of goal conflicts when different measures are imple-

mented. A simple example of a goal conflict is that pastures favouring biodiversity

require grazing animals, but a greater number of animals increases ammonia emis-sions. Another example is the arable area payments scheme, which, in combination

with the settlement price for crops, has improved the profitability of growing au-

tumn crops and legumes. These crops, which require heavy use of pesticides, are

now more widely grown as a result of increased support, which in turn counteracts

the aims of pesticide tax.Structural rationalisation and specialisation of companies has continued since

Sweden joined the EU. There are now more businesses specialising solely in arable

farming than before 1995. This trend threatens cultural heritage in some less attrac-

tive rural areas. The EU arable area payments scheme in combination with the

settlement price for crops has improved the profitability of growing autumn cropsand legumes These crops, which require heavy use of pesticides, are now morewidely grown. There is now less seeded grassland and spring sowing, due to poorer

profitability. All in all, the arable area payments scheme was not as good for the

environment as livestock support schemes and environmental subsidies. A special

subsidy for seeded grassland was introduced to encourage this form of cultivation.

This benefits not only cultivation of seeded grassland, but indirectly also grazing of

pastures by providing an incentive for greater animal numbers. The fact that a large

proportion of valuable natural pastures are grazed is also due to the environmentalsubsidies for pastures, direct support for grazing animals and environmental subsi-

dies for organic production. Livestock farming has become more profitable in for-ested areas and areas with mixed agriculture and forestry thanks to these forms of

support and subsidies. Organic farming has a high level of goal achievement, but is

to some extent increasing in the wrong areas. This is because the scheme is used

most in areas and for crops that are easiest to grow without pesticides. As a result,

the increase in organic farming has not been as beneficial to the environment as

intended.

5.6 Other economic instruments5.6.1 Environmental penalty

The purpose of the environmental penalty is to maintain high standards

in environmentally hazardous industry. The minimum environmental penalty is SEK 1,000 and the maximum is

SEK 1 million.

A government-commissioned study in 2004 concluded that the charge

has had a pronounced preventive effect and fulfils its purpose. It is also

proposed that more offences should be subject to the environmental

penalty.




221

HISTORY AND PURPOSE

Under chapter 30 of the Environmental Code, a special charge (environmental

penalty) is payable by an operator who, in conducting his operations

contravenes regulations issued under the Environmental Code;

commences operations requiring an operating permit or notification un-

der the code without having obtained an operating permit/notified the ap-

propriate authority;

contravenes a permit or permit conditions issued under the Environ-

mental Code or under regulations issued on the strength of the code.

The purpose of the environmental penalty is to maintain high standards in envi-

ronmentally hazardous industry. It is intended that simplicity, clarity, standardisa-

tion, and speedy administration should be distinctive features of the system(source: Environmental Penalties – Report to the Government, M 2004/2012/R).

The purpose of the provisions is not to eliminate any financial advantagesgained by the operator; the aim is solely to influence behaviour, thereby ensuring

high standard in environmentally hazardous industry. Many commentators have

called for further differentiation of the penalty based on the financial strength of

the operator or the size of the operation (Swedish EPA, 2004h), but in the EPA's

view, this would be counter to the idea of simplicity, among other things.

In its white paper "The Penalty System and Rules of Consideration under the

Environmental Code" (SOU 2004:37), the Environmental Code Commission con-

sidered that "the environmental penalty should be used as a sanction for less seri-ous offences. The environmental penalty should not be used as an "added punish-ment", but as an alternative sanction. The system of penalties should be speedy,

clear and standardised. This means that it should be easy to identify offences and to

decide the penalty to be imposed in each individual case."


Environmental penalties accrue to the state. The penalty payable is determined in

the light of the seriousness of the offence and the importance of the provision con-

travened. The minimum environmental penalty is SEK 1,000; the maximum is

SEK 1 million.

EVALUATIONS

Administrative aspects

It is intended that simplicity, clarity, standardisation, and speedy administration

should be distinctive features of the system. Nonetheless, 11 out of 23 municipali-

ties asked in a study (Swedish EPA, 2004h) said that the environmental penalty

diverts resources from more urgent regulatory issues, since administrative proce-

dures prior to a decision take up time and resources.




222

An appendix to a Swedish EPA report (2004h) examines the time and money

expended on processing environmental penalties imposed for late or non-

submission of environmental reports, deficiencies in self-regulation and prosecu-

tion reports. The cost of processing an environmental penalty imposed for late ornon-submission of an environmental report is 4.5 hours and SEK 3,150 for the

municipality and 8 hours and SEK 5,600 for the county administrative board. The

cost of processing a case involving deficiencies in self-regulation is 6 hours and

SEK 4,200 for the municipality and 10 hours and SEK 22,400 for the county ad-

ministrative board.

Effectiveness of the instrument

A Swedish EPA study (2004h) examined statistics on environmental penalties

imposed, and interviewed 29 regulatory authorities (county administrative boards

and municipalities). The study concluded that the penalties had had a marked pre-ventive effect and achieve their purpose. All those interviewed considered that the

environmental penalty acts as a deterrent against contravention of the regulations.Many small municipalities impose relatively few environmental penalties, prefer-

ring instead to focus on information as a means of prevention. The evaluation does

not include any assessments of environmental impacts or whether it is a cost-

effective way of achieving the purpose.

The Swedish EPA (2004h) has concluded that the penalties have had a marked

preventive effect and achieve their purpose. The agency also proposes that a widerrange of offences should be subject to the environmental penalty, including failure

to comply with permit and notification obligations for private sewers, the duty ofnotification for small heat pumps, the permit obligation for game fences, and the

regulations on inspection of tanks used to store inflammable liquids.

5.6.2 Landfill tax

Since 1 January 2006 the landfill tax rate has been SEK 435/tonne. Tax

revenues totalled SEK 635 million in 2005.

Since the tax was introduced in 2000, the total quantity of waste sent to

landfill has fallen by about 0.7 million tonnes, for which effect the land-

fill tax is considered to be largely responsible. The quantity of both conventional and industrial waste going to landfill

has fallen.

Waste that is sorted and transported out of landfill facilities has in-

creased by around 1.1 million tonnes.

Waste treated at landfill facilities themselves has increased.

The quantity of tax-exempt waste has remained fairly constant at 4.4

million tonnes. Landfill tax was paid on one third of the waste remaining at landfill

facilities.

The tax should be differentiated in future according to waste fractions.




223

HISTORY AND PURPOSE

The purpose of landfill tax is to create economic incentives for treating waste by

re-use, materials recovery and recycling or incineration with energy extraction. The

aim is also to reduce waste quantities.


The tax covers conventional as well as specific industrial waste sent to landfill. The

tax is levied on waste transported to a facility where more than 50 tonnes of waste

a year is landfilled or stored for more than three years. Industrial facilities also pay

the tax on waste generated at the facility.

The legislation provides certain allowances for the taxpayer. The tax rate has

been SEK 435/tonne since 1 January 2006. Revenues from the landfill tax at its

previous rate were SEK 635 million in 2005. There were 234 taxpayers.

Waste incineration is part of the energy system and there are links to instru-ments in that area, particularly the carbon dioxide and energy taxes. Government

report SOU 2002:9 mentions a number of instruments in the waste sector that may

have influenced the impact of landfill tax on behaviour:

The decision in 1998 to end landfill of sorted burnable waste as from

2002 and of organic waste as from 2005. As from 2002 burnable waste is to be separated from other waste.

