Opponents of Canada’s nascent carbon tax and rebate keep telling us that the system needs to be scrapped because it kills jobs, destroys the economy, and doesn’t work to reduce greenhouse gas emissions.
If this were true, then surely Sweden would today be a bankrupt mess. Sweden was the first country to implement a carbon tax in 1991, and currently charges the highest tax rate in the world at around $177 Canadian dollars (1,190 Swedish krona) per tonne of carbon dioxide. That’s almost six times Canada’s $30/tonne federal carbon tax rate in 2020.
But far from destroying the Swedish economy, the high Swedish carbon tax has helped reduce greenhouse gas emissions, even while GDP has grown. In fact, the Swedish economy has grown considerably faster than the European average since Sweden first implemented its carbon tax. And Sweden is on track to be carbon neutral by 2045.
The Swedish example not only demonstrates that high carbon prices can go hand in hand with strong economic growth, but confirms once again that carbon taxes work to reduce emissions. Canadians should take note.
Origin story
Sweden has a long history of taxing energy, beginning with a tax on gasoline in 1924 and followed by taxes on electricity, oil, coal, and natural gas. Swedes were used to paying tax on their energy consumption, not to mention a much higher level of taxation overall, which may help to explain the broad public acceptance of the carbon tax.
Like Canada, Sweden phased their tax in slowly in order to give households and businesses time to adapt, though they started at a much higher level—about $76/tonne in inflation-adjusted terms, compared to the $20/tonne rate at which the Canadian federal carbon tax was introduced in 2019.
The Swedish carbon tax is levied on all fossil fuels in proportion to their carbon content, just like Canada’s. Many categories of emissions are exempt, however, because they fall under the European Union’s Emissions Trading System, including those from power and heat generation, commercial aviation, and energy-intensive industries like oil refineries, steel works, and cement production. In Canada, large industrial emitters are covered by the federal Output-Based Pricing System, which is separate from the levies applied to transportation fuels and natural gas.
While the Canadian system rebates the carbon tax to households and businesses, Sweden’s carbon tax funds all flow to general government revenue. The government can then use these funds for initiatives that address climate change, or for mitigating regressive impacts of the tax.
The Swedish carbon tax is also integrated within a broader policy framework that aims to reduce the country’s emissions—including a value-added fuel tax, efficiency standards, congestion pricing, and heavy investment in renewable energy and public transit.
Incredible shrinking emissions
The results of Sweden’s nearly 30-year carbon pricing policy are contributing to a growing body of data that shows that carbon taxes work to reduce emissions.
The tax began having an impact almost as soon as it was introduced. Within four years, emissions were already 15% below business-as-usual projections. By 2000, they had declined 25% below where they would have been without a carbon tax.
Over the long term, the role of the carbon tax in cutting net emissions has been striking. Between 1990 and 2017, Sweden’s net greenhouse gas emissions dropped 26%. Sweden now produces less greenhouse gas than most other EU countries.
The largest reductions have come from changes to the way buildings are heated. Though heat production now falls under the European Emissions Trading System, it was initially subject to the Swedish carbon tax. The tax helped incentivize a switch from high-carbon oil and coal to carbon-neutral biofuels. Combined with the efficiency gains from Sweden’s centralized district heating systems, carbon emissions from buildings have fallen 87% since 1991.
Even transport, a notoriously stubborn sector in which to achieve emissions reductions, has seen declines of 10-15% as a result of the carbon tax. It wasn’t straightforward—emissions caused by transportation didn’t begin to decline in earnest until 2007. Improvements came largely from technological advances incentivized by the tax, such as more efficient cars, electric vehicles, and blending biofuels into road transport fuels.
Biofuels are an important part of the story in the reduction of greenhouse gas emissions in Sweden’s industrial sector, one third of which is not subject to the EU’s Emissions Trading System. The pulp and paper industry was incentivized to switch from oil to biofuels, which reduced their carbon output. New technologies and improvements in energy efficiency also helped, reducing overall emissions by 19% from 1990 levels.
Swedish agriculture has also achieved significant reductions, dropping their emissions 10% over the same period by reducing livestock holdings, increasing productivity, and reducing the use of mineral fertilizers.
A thriving economy
Not only did Sweden’s carbon tax reduce greenhouse gas emissions by 26% between 1990 and 2017, the tax didn’t destroy their economy. Far from it. During the same period, Sweden’s GDP grew by 78%, one of the highest rates of economic growth in Europe. And don’t forget—that period includes the global financial crisis of 2007-2008, one of the worst economic shocks since the Great Depression. Yet Sweden still prospered.
The carbon tax didn’t break the economy, it created incentives to steer economic activity in a low-carbon direction. Importantly, it made carbon-neutral biofuels more cost-competitive, and encouraged their use in heating and transport. Today, more than 40% of energy in Sweden comes from biofuels.
Government policies that complimented the carbon tax also helped—for example, subsidies for new furnace installations and a policy package to encourage district heating.
The most important lesson to be learned from the Swedish experience is that carbon pricing can help to reduce emissions even as the economy continues to grow. The carbon tax isn’t a brake, it’s a steering wheel. Canada should look to Sweden as an example of how an advanced economy can decarbonize and prosper at the same time.
