%CONOMIC )NSTRUMENTSIN %NVIRONMENTAL0OLICY · Internet: ISBN 91-620-5678-6.pdf ISSN 0282-7298 ... Therese Karlsson (Swedish Energy Agency), Henrik Scharin (Swedish EPA), Ul- ... and

Economic Instruments in Environmental Policy

A report by the Swedish Environmental Protection Agency and the Swedish Energy Agency

SWEDISH ENVIRONMENTAL PROTECTION AGENCY

OrdersPhone: + 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 Agency Phone: + 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 Bildbyrå

Translation: 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 Y E 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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PrefaceThis report reviews existing economic instruments in the environmental field in Sweden. 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 to achieve 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: Reino Abrahamsson (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 9Summary of the need to evaluate economic instruments 21

2 BACKGROUND 25

3 INTRODUCTION 273.1 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 434.1 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 855.1 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


5.2.8 Combined effects of instruments in industry 130

5.2.9 Company interviews 134

5.3 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


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


5.4.18 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


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 243General 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 a fairly 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 have also 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 comprehensive review 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 other instruments 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 sufficient to 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 few years. 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 the implementation 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 is sufficient 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 is sufficient. 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 great deal 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 the least expensive measures first); (ii) dynamic efficiency (the capacity of an instru-ment to generate technological development and encourage the most cost-effective solutions 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 are many 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 Impact The 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 the transport 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 on electricity 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 incentive for 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 account is 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 transport sector. 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 of several 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 in the 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 ex-press 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 phos-phorus. 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 instruments designed 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 instrument that 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 nitrogen emissions, 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 is mainly 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 effective means 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 instruments from 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 not conflict with international agreements.

RESULTS FROM ONGOING STUDY PENDING There is an ongoing study initiated by the National Chemicals Inspectorate aiming to 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


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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 is considered 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 ForestsThere 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 recent years, 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 measures in 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 potential goal 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 gas emissions 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


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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-based mechanisms. 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 are inefficient. 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 affect the 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


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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 economic instruments 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 concepts and definitions describing the socio-economic effectiveness of our approach to achieving the environmental objectives. Going forward, it is essential that the terms used 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.


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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 a long-term effective means of furthering environmental inter-ests (based on the criteria of cost-effectiveness, dy-namic efficiency and achievement of objec-tives)?

Main objective(s)

Multi-sectoral

General comments on energy and carbon dioxide taxes

Yes, except for re-duced-rate taxes for industry outside the EU emissions trading scheme

Yes, tax reductions may be justified for trade and industry policy reasons.

Reduced Climate Impact. Fiscal. Energy system transition.

Sulphur tax Essentially yes, but the effect of lowering the tax exemption limit needs to be examined.

Yes. Zero Eutrophication. Natural Acidification Only.Clean Air.

KLIMP (local climate investment pro-grammes

Yes. Probably not, but fairly effectively for a grant system, owing to broad coverage and flexible choice of measures.

Reduced Climate Impact. Energy system transition.

Grants for market launch of energy-efficient technologies

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

Energy system transition.

Manufacturing industry and energy production

Financial support for wind power, in-cluding environmental bonus

No, no evaluations made.

No. Energy system transition.

Programme for Improved Energy Effi-ciency (PFE)

No. Doubtful, although the effects of this instrument interact positively with other economic instru-ments.

Trade and industry policy.Energy system transition.

Property tax on wind power and hydro-power

Not in terms of its environmental im-pact.

Unclear. Fiscal.

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

Unclear. Fiscal. Energy system transition.

NOx charge Yes Yes, for sources included. Zero Eutrophication. Natural Acidification Only.Clean Air.


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Main objective(s)

Housing and services etc.

Tax relief for installation of biofuel unit serving as main heating source in new houses and for installation of energy-efficient windows in existing houses.

No. No. Narrow focus. Reduced Climate Impact. Energy system transition.

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

No. The Board of Housing, Building and Planning pre-sented a plan for monitoring and evaluation of these grants in June 2005.

No. May have brought measures forward, but they are often profitable even without grants.

Reduced Climate Impact. Energy system transition. Increased employment.

Conversion grants for homes and re-lated premises

No. The Board of Housing, Building and Planning pre-sented a plan for monitoring and evaluation of these grants in June 2005.

No. May have brought measures forward, but they are often profitable even without grants.