New landfill requirements under the EC Landfill Directive 1999/31/EC,

which enters into full force in 2008.

New requirements governing waste incineration plants under the ECWaste Incineration Directive 1999/31/EC (effective in 2003 for new

plants and in 2006 for existing ones). Increasingly extensive producer responsibility.

EVALUATIONS

A government white paper (SOU 2005:64) identified the following effects of land-fill tax:

Waste quantities going to landfill have diminished.

The total quantity of waste transported to landfill facilities has decreased by about 0.7 million tonnes.

Quantities of both conventional and industrial waste have fallen. The quantity of sorted waste transported out of landfill facilities has in-

creased by approximately 1.1 million tonnes.

The quantity of waste treated at landfill facilities has increased.

The quantity of tax-exempt waste has remained fairly constant at 4.4

million tonnes.

Landfill tax was paid on one third of waste remaining at landfill facilitiesin 2004.




224

Since a number of instruments have been introduced during the period, it is

considered difficult to specify the extent to which various instruments have con-

tributed. However, as the quantity of waste going to landfill has fallen sharply

since the inception of landfill tax, it may be assumed that it has played a major partin developments.

According to SOU 2005:64, it is much harder to draw any conclusions as to

whether the tax has helped to reduce overall waste quantities. Before the tax was

introduced, the annual increase in municipal waste was 3.4 per cent; after the tax

came in, the increase was around 2.6 per cent. This suggests that the tax may haveslowed the rate of increase in waste quantities. The result may differ depending on

which periods are compared, however.

The white paper also proposed some changes in the tax:

The tax should be differentiated.

The tax on sorted burnable waste and organic waste should be higherthan for other kinds of waste.

It will be necessary to raise the tax rate on these fractions if a waste in-

cineration tax is to be introduced. The report proposes a tax of SEK 470

per tonne.

Tax exemption of contaminated soil from site remediation and contami-

nated dredging sludge should be abolished; the tax should be set at SEK

90.

Other waste should continue to be taxed at SEK 370 per tonne (whichwas the tax when the white paper was presented).

In its statement of opinion during consultation on the white paper, the Swedish

EPA expressed a number of views on the future design of the tax. Among other

things, the agency was in favour of the proposal to raise the landfill tax (on waste

covered by the landfill ban but exempted) and considered that if an incineration taxis introduced, it should be higher than SEK 470 per tonne. The proposal to tax

contaminated soil and dredging sludge is not supported by the Swedish EPA.




225

5.6.3 Funding of site remediation

There are some 80,000 potentially contaminated sites in Sweden. There

is no-one that can be held responsible for about a third of them. Funding of approximately SEK 500 million was allocated in 2005 to pay

for investigation and remediation of priority sites where there is no-one

that can be held responsible.

This funding provides the greatest single impetus for site remediation.

The remediation rate, which is largely based on available funding, was

too slow to achieve the interim target by 2005.

It is too early to say whether we will achieve the new interim target by

2010.

In view of the nature of the problem, it is hard to conceive of an alterna-

tive instrument to funding via budget appropriation. There may be reason to evaluation the system to find a more cost-

effective approach, or to determine how much funding is required to

achieve the environmental objective.

HISTORY AND PURPOSE

The Swedish EPA estimates that there are some 80,000 sites Sweden where poten-

tially polluting operations have been conducted, of which an estimated 50 per cent pose a threat to health or the environment. These sites have now been identified,

and extensive efforts are being made to classify them according to risk so that

remediation priorities can be decided at the same time as site remediation is being

carried out. The sites are classified using a method for surveying contaminated

sites called MIFO ( Metodik for Inventering av Förorenade Områden). The method

employs a scale of 1 - 4, where 1 represents the greatest risk. At present some11,000 sites have been classified using this method. It is considered that 1,500 of

Swedish contaminated sites belong to risk class 1 and 15,000 to risk class 2,

thereby posing very great or great risks to human health or the environment.

The funding allocated to site remediation is intended to promote measures to

permanently eliminate or reduce current or future impact on health and the envi-

ronment caused by pollutants in soil/ground, groundwater and sediment.


County administrative boards can apply for funding out of the Swedish EPA ear-

marked appropriation for site remediation for investigation and remediation of priority contaminated sites, insofar as there is no-one that can be held responsible

for the contamination. The agency's letter of instruction for 2005 also allowed use

of this funding for exercise by county administrative boards of regulatory control

over contaminated sites.

The funding appropriation for 2005 was SEK 540.6 million, although only

SEK 442 million could be paid out, owing to disbursement restrictions. SEK 23

million of this money was used for regulatory control, SEK 78 million for




226

investigations, and SEK 314 million was spent on remediation itself. Funding ap-

propriations have trended higher over time.

To a limited extent, available funding acted in combination with LIP (Local In-

vestment Programme) funding, some of which was used to support site remedia-tion. LIP ended in 2000.

Where someone can be held liable for a contaminated site under the Environ-

mental Code, voluntary site remediation is being carried out. Oil companies are one

example, remediation being performed by a subsidiary called SPIMFAB. Other

stakeholders are also working on contaminated sites. These include the SwedishDefence, the Swedish Roads Administration, the Swedish Rail Administration and

Swedish Airports and Air Navigation Services. Since the funding appropriation is

intended for sites for which no-one can be held responsible, these instruments

complement one another.

EVALUATIONS

A report presented by the Swedish EPA in 2006 describes the government funding

appropriation as the greatest single impetus for development of site remediation in

Sweden. Establishment of an organisation and know-how, combined with exten-

sive and time-consuming investigations are mentioned as reasons why only justover half of the interim targets for measures have been achieved.

In 2003 the Swedish EPA evaluated site remediation operations. This led to the

following conclusions (Swedish EPA, 2003g).

There is a need for clearer objectives.

The role of stakeholders should be reviewed – central or regional instru-

ments?

More support for regulatory-driven projects and activities. Tools for more cost-effective systems.

More guidance and experience feedback – a learning system.

On balance, it was considered that site remediation was in a phase of rapid expan-

sion, and that the experience outlined above ought to provide a good basis for fur-

ther development.The use of LIP funding for site remediation has been evaluated by the National

Institute of Economic Research (2006). That evaluation shows that factors other

than risks associated with the area were important/critical in the allocation process.

The reason for this might be that LIP funding was awarded for entire action pro-

grammes, and was intended to promote sustainable development and stimulate

employment.In its evaluation of government control of the Swedish EPA, the National Audit

Office remarked that site remediation is a costly and time-consuming process, that

state funding has increased sharply but unevenly since its inception in 1999, and in

particular that the cut in funding in 2003 (SEK 461 million allocated in the letter of

instruction, reduced to SEK 173 actually disbursed) has greatly hindered site




227

remediation, and has had negative repercussions for long-term implementation of

environmental policy. (National Audit Office, 2006).

AGENCY COMMENTS

The funding appropriation is intended for remediation of contaminated sites for

which no-one can be held responsible under the Environmental Code. This funding

is an essential tool in the efforts to achieve one of the most difficult environmental

objectives, as well as being a very large sum of money. Bearing in mind the nature

of the problem, it is difficult to conceive of any instrument other than a funding

system. The problem area is complex, the legislation unproven, the field in the process of development, and robust central support is therefore needed. Several of

those involved perceive central support to be the bottleneck in current site remedia-

tion (Yvonne Österlund, personal communication). There has been no evaluation

showing whether or not the funding appropriation is cost-effective, and consideringthat the area has been in a phase of rapid expansion and development and that it is

considered difficult to achieve the relevant interim targets, there may be reason to

once again evaluate the system to find a more cost-effective approach or, alterna-

tively, to determine the amount of funding required to achieve the environmental

objective.

5.6.4 Tax on natural gravel

Natural gravel is less used and has been replaced by crushed stone since

the tax on natural gravel was introduced in 1996. It is uncertain how great a proportion of the decline in use can be attrib-

uted to the tax.

The most powerful instrument for reducing use of natural gravel is the

permit procedure at the county administrative board.

HISTORY AND PURPOSE

The purpose of the tax is to conserve natural gravel, and also to make alternativematerials more competitive, thus reducing natural gravel abstraction.


Tax is payable on quarried natural gravel abstracted for any purpose other than the

landowner's private needs. Gravel abstraction requires a permit issued under chap-

ter 11 of the Environmental Code or under the Water Act (1983:291), or chapter 12

of the Environmental Code. The term "natural gravel" means naturally sorted earthlargely consisting of sand, gravel, stone and boulder fractions.

The tax was raised on 1 January 2003 by SEK 5/tonne to SEK 10/tonne and

then to SEK 13/tonne on 1 January 2005. Tax liability arises when gravel is deliv-

ered to a purchaser or is otherwise used, but not where natural gravel use is solely

necessary to conduct abstraction, or for after-treatment of the quarry. Tax revenues

in 2005 were SEK 200 million. There were 662 taxpayers.




228

EVALUATIONS

Figure 23 shows the quantity of natural gravel delivered between 1984 and 2001.

The tax on natural gravel was introduced in 1996, but quantities of natural gravel

delivered in Sweden were already in decline before then.Crushed stone is a close substitute for natural gravel. Figure 23 shows that

crushed stone was being substituted for natural gravel for several years before the

tax was introduced, and that this trend continued afterwards.

Figure 23 Supply of natural gravel and crushed stone 1984 – 2001, percentage of total ballastdeliveries in Sweden.

Source: Swedish Geological Survey (2002)

According to the Swedish EPA (2000a), the existing trend has resulted in an aver-

age reduction in use of natural gravel of two percentage points per year, whereas

the tax (SEK 5/tonne) is said to have reduced use by 11 per cent a year. The same

study estimates that this represents about 5.6 million tonnes of natural gravel in

1997 and about 6.6 million tonnes in 1998. The Ministry of Finance (2003b) con-siders that the move away from natural gravel is also the result of a decline in de-

mand, where road construction in particular has quality requirements that include

the amount of crushed surface area. At present there is no requirement for the use

of uncrushed material. It is also considered that increased environmental aware-

ness, i.e. that people on both the supply and the demand side consider that naturalgravel is far too valuable to be used for unsophisticated purposes, has helped toreduce use of this material. Another comment is that the decrease in the proportion

of natural gravel in ballast supplied between 1996 and 2001 has indeed been more

rapid than it was between 1984 and 1996, i.e. before the tax was introduced. How-

ever, it is argued that it is difficult to prove that use of natural gravel has been in-

fluenced unequivocally or decisively by the tax. The Swedish Geological Survey

says in its consultative statement to the Swedish EPA (2000a) that, based on the

Swedish EPA report, it does not consider that the natural gravel tax has played a

decisive part in causing greater conservation of natural gravel. The figures for 1997

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

1984 1986 1988 1990 1992 1994 1996 1998 2000

Natural

gravel

Crushed stone

P r o c e n t a g e o f a l

l s u p p l y




229

and 1998 are in line with the trend shift that the Geological Survey considers took

place in 1992.

5.6.5 Water pollution charge

The water pollution charge is levied on contravention of any of the bans

on oil discharges from ships where the discharge is not insignificant.

The charge was raised on 1 January 1995. Discharges decreased gradu-

ally from 1996 to 2002. However, it is difficult to ascribe the decrease tothe higher charge with certainty.

The number of charges imposed in relation to the number of identified

discharges is low, however.

There is good reason to suppose that the charge has a preventive effect

on low-volume discharges.

HISTORY AND PURPOSE

The water pollution charge was introduced in 1984. Under chapter 8 of the Meas-

ures to Combat Water Pollution from Ships Act (1980:424), a water pollution

charge is to be levied on contravention of any of the bans on oil discharges from

ships where the discharge is not insignificant. The same applies if a discharge of oil

has not been limited as far as possible. The charge accrues to the state. The water

pollution charge is payable by the private individual or legal entity owning or oper-

ating the ship at the time of the contravention. The purpose of the charge is to deter

ships from discharging oil at sea, thereby combating water pollution. In otherwords, the charge is intended to be preventive rather than to compensate for oil

damage or fund measures preventing damage caused by oil (government report

SOU 1998:158).


The size of the water pollution charge is fixed to take account of the extent of the

discharge and the gross tonnage of the vessel. The charge is determined by theSwedish Coast Guard (Law 1988:437). Decisions on the charge are issued by the

Coast Guard central or regional management body (Ordinance 1988:598).

EVALUATIONS

The number of reported and confirmed discharges fell after the charge had been

introduced, although the beginnings of a decrease could be discerned even before

then. Discharges then increased gradually between the late 1980s and 1996. The

charge was raised on 1 January 1995. Discharges fell gradually to 2002. However,

according to government report SOU 1998:158, it is difficult to conclusively as-

cribe the decrease to the higher charge, since there are other factors involved. Forinstance, the Coast Guard writes that "the Coast Guard has further intensified its air

surveillance and has carried out a number of targeted operations with a view to

punishing those responsible for illegal discharges. The Coast Guard considers that




230

this, in combination with the efforts currently being made in many other forums,

have reversed the rising trend, so that some reduction seems to have occurred.”

(Coast Guard, 2006). Even though oil discharges have decreased in number since

the mid-1990s, they remain numerous.

Table 24 Confirmed oil discharges and water pollution charges imposed

Year Number of confirmeddischarges

Number of water pollution charges

Total charges,SEK

1999 326 21 1,000,000

2000 294 19 325,000

2001 176

2002 228 20

2003 207 7

2004 342 16 1,051,220

Source: Swedish Coast Guard "Oil discharge statistics", 1999 – 2004.

Effects in combination with other instruments

Measures acting in combination with the water pollution charge are air surveillance

by the Swedish Coast Guard, targeted air and sea operations, joint internationalsurveillance operations, more effective enforcement (wider jurisdiction and powers

for the Coast Guard), and information supplied to the shipping industry about the

harmful effects of oil discharges.

Effectiveness and development potential of the instrument

Bill 2000/01:139 "Measures to Combat Pollution from Ships" considers that thereis good reason to assume that the water pollution charge has a preventive effect on

low-volume discharges. The number of charges imposed in relation to the numberof confirmed discharges is fairly low, however: 3 – 9 per cent during 1999 - 2004.

5.6.6 Batteries charge

The sales trend for hazardous batteries is unclear.

The batteries charge has not had any clearly discernible effect.

The charge has indirect effects, e.g. in the form of information.

The impact of the charge may be in need of evaluation.