Property taxation Not in terms of its environmental im-pact.

Possibly counterproduc-tive, but probably limited.

Fiscal.

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

No, monitored, if anything.

No. The main aim is to encourage the use of a given technology. The design of the scheme is in need of review.


Transport sector

Motor fuel tax Yes. Yes. The effect on other societal goals may limit the scope for using motor fuel tax.

Fiscal. Reduced Climate Impact. + other external effects (noise, road wear etc).

Tax exemption for biofuels No. Unclear. Its effect alone and with other instruments needs to be examined.


Vehicle tax No. Probably not. Its effect in conjunction with other instruments in the sector needs to be analysed.

Fiscal. Reduced Climate Impact.

Environmental classification of motor fuels and differential taxes

Yes. Yes. Natural Acidification Only Clean Air Zero Eutrophication. Non-Toxic Environment.


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Main objective(s)

Taxation of company cars and free motor fuel

No. Counterproductive. Amended regulations combined with other eco-nomic instruments in the transport sector should be analysed.

Fiscal. Clean Air, Natural Acidifi-cation Only, Reduced Climate Impact. (Amended regulations)

Road charges for certain types of heavy-duty vehicles

No. No. Different main pur-pose. Effects combined with other economic in-struments in the sector should be analysed.

Fiscal. Acidification, Clean Air. (Differentiation)

Subsidised public transport. Yes. Doubtful. Other aspects need to be taken into account, however.

Several traffic policy objectives Reduced Climate Impact. Energy system transition.

Car-scrapping premium Yes. Not in terms of encourag-ing people to scrap old vehicles. Does encourage people to take their scrap vehicles to scrap yards.

Non-Toxic Environment. Natural Acidification Only.Zero Eutrophication. Clean Air.

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

Transport funding Yes. Probably marginal effect. Regional policy. Lower tax on alkylate petrol No. Unclear. More incentives

needed.Non-Toxic Environment.

Aviation tax No. No. Does not influence technical development. Global markets entail a risk of carbon dioxide "leak-age".

Reduced Climate Impact. Fiscal.

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

Zero Eutrophication. Natural Acidification Only.Clean Air.

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

Zero Eutrophication. Natural Acidification Only.Clean Air.

Grants for disposal of oil waste from ships

No evaluations made.

No. Essentially regulation. Very few grant applications received.

Balanced Marine Envi-ronment.

Agriculture, forestry, fisheries Grants for planting of energy forest and cultivation of energy crops

Yes (white paper under preparation)

No. Design of the scheme may be in need of review.



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

Is the instrument a long-term effective means of furthering environmental interests (based on the criteria of cost-effectiveness, dy-namic efficiency and achievement of objec-tives)?

Main objective(s)

Grants for conservation of natural and cultural heritage, and management of broad-leaved deciduous woodland

No, but not a priority. Difficult to say. But there has been a positive effect on natural and cultural assets 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-use restrictions and management of forest land

No. Environmental effect and level of funding should be evaluated.

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. Zero Eutrophication.

Pesticide tax Yes. Limited effect Non-Toxic Environment. Agricultural environmental compensa-tion

No, needed continu-ously.

Unclear, acts for and against.

Varied Agricultural Land-scape.CAP.

Tax relief on light heating oil ( EO1) used in agriculture and forestry for purposes other than operating motor vehicles

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).

Reduced Climate Impact. Good Built Environment. EU waste strategy.

Funding of site remediation No, effectiveness and funding level should be evaluated.

Unclear. Non-Toxic Environment. Good Quality Groundwa-ter.

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

Good Built Environment.

Water pollution charge Yes. Unclear link but probably prevents emissions.

Balanced Marine Envi-ronment.

Batteries charge No, the charge should be evaluated.

Unclear. Non-Toxic Environment.

Radon grants Yes. Can probably be made more effective. Greater incentive needed.

Good Built Environment.

Government grants for liming of lakes No, effectiveness and funding level need evaluating.

Unclear. Natural Acidification Only.

Government funding of fisheries con-servation measures

No, better monitoring needed.

Unclear. Flourishing Lakes and Streams.


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2 Background In 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 use of 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 objectives and 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.


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3 Introduction 3.1 Purpose, method and scope The 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 or modified 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 in two 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) Swedish economic instruments in the environmental field. Some borderline cases are exam-ined where considered relevant, particularly instruments involving large sums of money 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 Sustainable Forests), 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.