HISTORY AND PURPOSE

The purpose of the ordinance is to prevent emissions into the environment of cad-

mium, mercury and lead from batteries. A charge is levied to fund collection andrecycling of old hazardous batteries, and should equal the cost to society of:

disposing of or recycling hazardous batteries;

information that must be disseminated to achieve the purpose set out in

the Batteries Ordinance (1997:645);

municipal sorting of hazardous batteries;




231

collection of lead accumulator batteries;

provision by the Swedish EPA of the information to be filed on hazard-

ous batteries.


A charge is levied on hazardous batteries sold in the Swedish market or imported

into Sweden by a business for its own commercial use. The charges were raised to

their present level in 1997, and range from SEK 30/kg for lead accumulator starter

batteries to SEK 500/kg for silver oxide batteries (the charge for sealed nickel-

cadmium batteries is SEK 300/kg).Paid-in charges are invested in an interest-bearing account – the "batteries

fund", administered by the National Debt Office. In 2001 approximately SEK 70

million was paid in to the fund for lead batteries and SEK 41 million for nickel-

cadmium and mercury batteries together. Since the Batteries Ordinance covers end-of-life products with integral hazardous batteries, there is a degree of interplay with

the Producer Responsibility for Electrical and Electronic Products Ordinance

(2000:208), and with the regulations on pre-treatment of all end-of-life electrical

and electronic products in the Waste Ordinance (2001:1063), which is largely

based on producer responsibility and a voluntary commitment by the various play-ers in the market. The batteries charge also funds indirect instruments, e.g. dis-

semination of information so as to increase public awareness of the hazards posed

by batteries.

EVALUATIONSThe batteries charge was raised sharply in 1997 to the above levels as a result of

the Batteries Ordinance (1997:645). Sales and collection of lead, mercury and

nickel-cadmium batteries between 1994 and 2002 can be seen from Figure 24 -

Figure 26 below. (Swedish EPA, 2003a).

Figure 24 Number of lead accumulator batteries sold and collected in Sweden 1994 - 2002(tonnes)

Source: Swedish EPA (2003a)

0

5000

10000

15000

20000

2500030000

35000

40000

45000

1994 1995 1996 1997 1998 1999 2000 2001 2002

Batteries sold Batteries collected

L e a d s t a r t e r b a t t e r i e s ( t o n n e s )




232

Figure 25 Number of mercury batteries sold and collected in Sweden 1995 - 2002 (tonnes).


Figure 26 Number of Ni-Cd batteries sold and collected in Sweden 1995 - 2002 (tonnes).


There are no studies establishing the correlation between the batteries charge and

emissions of cadmium, mercury or lead. Hence, the decrease in these emissions

cannot be construed as the result of the batteries charge. Emissions of cadmium to

air and water derive mainly from metal manufacture and burning of fossil fuels,

although batteries are considered to add a large quantity to the total exposure tocadmium. Waste from batteries comprises at least half the total quantity of cad-

mium in landfill (Swedish Chemicals Inspectorate, 2003). Hence, it is not an en-

tirely simple matter to determine the extent of the impact on behaviour of the bat-

teries charge. It may nonetheless be of interest to see how cadmium emissions have

changed since the charge was introduced. Figure 27 shows the change in emissions

0

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002

N i C d - b a t t e r i e s ( t o n n e s )

0

5

10

15

20

25

30

1994 1995 1996 1997 1998 1999 2000 2001 2002

Batteries sold Batteries collected

M e r c u r y b a t t e r i e s ( t o n n e s )

Batteriescollected

Batteriessold




233

0

50

100

150

200

250

300

350

400

450

1985 1991 1993 1994 1995 1996 1997 1998 1999 2000

C a d m i u m ( k

g )

of cadmium to air between 1985 and 1999. The decrease began in the late 1980s,

i.e. before the charge was introduced in 1997. Emissions rose somewhat that year,

but have fallen back since then.

Figure 27 Emissions of cadmium to air from waste incineration.


Under the ordinance, the municipality must collected discarded batteries and ar-range a suitable system for that purpose. Discarded batteries received by anyone

engaged in the commercial transfer or sale of batteries must be delivered to the

municipal collection system. Anyone selling batteries must inform customers

where they can hand in discarded batteries. End-of-life products with integral haz-

ardous batteries must be delivered to anyone engaged in the commercial transfer or

sale of products of that type, or to a place designated by the municipality. It is es-timated that the cost of administering the charge on lead accumulator batteries in

1996 was SEK 400,000 for the Swedish EPA and the same amount for the Retur-

batt company (which administers recycling of lead accumulator batteries). Includ-

ing administrative expenses incurred by companies, the total cost of the system was

estimated at around SEK 1 million, i.e. roughly 1.5 per cent of revenues from the

batteries charge. The cost of administering collection of nickel-cadmium batteries

was SEK 400,000 in 2001, i.e. one per cent of revenues (Swedish EPA website,

2006f).

5.6.7 Radon grants

Many homes remain to be decontaminated; the expense is an obstacle to

action. There is a desire to extend the grant scheme to cover other houses.

Decontamination has reduced radon levels, but there is scope for in-

creased efficiency.

HISTORY AND PURPOSE

The purpose of the grant scheme is to reduce radon levels in one and two family

houses.




234


Grants are available where the concentration of radon in indoor air constitutes a

health risk that is not negligible or entirely temporary. The grant is for measures

deemed necessary to ensure that the level of radon in the house does not exceed200 becquerels per cubic metre of indoor air. This is a reduction from the previous

level of 400 becquerels per cubic metre, and entered into force in January 2003.

The grant is available to owners of one or two family houses who live in the build-

ing themselves if the radon concentration exceeds the above limit. The grant is 50

per cent of the reasonable cost of the remedial measures, subject to a maximum of

SEK 15,000. Grants under SEK 1,000 are not paid out.

EVALUATIONS

Grants under the scheme have been disbursed in decreasing amounts since 1994.

According to the Board of Housing, Building and Planning (1998), grants peakedin 1994 owing to a combination of a higher upper grant limit (raised from SEK

15,000 to SEK 25,000) and national information campaigns. Far fewer grants have

been paid out since then. In 1996 grants averaging SEK 9,935 were awarded in

1,130 cases. The following year the number of grants fell to just over 800, averag-

ing about SEK 10,200 each. There was also a national information campaign to

some extent in 1996, and so more people took advantage of the grant that year. Thereport (Board of Housing, Building and Planning, 1998) confirms that the need for

radon decontamination varies from municipality to municipality, depending on

local geology and the location of homes in relation to radon in the ground, as well

as the proportion of construction materials containing radon used to build thehouse. Readings have been taken that show that many municipalities have a large

number of houses with radon. Nonetheless, only a few grants have been approvedsince 1994 (Swedish Radiation Protection Institute, 1993).

By 1998 15,000 homes had been decontaminated with the help of government

funding (Board of Housing, Building and Planning, 1998). In total, it was estimated

that a further 65,000 or so homes had radon concentrations above the grant thresh-

old (400 becquerels per cubic metre at that time). Nevertheless, the grants available

for radon contamination in Swedish homes were not used to the full during the period 1995 - 1996. Only SEK 24 million was disbursed out of a funding appro-

priation of SEK 32 million. According to the report, it is unlikely that any addi-tional widespread radon decontamination has taken place. According to govern-

ment report SOU 2001:7, there are currently 280,000 – 320,000 houses where the

radon concentration is over 200 Bq/m³, which is 16 - 18 per cent of all houses in

Sweden. In addition to these, there are a large number of houses (1.65 million)where the radon concentration is not known. One explanation given for the short-

fall in decontamination during 1995 - 1996 is that most people living in "radon

houses" consider it too expensive, despite the grant, to reduce the level of radon in

relation to the risk of contracting a radon-related disease. According to the report,

this could in turn be because information campaigns have not had the desired ef-

fect. In some cases a further reason may be that measures have not been taken ow-

ing to financing problems. In a questionnaire survey conducted by the Board of




235

Housing, Building and Planning (1998), municipalities said that cost was a decisive

factor in the decision not to take action, even where readings showed radon levels

above the grant threshold.

In the same questionnaire, the majority of county administrative boards said buildings other than houses should also be eligible for the grant, identifying the

different treatment of dwelling houses and apartment buildings as a major defi-

ciency in the scheme. "House owner-occupiers have a personal interest in decon-

tamination, but still receive a grant [whereas] occupiers of rented or owned apart-

ments, who have no incentive for carrying out radon decontamination, are not eli-gible for a grant."

According to Clavensjö (1998), radon decontamination during 1995 - 1996 re-

duced radon levels from an average of 830 to 240 Bq/m³ in the 900 or so houses for

which radon concentrations have been reported before and after remedial action.

The limit for risks to health is 400 Bq/m³. In 88 per cent of the instances whereaction was taken, radon levels were reduced to below this limit, but in 12 per centof cases the measures failed. According to Clavensjö (1998), this indicates un-

changed, or possibly slightly improved, efficiency as compared with previous

years. However, Clavensjö considers that the grant scheme could be a great deal

more efficient. "The scheme subsidises work carried out by SEK 19 per reduced

Bq/m³." Clavensjö, (1998).

5.6.8 Government lake liming grants

Liming has increased more than fourfold since the grant scheme wasintroduced.

There are signs of lower acidification, but recovery is slow.

Less acidification in surface water has resulted in less liming in northernSweden, but this is counterbalanced by more liming in south-west Swe-

den.

Given the current level of funding, it is necessary to prioritise sites for

treatment.

HISTORY AND PURPOSE

Acidification of many lakes and watercourses has caused sensitive plants and ani-mals to decline in number or disappear completely. Some 200,000 tonnes of lime

are spread over Swedish lakes and watercourses each year to restore biodiversity

and create conditions for fishing. These operations are mainly funded by a central

government appropriation, allocated by the Swedish EPA.


Government grants are approved as available for liming and biological restorationof limed waters. "Liming" means spreading of lime or some other agent capable of

counteracting acidification of lakes and watercourses. "Biological restoration of

limed waters" means measures that allow the return of plant or animal species thathave disappeared owing to acidification. Grants are paid primarily to municipalities




236

and fisheries management area associations. The maximum grant is 85 per cent of

the cost approved by the grant awarding authority, unless there are particular rea-

sons for allowing a higher percentage. But according to the Swedish EPA (2003b),

a higher grant proportion may be approved in the case of nationally valuable water bodies, or if municipalities or counties do not have the financial resources needed

to carry out liming. This option is often used; 47 per cent of grant applications for

budget year 2006 were for 100 per cent of the liming cost. Figure 28 shows

changes in the funding appropriation during the period 1976 - 2006 (nominal

prices).

Figure 28 Government grants for liming of lakes and watercourses 1976 – 2006

(SEK millions).Source: Swedish EPA liming operations

EVALUATIONS

Originally liming was conducted on a trial basis by the National Board of Fisheries.Large-scale grant-funded liming began in 1982, with the Swedish EPA and county

administrative boards as the public authorities responsible. Eighteen counties had

liming programmes in 2006. These are described in detailed action plans, which are

submitted to the Swedish EPA. Liming increased up to the 2000s, but now remains

fairly steady at around 200,000 tonnes a year for the whole of Sweden. 7,500 lakesand 12,000 km of rivers and streams were limed in 2001 (Swedish EPA, 2003h).

Since then the number of sites limed as fallen; in 2005 some 7,000 lakes and about

11,000 km of water courses were limed.

An analysis (see Swedish EPA, 2003h) of around 70 Swedish lakes showed

that pH levels rose slowly in the 1990s. A Nordic study (Skjelkvåle et al., 2001) ofapproximately 350 lakes showed that recovery began in the 1980s and acceleratedin the 1990s. According to model calculations, recovery will continue until 2010,

before ebbing out over the following decades (Swedish EPA, 2003h). It is not pos-

sible to say at present when liming can be discontinued in the worst affected areas

of south-west Sweden.

Goal achievement is around 83 - 91 per cent.

Key figures are used to measure the results of liming. These show goal achieve-

ment for water chemistry and biological objectives, among other things. The bio-

Funding appropriations for liming 1976-2006 (SEK million)

0

50

100

150200

250

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006




237

logical objectives are the occurrence of bottom-dwelling species that have

disappeared because of acidification, or fry of species sensitive to acidification.

The water chemistry objective (or target) is that the pH should not fall below a

certain level. Depending on the nature of the ecosystem and the species thatare/have been present, the pH target is set at 5.6, 6.0 or 6.3. The results of liming

are reported by counties as "target achieved", "target not achieved" or "results un-

known". The Swedish EPA calculates the percentage of water chemistry targets

achieved in the water bodies for which the result are known. Biological goal

achievement is not used as an assessment criterion because it is regarded as a farmore uncertain parameter than water chemistry. Goal achievement in all counties

in 2004 is shown in Table 25. Goal achievement based on lake surface area is

higher than that based on number of lakes, because it is harder to achieve the target

in small lakes with rapid water throughflow.

Table 25 Quantity of limed water in Sweden in 2004 and goal achievement in relation tothe various pH liming targets.

Lakes Lakes Watercourses

Number Goalachievement, %

Lakesurfacearea,km2

Goalachievement, %

km Goalachievement, %

Total 2,866 89% 3,275 95% 8,439 86%

pH target 5.6 316 96% 138 98% 1,407 89%

pH target 6.0 2,511 88% 2,899 95% 6,253 86%

pH target 6.3 39 91% 238 99% 779 83%

Theoretically speaking, the percentage of successful liming operations will gradu-

ally rise as deposition decreases and liming techniques develop. The diversified pHtargets were introduced in 2003. Before then, the pH target for liming was always

6.0. This makes it difficult to compare goal achievement in 2003 and subsequent

years with previous results. However, since 2003 key figures from county adminis-

trative boards are reported more uniformly than before, which makes it easier to

compare figures between counties or between regions and the country as a whole.

Less acidification in surface waters has only been reported from a few counties,

but it has still not been possible to reduce liming in most of those counties. Oneexception is the county of Norrbotten in the far north (Swedish EPA, 2003b),

which discontinued liming in 2002. Other counties where liming is decreasing are

Jämtland in central Sweden, which has cut its operations by almost 40 per cent

since 2000, and Västerbotten in the north, which ends liming of around 10 lakes

and watercourses each year thanks to less acidification. The reason that liming

costs overall are not falling is that lime quantities, particularly in south-west Swe-

den, have actually tended to rise in recent years, and also that the Swedish EPA is

committed to better quality, which has made operations more expensive.The Government has said that the Swedish EPA national liming plan should

form the basis for liming operations to 2010. The emphasis of those operations

should be on acidified areas of national and regional value. Operations should also




238

continue in areas of great local value. A better way of describing how liming areas

are selected and where quality improvements are to be made is now therefore re-

quired. Quality improvements in liming operations are therefore a key element of

the action plans submitted by county administrative boards to the EPA for ap- proval. Apart from size, retention time and background pH for all limed waters, the

plan must specify the reason for liming (biological reason), liming objectives (the

three pH targets) and criteria for prioritising sites. This has improved liming in

many areas by making it possible to rectify or discontinue less successful liming.