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3.2 Structure of the report Chapter 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 othersocietal goals Environmental 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


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(2010)Phase-out of hazardous substances (2007/2010) Ongoing reduction of health and environmental risks associated with chemicals (2010) Guideline values for environmental quality (2010) Surveys of contaminated sites completed (2010) Site remediation areas (2005-2010)/2050 Dioxins 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 the sea (2010) Reduced emissions of ammonia (2010) Reduced emissions of nitrogen oxides to air (2010)

Flourishing Lakes and Streams Action programme for natural habitats and cultural heritage (2005/2010) Action programme for restoration of rivers and streams (2005/2010) Water supply plans (2009) Release of animals and plants living in aquatic habitats (2005) Action programme for endangered species and fish stocks (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 areas and archipelagos (2005/2006/2010) Strategy for cultural heritage and cultivated land-scapes in coastal areas and archipelagos (2005) Action programmes for endangered marine species and 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 on farmland (2005) Management of culturally important landscape features (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)


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

A Good Built Environment Planning documentation (2010) Built environments of value in terms of their cultural heritage (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 on each 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)TransportEnergy

transitionAgricultureForestry Municipalities

Agencies

National legislation

Inter-nationalagreements

Directives

White cer-tificatesEnergy-

declarations

Extended trading-scheme

Heating Certifcates

Kilometre tax

Planning, building

and housing act

Environ-mental code

Emissionstrading LTACO2 tax Electricity

certificatesEnergy

Tax

KLIMP SulphurTax

NOXcharge

WasteTax

Environ-mental-bonus

Investmentgrants

Conversiongrants

LabellingCertif.

EnergyAdvice

VehicleTax

Information

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


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3.4 Instruments to achieve the objectives The 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 instruments interact 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

Emissions

trading

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 to use 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.


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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 economic cost 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 instruments 3.5.1 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 the complexity 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 and also 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


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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 in achieving 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 the optimal 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 consumers demand 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 the worst 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 production or consumption are not reflected in market prices and thereby contribute towards inefficient 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 a transboundary 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 can therefore 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)


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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 be seen 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 the long-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 attractive from a socio-economic viewpoint. But whether priority should be given to goal achievement 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 achievementDoes 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.


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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 in assessing 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-effectivenessWill the instrument achieve the environmental objective at the lowest possible cost?

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 economic instrument as compared with quantitative regulation. Note also that an instrument may be cost-effective within the collective affected by it, but not necessarily for the entire 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 emissions may 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 new equilibrium


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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 a global one.

Dynamic efficiencyHow powerful an incentive for technological development does the instrument create?

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 the environment, 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 the instrument 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


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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 been included 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 of some 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 reduces the 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, individuals are 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 the effectiveness 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


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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, a degree 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 industries will 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 homogenous the 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.

TAXESA 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 a given 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 for reducing 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.

REGULATIONRegulation 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 regulate treatment 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 a complement 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 may not 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 treatment target has been reached, this approach does not incorporate the polluter pays prin-ciple. Regulation creates no economic incentive for reducing emissions by more than 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


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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 be avoided 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 in turn 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 ALLOWANCES Tradable 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 current emissions.

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


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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 the only 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 all those involved.


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4 Environmental objectives, strategies and economicinstruments used Trends 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 be very 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 de-pendent 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 targets and 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 cases important 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 important means of controlling European emissions of greenhouse gases.


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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-term impact 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 target is 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 the Kyoto 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 objective should 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 reviewing the 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.


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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 lower than 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 heating systems 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 by 4.5 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

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

CO

2 eq

uiva

lent

s (k

tonn

es)

Transport

Electricity and districtheating

Industrial combustion

Residential andcommercial

Agriculture

Industrial processesand 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 the level 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 some industrial 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


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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 than was 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 by carbon sinks or flexible mechanisms – as compared with 1990.

Table 4 Historical and projected emissions of greenhouse gases by sector (Mtonnes CO2equivalents )

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 (not LULUCF)

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 gas emissions 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 with emissions 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.


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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, the electricity 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 one sector. 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


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(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 are only 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 a statutory obligation to buy electricity certificates corresponding to a certain per-centage of their consumption. This percentage is raised from year to year. The system 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 of grants 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 comparison is 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 increase the 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 certificate scheme and the EU emissions trading scheme.