5.6.9 Government funding of fisheries conservation

Various forms of government funding are available for a variety of

fisheries conservation measures.

Nowadays the aim of fisheries conservation is not only to increasefish production; it is also to restore the ecosystems concerned.

Results have shown that it is difficult to demonstrate any quantita-

tive effects on fish or crayfish stocks resulting from measures

funded from the fisheries conservation appropriation. Goal

achievement is poorly monitored. However, experience at county

administrative boards is that most projects have achieved good re-

sults

HISTORY AND PURPOSE

According to the Swedish Board of Fisheries (2004), various forms of governmentfunding are available for a variety of fisheries conservation measures:

Table 26 Government funding of fisheries conservation

Government funding 2003 Expenditure 2003,

SEK millions

Fisheries conservation appropriation 23.8

Fisheries Development Fund 1.8

Fisheries charges under s 6.5 of the former Water Act 10.8


Special appropriation (older) 0.08


Biological restoration of limed waters 6.6

Use of public agency appropriations EU funding

Conditional funding 1.0

Source: Swedish Board of Fisheries (2004)

The aim of fisheries conservation today is not only to increase fish production; it is

also biological restoration of the ecosystems concerned (Swedish Board of Fisher-

ies, 2004).




239


Under the Support for Fisheries Conservation Ordinance (1998:1343), government

grants may be paid for measures to promote fisheries conservation, principally in

waters in which the public are entitled to fish. Grants are available for the follow-ing costs.

Creation or modification of fisheries conservation areas.

Regulatory control of fisheries.

Fish planting.

Projects to conserve endangered fish species and stocks, biotope conser-vation and other measures promoting biodiversity.

According to the Swedish EPA (2003d), most of this appropriation (SEK 14.5

million) went on county fisheries conservation. Most of this money was used torestore rivers and streams to ensure sustained reproduction and production of par-

ticularly valuable species. The maximum grant is 50 per cent of the approved cost

of the measure. Grant applications are approved by the Board of Fisheries or by the

relevant county administrative board on the Board's authority. The funding appro-

priation has remained unchanged at SEK 20 million since 1998.

EVALUATIONS

A Board of Fisheries report (2004) shows how funds allocated under expenditure

area 23 (appropriation 43:11 Fisheries Conservation) have been administered and

allocated, and the results of measures taken. The results show that it is difficult todemonstrate any quantitative effects on fish or crayfish stocks of measures funded

from the fisheries conservation appropriation. Goal achievement is poorly moni-

tored. However, experience at county administrative boards is that most projects

have achieved good results. It is also considered that the fisheries conservationappropriation has helped to stimulate existing interest in continuing with fisheries

conservation. The report is based on opinions at county administrative boards

founded on their experience and knowledge of developments in their own counties,

rather than on any scientific studies.

EFFECTIVENESS AND DEVELOPMENT POTENTIAL OF THE INSTRUMENTThe Board of Fisheries report (2004) contains a number of proposed changes in the

administration of the fisheries conservation appropriation. Among other things, it is pointed out that monitoring of effects needs to be improved.




240

5.6.10 Relationship between the instruments and environmental

objectives and strategies

Table 27 Relationship between other economic instruments and the environmental objec-tives.

ReducedClimate Im-

pact

A Non-Toxic Envi-ronment

Zero

Eutrophication

SustainableForests

Other objectives

Landfill tax Reduced meth-ane emissions.

Closed nitrogen andphosphorus cycles.

A Good Built Envi-ronment, interimtarget for waste.

Environmentalpenalty

Several, particularly AProtective OzoneLayer.

Site remediation

appropriation

Reduces risks

posed by contami-nated land.

Tax on naturalgravel

A Good Built Envi-ronment, interimtarget for naturalgravel abstraction.


Water pollutioncharge

Reduced oil dis-charges.

A Balanced MarineEnvironment.

Flourishing Coastal Areas and Archipela-gos.

Batteries charge Safe disposal ofmore discardedbatteries.

Radon grant A Good Built Envi-ronment, good qualityindoor environment.

A Safe RadiationEnvironment.

Government lakeliming grant

Natural AcidificationOnly.

Flourishing Lakes andStreams.

Government funding

of fisheries conser-vation

Flourishing Lakes and

Streams: restorationof watercourses.




241

Table 28 Relationship between other economic instruments and the three actionstrategies.



Management of land,water and the built envi-ronment

Landfill tax Increases conservation ofresources.

Environmental penalty Makes contaminated landavailable for use.

Tax on natural gravel Conservation of naturalgravel and groundwaterreservoir resources.

Water pollutioncharge

Reduced oil discharges.

Batteries charge Safe disposal of morediscarded batteries.

Radon grant Reduces risks in existinghousing stock.

Government lakeliming grant

Restores acidified lakes.

Government funding offisheries conservation

Restoration of water-courses.




242




243

6 List of evaluation requirementsThe following is a list of the evaluations that the agencies consider are lacking,

having reviewed existing evaluations. The priority areas for evaluation or study aremarked in bold. Other evaluation proposals have been set out under the various

sections of this report.

General

Further evaluation of the green tax shift.

The scope for achieving the environmental objectives by increased en-

ergy-efficiency, and how the use of instruments to improve energy-

efficiency relates to socio-economic efficiency.

Indexation of energy and carbon dioxide taxes in line with real growth in

GDP. Examine the design of support for market launch and technology pro-

curement, which includes the scope for extending the support to parts of

the energy sector other than improved energy efficiency.

A follow-up study should be made into the effect of lowering the tax

exemption threshold for the sulphur tax.

Industry

Analyse the effects of abolishing the lower-rate energy and carbon

dioxide taxes for non-energy-intensive manufacturing industry. This

should include both impact on the environment and the effects onindustrial competitiveness.

The effect of energy and carbon dioxide taxes on industrial profitability

and competitiveness (business studies).

Transport

A comprehensive evaluation of economic instruments in the trans-

port sector. Areas of study could include the way motor fuel taxes

are used in combination with vehicle tax, ways that fiscal taxes can

help to achieve environmental objectives and ways of encouraging

the use of alternative fuels (several of the studies proposed belowshould form part of the comprehensive evaluation). The analysis

should cover relevant environmental objectives, action strategies and

also other key societal goals in the sector. A survey should also be

made of potential joint EU-harmonised instruments.

The definition of an "eco-car" for benefit taxation purposes should be

revised.

Examine the scope for environmental differentiation of existing charges.

The consequences of the 2006 vehicle tax reform and the introduction of

a tax rebate for new diesel cars fitted with particulate filters should be

evaluated, together with an impact analysis of introducing further envi-ronmental instruments.




244

The environmental impact of shipping lane dues should be evaluated, and

alternative instruments examined.

The aviation tax due to be introduced in summer 2007 should be evalu-

ated. The environmental benefit and size of the lower-rate tax on alkylate pet-

rol should be evaluated.