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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 the climate 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 the travel 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 num-ber 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 that collected 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 agricultural land.

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 impacted greenhouse 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


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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 carbon dioxide 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

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Figure 3 Projected greenhouse gas emissions to 2010 by sector


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The emission trend depicted in Figure 3 clearly shows that if emissions in Swedenare 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 with carbon 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 instruments affect 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 planning and for the energy performance of buildings are central, since the impact of the carbon 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 im-provements in public buildings, can be questioned, since some of these measures might have been taken even without grants or tax relief. These grants may inflate the 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 that may 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). Taken together, 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


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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 is not 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 emissions attributable 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 use of 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 the EU 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 process is 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, the charge/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


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new, energy-efficient, machinery and vehicles purchased to replace their old equipment.

Technology sharing and development of new technology are an important factor in achieving 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 requires initial 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 it already commercially viable.

Grants paid to municipalities to carry out various kinds of measures have been a central 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 regular evaluations 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 of chemicals 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.


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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 zero and, 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.

AssessmentNew 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 all deliberately manufactured or extracted chemical sub-stances handled in the market.

REACH will improve knowledge of chemical properties. The proposed testing requirements for substances are not nearly 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 they contain.

The interim target cannot be achieved unless further pow-erful measures are taken. An information requirement for hazardous substances needs to be incorporated in interna-tional agreements.

Interim target 3 As far as possible, newly manufactured finished products will 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 hazardous substances under REACH forms a good basis for ap-proaching the interim target. The scheme is expected to have a preventive effect. Broad exemptions from the permit requirement and an unclear timetable may make it difficult to achieve the target.


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possible, but no later than 2007; - other carcinogenic, mutagenic and reprotoxic sub-stances, and endocrine disrupting substances or highly allergenic substances, by 2010, if the products that con-tain them are intended to be used in such a way that they will 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 reduced continuously to 2010

There are few indications of clear trends at present. None-theless, it is considered possible to achieve the interim target 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 Chemicals Inspectorate has set and published guideline values for 100 chemicals used in insecticides. The Swedish EPA has published 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 of 2010 at all contaminated sites that pose an acute risk of direct exposure, and at contaminated sites that threaten important 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 performed at around half of the sites.

Interim target 7 Between 2005 and 2010, measures will be implemented at a sufficiently large portion of the prioritised contami-nated sites to ensure that the environmental problem as a whole can be solved by 2050 at the latest.

Surveys and investigations are being pursued to ascertain the extent of the environmental problem posed by con-taminated sites and what measures should be taken. Particular emphasis is now being placed on regulatory control to ensure that site remediation takes place where liability 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 in food of dioxins harmful to humans.

Ongoing action programmes are the Swedish plan for implementation of the Stockholm Convention and the EU programme for common limit values for foods. The EU limit values were introduced in 2002 and will be reviewed in 2008. Proposal of further effective measures will require more knowledge about the contribution of various sources to dioxins in foods, including the importance of various secondary sources such as atmospheric deposition and contaminated sites.

Interim target 9 By 2015 the dietary and occupational exposure of the population to cadmium will be at a level that is safe from a long-term public health point of view.

It is not possible at present to determine a safe exposure level. No overall review has been made of the effects of ongoing measures. In view of these uncertainties, it is difficult at the moment to say what is needed to achieve the interim target. For the time being the emphasis should be on reducing exposure, which is required under the EU programme for existing substances.

4.2.1 Available instruments 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


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- 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.

4.2.2 Development potential

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 to control 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." The report 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 imposing tax as "close" to the environmental problem as possible, and a simple tax with low compliance 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.


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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 Forests Under 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 processes take 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 of compensation for land-use restrictions. The amount and nature of this funding is the decisive factor determining whether the objective will be achieved. 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 how state-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


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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 agreements militate against formal protection of forest land and thereby hinder ful-filment of the environmental objective.

THE ENVIRONMENTAL QUALITY OBJECTIVE The value of forests and forest land for biological production must be protected, at the 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 productive forest 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 considered difficult. 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 14,780 hectares 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 30,000 hectares 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


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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; it is 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 biological diversity 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


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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 preserved and 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 the deadline for their fulfilment. The short-term objectives incorporate all or parts of interim 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 for recreation 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 agreements less 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 be achieved until 2020. The specific land management costs for the Swedish state are around SEK 200 million. Monitoring of the financial implications of land


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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, cultural heritage and social amenities.

OTHER INSTRUMENTSThere 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 under the 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 forestry include those governing environmentally hazardous activities (which apply to fer-tiliser use in forests), land drainage and pesticides.

Certification of forest land The 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 and financially 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 owners have made voluntary land allocations.

Green forestry plans Green forestry plans are based on the twin goals for production and environment in forestry 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


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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 the following forms:

Surveys and distribution of information on the location of ancient monuments. Method development and applied research on development of sustainable forestry 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 per cent 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.

LIFEThe 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.


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4.3.2 Development potential 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 other schemes, 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

THE ENVIRONMENTAL QUALITY OBJECTIVE Nutrient levels in soil and water must not be such that they adversely affect human health, 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 main source 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.


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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 TARGETSInterim 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 with 1995 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 interim target 4 (nitrogen oxides), further measures will be necessary, mainly in the trans-port sector. The EC directive imposing requirements for further development of exhaust 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


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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.

4.4.1 Available instruments 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 to some 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 emission conditions 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 negative environmental 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


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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 an agricultural 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 tax has 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 and coastal 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).

4.4.2 Development potentialFor 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 nitrogen load. 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


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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 by law, 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 protection zones7, 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 be achieved 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 outgoing sewage 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, which enables them to absorb nutrients (mainly phosphorus).


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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 the charge 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 in the 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 the lowest 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 emission reduction 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


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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 also increases 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 im-portant 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 countries contributing to the load on the Baltic.


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4.5 Three action strategies and economicinstruments used

All three action strategies involve use of economic instruments. They are most 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 the strategy 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 scheme also 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 ob-jectives 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.


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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 are specifically 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 environmentstrategy is mainly based on economic and normative instruments, backed up with information. 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 (Swedish EPA, 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.


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Table 5 General description of the three action strategies Main environmental objectives concerned

Characteristic features of the strategy

More effi-cient energy use and transport

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-toxic and re-source-efficientcyclical systems

A Non-Toxic Environment A Protective Ozone Layer Zero Eutrophication A Safe Radiation Environment A Good Built 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. Management of land, water and the built environment

A Rich Diversity of Plant and Animal Life A Magnificent Mountain Land-scapeA Varied Agricultural Landscape Sustainable Forests. Thriving Wetlands A Balanced Marine Environment, Flourishing Coastal Areas and ArchipelagosGood Quality Groundwater. Flourishing Lakes and Streams A Good Built Environment

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


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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 an attempt to encapsulate and emphasise the characteristic features of the strategies.

4.5.1 More efficient energy use and transport

PROBLEMSThe More efficient energy use and transport strategy contains many important components 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. Treatment equipment 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 to reduce 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


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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 the same. 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 energy Another 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 liquid one. 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 sector A very important aspect of the strategy is how to control/reduce emissions in the transport 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.


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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 and transport 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 in relation to the other synthesis chapters for the four environmental objectives. The

NOx charge, environmentally differentiated shipping 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.


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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 consumption tax on electricity), as well as increased use of fuels from renewable sources (carbon dioxide 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 taxes are 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 considered to 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 of tax 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 fuels for 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. The vehicle 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-efficient vehicles, 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


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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 dis-posal 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 is still 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 the tax 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 great extent. 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 be regarded 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


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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 heating systems. 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. Some grants 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 for improved 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 particularly aware 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 this field 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


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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 further efforts 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 also impact 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 trading scheme 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 a development 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 Moreefficient energy use and transport strategy. The climate problem, which is a global


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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 future efforts.

4.5.2 Non-toxic and resource-efficient cyclical systems PROBLEMSThe 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 requires an 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.


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AVAILABLE INSTRUMENTS

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 energy 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.


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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 im-pact 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 offer a 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 use combined 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

PROBLEMSThe 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 and natural 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 increased use 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 forest environment 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.


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AVAILABLE INSTRUMENTS

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 energy crops, 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.


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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 objectives not 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 endeavouring to 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.


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5 Survey of instruments The 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 other instruments (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 used in 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 clear incentive 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.


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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 the studies 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, carbon dioxide 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 over a ten-year period, i.e. between 2001 and 2010. This has involved a sharp increase in 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, the economy will operate more efficiently and result in a higher standard of welfare.