Agriculture and fisheries

A comprehensive evaluation to determine the goal achievement (en-

vironmental impact) and cost-effectiveness of the various existing

forms of economic support, including tax incentives (environmen-

tally effective as well as counteractive) in relation to the Sustainable

Forests environmental objective.

An assessment of the quantity of biomass for fuel that can be sustainablyabstracted, as well as the rate of sustainable abstraction.

The rules on accrual accounting of income under nature conservationagreements, capital gains taxation of real property and compensation lev-

els under nature conservation agreements should be reviewed.

An analysis of risk differentiation of pesticide tax.

The scope for using instruments to encourage hothouse cultivation enter-

prises to use less heating oil, while remaining competitive, should be ex-

amined.

There is a need to examine instruments to reduce the risk taken by farm-

ers who commit to growing Salix for many years ahead.

Other sectors

The cost-effectiveness and goal achievement of the funding appro-

priation for site remediation should be evaluated in relation to the

relevant interim targets.

The cost-effectiveness and goal achievement of the appropriation for

grants for lake liming should be evaluated in relation to the relevant

interim targets.

The effects of the batteries charge on behaviour should be evaluated.

A review of the form of support for solar heating and solar cells isneeded.

SOME PROJECTS IN PROGRESS OR DUE TO START

Kontrollstation 2008 ("Checkpoint 2008" – an evaluation of Sweden's climate

strategy), will include an analysis of the effects of abolishing the lower-rate energy

and carbon dioxide taxes paid by manufacturing industry not participating in the

EU emissions trading scheme. Checkpoint 2008 will also analyse instruments used

in the transport sector.

The Swedish Agency for Public Management has been instructed by the Gov-

ernment to evaluate existing nature conservation instruments (nature reserves, bio-

tope protection areas and nature conservation agreements) and their long-term cost-




245

effectiveness, and also how state-owned forest land can facilitate achievement of

the entire Sustainable Forests environmental objective. The agency's evaluation

report is to be submitted by 30 September 2007.

A government commission is currently preparing a white paper on the role ofagriculture as a bioenergy producer (Jo 2005:05).

The EU Commission will be presenting a green paper on market-based instru-

ments at the beginning of 2007. The European Environmental Bureau (EEB) has

proposed a programme of tax reforms within the framework of the "open coordina-

tion method". The new sustainability strategy, adopted at the EU summit in 2006,urges member states to continue the green tax shift. The Commission will be pre-

senting a report in 2007 on the systems prevailing in member states. In 2008 the

Commission will be presenting a report containing proposals on an approach to

commencing the phase-out of the most environmentally damaging subsidies.




246




247

Appendix 1: Tax AgencyMemorandum 5 June 2006

Facts

Pesticide tax: There were 41 registered taxpayers on 31 December 2005. Tax reve-

nues were SEK 59 million in 2005; the tax was SEK 30/kg active ingredient in the

pesticide.

Petrol: There were 40 registered taxpayers on 31 December 2005. Tax revenues

were SEK 25,972 million in 2005.

Fuels: There were 575 registered taxpayers on 31 December 2005. Tax revenues

were SEK 19,463 million in 2005.

Electric power: There were 709 registered taxpayers on 31 December 2005. Tax

revenues were SEK 18,151 million in 2005. Energy tax was SEK 0.261/kWh, in

some northern Swedish municipalities SEK 0.201/kWh. For manufacturing indus-

try and commercial hothouse cultivation the tax is 0.005/kWh.

Fertiliser: There were 100 registered taxpayers on 31 December 2005. Tax reve-nues were SEK 328 million in 2005. The fertiliser tax is SEK 1.80 for each full kilo

of nitrogen (provided the proportion of nitrogen is at least 2 per cent) and SEK 30

for each full gram of cadmium in the fertiliser exceeding 5 grams per tonne of

phosphorus.

Waste: There were 234 registered taxpayers on 31 December 2005. Tax revenues

were SEK 635 million in 2005. The tax covers household refuse as well as indus-

trial waste and is SEK 435/tonne of waste going to landfill.

Tax on natural gravel: There were 662 registered taxpayers on 31 December 2005.

Tax revenues were SEK 200 million in 2005. The tax was SEK 13/tonne of natural

gravel.

The normal accounting period is one month, except for those paying less than SEK20,000 a year, who can report once a year. Accounting dates are determined by thecompanies' VAT accounting, so that all returns are filed at the same time and the

taxpayer has sufficient funds in its "tax account" to cover the tax payable.

Time expended

On the basis of information provided by employees on their time sheets, the Tax

Agency spent the following amounts of time administering the above taxes in

2005.




249

Tax 2005 2006

Energy tax on electricity 2,028 806

"Nuclear power" 1 0Oil, LP gas & Methane 1,302 716

Natural gas, Coal & Petroleumcoke 96 45

Petrol 119 56

Lower-rate energy tax

on manufacturing processes 1,312 1,023

Sulphur 81 58

Raw tall oil 1 1

Matter type tax-exempt user 2005 2006

Energy tax 756 376Refunds 2005 2006

Boats/Ships 1,820 952

Manufacturing industry 14,441 7,828

Heat production 1,592 829

Diesel use in agriculture, for-estry and aquaculture

15,957 27,999

Electric power use in agricul-ture, forestry and aquaculture 21,694 20,210

The sharp rise in the number of applications for diesel tax refunds from agricul-

tural, forestry and aquaculture enterprises is partly explained by the new regula-tions extending tax refunds to vehicles used in agriculture, forestry and aquaculture

from 1 January 2005. Quarterly applications require consent. Just under 4,000 con-

sent applications have been received, which means that most applications are made

on an annual basis. The rules governing applications for refunds of energy tax on

electric power were amended in that the former basic position that the accounting period was 1 July - 30 June was changed to the calendar year. This meant that we

received many applications early in the year for the periods 1 July 2004 – 30 June

2005 and 1 July 2005 – 31 December 2005, which was a transitional period. Higher

tax rates on electric power and the new right to apply for tax refunds on diesel fuel

for vehicles used in agriculture, forestry and aquaculture may also partly explainthe large number of cases we have dealt with.

TAX REFUNDS INSTEAD OF TAX-FREE PURCHASE

Selective purchase taxes are used with increasing frequency as a political instru-

ment to influence patterns of consumption and production, while also generating

significant revenues for the state. Selective purchase tax revenues account for some

seven per cent of all tax revenues. The current system, whereby taxpayers entitled

to a refund are also able to buy tax-free makes it difficult for the Tax Agency to

check that the system is not being abused. The system also places a greater respon-

sibility on the taxpayers to only sell tax-free to those who are in fact entitled to buy




250

tax-free. This may be difficult to determine, and may only apply to a portion of the

product supplied, depending on the use to which it will be put.

Under the system whereby a refund is sought once a quarter or once a year after

consumption, the user incurs a cost from the time of the taxed purchase to the timea refund is received. Throughput time, i.e. the time for processing an application,

varies during the year, from four weeks at best to 12 at worst. The amount refunded

is credited to the applicant's tax account, from which any surplus will be paid out

following reconciliation at the first weekend each month. The tax is paid in by the

taxpayer when he files his monthly tax return. Provisions governing accounting and payment of taxes are contained in the Tax Payment Act (1997:483).