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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 salary charge, 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 environmental classes, 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 be reviewed 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 the carbon 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 a fuel other than fuels taxed as petrol, and if emissions of carbon dioxide from use of the 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 sub-ject to income tax.


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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/litreAlkylate petrol SEK 1.28/litre SEK2.13/litreenvironmental class 2 SEK 2.89/litre SEK 2.13/litre2. Petrol other than the above SEK 3.56/litre SEK 2.13/litre3. Heating oil, diesel heating oil, paraffin etc that: has a marking agent added or produces less than 85 per cent distillate by volume at 350°C

SEK 739/m3 SEK 2,623/m3

does not have a marking agent added or produces less 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 produces less 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 produces less than 85 per cent distillate by volume at 350°C, belonging to environmental class 3 or not belonging to 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 kgpurposes other than the above SEK 145/1000 kg SEK 2,759/1000 kg5. Methane used for: operation of motor vehicles, ships or aircraft SEK 0/1000 m3 SEK 1,116/1000m3purposes other than the above SEK 239/1000 m3 SEK 1,965/1000m36. Natural gas used for: operation of motor vehicles, ships or aircraft SEK 0/1000 m3 SEK 1,116/1000m3purposes other than the above SEK 239/1000 m3 SEK 1,965/1000m37. Coal-based fuels SEK 315/1000 kg SEK 2,282/1000 kg8. Petroleum coke SEK 315/1000 kg SEK 2,282/1000 kg9. 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. According to 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


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0

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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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 the fuel tax and electricity tax together. Total revenues from tax on energy, including fuel, 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 dioxide and other electricity production taxes) as well as revenues from fuel, electricity and carbon dioxide tax at current prices, 1993 – 2004.

Source: Statistics Sweden.


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CO2 tax, standardCO2 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 the sectors 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


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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 the tax 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 conclusion is 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 authors find 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 tax revenues 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 external effect of emissions.


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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 double dividends 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 in Sweden 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 tax shift 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 of existing 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 emission allowances 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


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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 little efficiency 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 share value. One way of achieving earnings neutrality studied by Bovenberg and Goulder is 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 but regressive. 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.


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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 an evaluation 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 Energy Tax 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 on electricity.

Requirement Total time spent per year and

company (min-utes)

Number of companies

concerned 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 and small 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


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Tax on raw tall oil: Gross tax (manufacturing plants)

360 10 14

Gross tax (suppliers) 720 2 6 Tax on electric power: Requirement for calculation of gross tax (large producers with distribution and large distribu-tors)

9,000 20 724

Requirement for calculation of gross tax (medium-sized pro-ducers with distribution and medium-sized distributors)

2,160 246 2,161

Requirement for calculation of gross tax (small producers with distribution, small distributors and 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 with environmentally-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 remains subject 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 a more 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 standard tax rates.


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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 are allocated 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, the report 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 higher with 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 from these viewpoints.


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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 technological development 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 that the 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 potential emission 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.


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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 in the 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, and also 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 in sulphur dioxide between 1989 and 1995 (Swedish EPA 1997b). Other factors in-clude the fact that industry has reduced its process emissions and substantially lower 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 tax has 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.


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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 sulphur concentrations 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 electricity consumption by 340,000 MWh. Only 86 measures out of the 134 project applications in the first round of grants included 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 the least 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 been carried out, may become profitable even without grants just a year or two later if the carbon dioxide tax is raised.


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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.

DESIGN OF THE INSTRUMENT 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 reducing emissions. The strategy should have firm local support and be integrated with other municipal 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 have also 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 effects to 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.

EVALUATIONS A 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 expected to 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


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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 kg carbon 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 the measures that would have been carried out even without a grant, and the measures that 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 to yield a total carbon dioxide reduction of 28.5 ktonnes, and could have been carried out 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 economic gain.

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 notional interest rate of 4 per cent to obtain the current value.


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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 a strictly 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 state can 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 those for 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 are often 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 and Klimp. 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 is thus 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


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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 or two 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 grants for 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 2005Research 23Industry 10Built environment 56Total 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, by theme area

Theme area 2003 2004 2005Transport 1 1 -Industry 1 1 1Built 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


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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 the cost-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 new forms 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 commitment throughout the entire technology procurement process.

Carl Bro (2006) also points out that the limitation whereby a grant recipient can only 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.