RESOURCE-DEMANDING

The refund system is resource-demanding because of the high number of applica-

tions. The present BRIS data support system requires a considerable amount ofmanual work. Applications are diarised, registered and approved manually. The

system lacks functions that would aid efficient risk analysis and monitoring. Dif-

ferent types of application take different amounts of time to register and enter the

decision in the system, depending on the quantity of information to be registered. It

is estimated that, making the basic checks, it takes around five minutes just to reg-ister a decision on repayment of energy tax on electric power used in agriculture,

forestry or aquaculture. A corresponding decision on refund of tax on diesel fuel in

the same sectors is estimated to take around 20 minutes. The amount of time re-

quired may increase sharply if further information is needed because information

provided is not complete or accurate. Some 20 per cent of applications for refundsof tax on diesel require additional information or checks. Approximately 75 percent of applications for diesel tax refunds relating to storm damage in the forests of

southern Sweden in 2005 required further work of this kind

The new KULING data support system requires documents to be scanned,

which allows data to be processed and decisions made automatically, greatly reduc-

ing the manual component. The system also allows risk analysis and monitoring. It

has not yet been formally decided to extend the system to cover refunds, but this isexpected to occur in the near future. If a decision is taken before the summer, it

will be possible to process refunds using KULING in autumn 2007, at the earliest.

This will enable the computer system to check a scanned application. If the infor-

mation is correct, a decision or proposed decision can be made by the computer

system. A new system would make it easier to process applications, and the time

saved in this way could be used to carry out more controls, for example.Even further ahead, another possibility would be for applications to be submit-

ted electronically. Applicants could then be given help to avoid filling in the wrong

information or forgetting to fill in compulsory information.

CONTROLS

The two types of control available are "desktop review" and audit. Regional audit

resources for selective purchase taxes are based in Stockholm, Gothenburg andMalmö. The National Audit Office has recently examined selective purchase tax




251

controls at the Swedish Tax Agency. The general aim was to ascertain whether the

Tax Agency carries out efficient control of selective taxes so as to minimise loss of

revenue. The review included the Government and the Swedish Tax Agency. The

review report (RiR 2006:10 Punktskattekontroll – mest reklam? ("Control of Selec-tive Sales Taxes – an Empty Gesture?") is dated 16 May 2005. In summary, the

National Audit Office concluded that the Tax Agency had not had a coherent strat-

egy for the focus of selective purchase tax controls during the period covered by

the review. The Audit Office considered that the Tax Agency should place greater

emphasis in the planning and selection process on high-revenue taxes with compli-cated legislation, and on taxpayers handling large amounts of supporting documen-

tation. In addition, an approach should be created to allow use of the most effective

form of control.

CONSULTATIVE STATEMENTS ON DRAFT LEGISLATIONThe Swedish Tax Agency is a referral body and is thus able to influence forthcom-

ing legislation. In its consultative statements the agency endeavours to appraise

proposals in terms of its own ability as well as that of the taxpayer/refund applicant

to apply the regulations. The time available to submit a consultative statement is

often short – anything from one day to two months. The agency may need to dis-tribute the proposals internally, which will create even greater time pressure.

The Swedish Tax Agency considers that the opinions it submits are taken into

account, but that there are many stakeholders whose views must be considered. As

a result, the comments expressed by the agency may not always be reflected in the

end product.

TIME REQUIRED FOR IMPLEMENTATION

Amendments to tax legislation and the time required for their implementation can-

not always be reconciled. Knowledge of forthcoming changes can cause "hoarding"

effects before an impending tax rise, or postponement of investments/purchasesuntil a tax reduction takes effect.

The latest example of the above is the tax imposed on waste incineration. The

tax entered into force on 1 July 2006; it was enacted on 2 June the same year. The

sector and the Tax Agency knew that changes were planned, following publication

of the BRAS white paper on waste incineration tax (SOU 2005:23) in March 2005.It was clear from the autumn 2005 Finance Bill that an incineration tax would beintroduced. It was originally intended that it should enter into force on 1 January

2006. The Government put the bill before Parliament on 6 April 2006. The Com-

mittee on Taxation white paper (SkU 2005/06:33) was published on 16 May 2006.

Taxpayers, numbering about 30 according to the bill, and registered at the relevant

county administrative boards, were supposed to send in their applications for regis-

tration before 1 July 2006. The first tax return was due to be distributed by theSwedish Tax Agency on 12 July. In other cases, e.g. when regulations governing

the right to a refund are introduced, it may be difficult to obtain a list of the ad-

dresses of those affected by the rules.




252

Before a tax can be administered, information must be available for the em-

ployees who will be dealing with the tax and for prospective taxpayers. Also re-

quired will be registration application forms, tax return forms and data support,

which may vary from one selective tax to another, depending on the information to be entered in the system. The information required for a given tax depends, among

other things, on the language in the law concerning supporting documents needed

to compute the tax and the right to allowances or relief.

ARE ERRORS PREVALENT WITH REGARD TO CERTAIN TAXES AND IS THIS

DUE TO MORE COMPLICATED RULES?

Energy taxation is a complex area, with many difficult delineations. The Tax Re-

duction Commission presented its report Svåra skatter! ("Difficult Taxes") (SOU

2003:38) in April 2003. Its brief was to review the regulations governing lower-

rate energy taxes for certain sectors. The commission presented an energy taxationmodel. No comprehensive overhaul of energy taxation has yet taken place.

The Swedish Agency for Economic and Regional Growth (Nutek) has pro-

duced a report entitled "The Administrative Burden Borne by Trade and Industry –

four selective purchase taxes" (R2005:07). Among other things, the report exam-

ines the Energy Tax Act. When asked, companies said that applications for refundsof tax paid on energy used for manufacture and heating were not time-consuming

to complete or particularly complicated. But it did transpire that several companies

had only completed one refund application recently because they did not know they

were entitled to a tax reduction. The administrative burden revealed by the survey

of companies paying tax under the Energy Tax Act was lower than that perceived by the companies. The Energy Tax Act is considered to be very complicated.Companies must spend a great deal of money, not least on training the employees

who deal with the legislation on a daily basis. According to the companies inter-

viewed, there are no external consultants specialising in this field.

SKILL REQUIREMENTS – DIFFERENCE BETWEEN SMALL AND LARGE

COMPANIES

Both small and large companies are subject to the same requirements; all of them

are expected to know the applicable regulations. Generally speaking, it may be said

that an application for a small sum of money received from a farmer may containerrors and lack necessary information, probably due to ignorance. Many people donot use accounting firms, but those firms also sometimes have little knowledge of

selective purchase taxes. On the other hand, if a large company misinterprets the

rules, the correction needed may involve substantial sums of money.

REFUNDS ALSO FOR THE SERVICE SECTOR

The Government announced a major overhaul of the tax system in its spring

budget, and stated in the Finance Bill 2006 that energy taxation will be reformed as

part of that overhaul. The Swedish Tax Agency sees a number of ways of design-

ing a future system for administration of tax refunds. One option might be to intro-

duce provisions on automatic decisions made in accordance with information




253

provided in an application received within the time limit for applications (see chap-

ter 11, section 16 of the Tax Payment Act (1997:483, SBL). A decision would be

deemed to have been made when an application is received by the Tax Agency,

provided it is submitted in the right time and in the right way. None of the options that the Tax Agency can see are considered to be feasible

without changes in the technical support available for energy tax administration.

An effective administrative system for extended tax exemption is thus heavily

dependent on development of technical support and a technical system that works

properly together with a computerised selection system (e.g. PUMA).




254




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