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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 on this, 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 grant will 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 be extended to parts of the energy sector other than improved energy efficiency.

5.1.5 Relationship between instruments and environmental objectives and strategiesThe tables below list multi-sectoral economic instruments. They also describe the relationship between the instruments and the environmental objectives and three action strategies.


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Table 11 Relationship between the multi-sectoral instruments and the environmental ob-jectives

Reduced Climate Impact

A Non-Toxic Environ-ment

ZeroEutrophication

Sustainable Forests

Other objectives

Energy tax on fossil fuels

Use of fossil fuels is indirectly mitigated.

Differential petrol tax helps.

Nitrogen oxide emissions are indi-rectly mitigated.

Fiscal. Energy system transition.Lower rate taxes for industrial policy reasons

Consumption tax on electricity

Presupposes that marginal electricity production uses fossil fuels. But in the short term emissions are not affected under the EU emissions trading scheme*

Presupposes that marginal electricity production produces nitrogen oxide emissions.

Fiscal. Lower rate taxes for industrial and re-gional policy rea-sons.Energy system transition.

Carbon dioxide tax Mitigates/reduces carbon dioxide emis-sions.

Nitrogen oxide emissions are indi-rectly limited.

Indirectly coun-terproductive if biofuels are not abstracted sus-tainably.

Fiscal. Lower rate taxes for industrial policy reasons.

Sulphur tax Klimp The aim of the pro-

gramme is to bring about measures to reduce greenhouse gas emissions.

Grants for market launch 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 use and transport


Management of land, water and the built envi-ronment

Energy tax on fossil fuels Greater energy efficiency. Resource-efficient cyclical systems.

Consumption tax on electricity Greater energy efficiency. Resource-efficient cyclical systems.

Carbon dioxide tax Greater use of renewable en-ergy. Counterproductive if greater use of renewable en-ergy reduces energy-efficiency.

Indirectly encourages re-source-efficient consump-tion.

Scope for greater use of renewable 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 of energy-efficient technology

Encourages energy-efficient technology.

Encourages resource-efficient technology.


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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 energy type, 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 and natural 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 LP gas 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

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Coke

EO

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EO

2-5

LP gas

Natural gas and coal gas

,

Other biofuels

District heating

Electrical energy

Types of energy

TJ 20032004

Pellets, briquettes etc

Wood chips, bark,

sawdust etc


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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 particularly large 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 cost and 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 at combined 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).

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Waste heat etcHeat pumpsElectric boilersBiofuels, waste, peat etcCoal, inc. smelter gasNatural gas, inc. LP gasOil

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. Since then, 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 certificate scheme. Several studies have concluded that efficiency is lost by retaining the carbon dioxide tax in sectors covered by the EU emissions trading


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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 from energy 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 cent of the standard rate.

Table 13. Partial or full exemption from fuel and carbon dioxide tax. Degree of exemption from Purpose: Non-exempt fuels

Fuel tax Carbon dioxide tax

1. Use for purposes other than as a motor fuel or 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 other products for which the manufacturer is liable to tax.

100% 100%

7. Use in the manufacture of taxable electric power, subject to certain limitations.

High-taxed oils1 100% 100%

8. Use in metallurgical processes2 Fuels except for coal-based fuels and petroleum coke

100% 100%

9. Use for purposes other than operation of motor vehicles in a manufacturing process in industrial operations2

Petrol, raw tall oil, high-taxed oils1

100% 79%

13. Use in a manufacturing process in mining operations for operation of motor vehicles other than automobiles, trucks and buses

Fuels except for high-taxed oils1

100% 79%

1 Heating oil, diesel fuel oil, paraffin etc. without added marking agents and producing at 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


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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 to which 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 the majority (around 700) are engaged in greenhouse cultivation.

Figure 9. Number of manufacturing companies (SNI 10 – 37) that have been granted exemption from 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- ochdryckesvaruframställning

17 Textilvarutillverkning

21 Massa-, pappers- ochpappersvarutillverkning

24 Tillverkning av kemikalieroch kemiska produkter

26 Tillverkning av icke-metalliska mineraliskaprodukter29 Tillverkning av maskinersom 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


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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 of 1.2 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 1 January 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 produced methane 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 exempt from electricity tax. Other exemptions include electricity used in the manufacture of mineral oil products, coal-based fuels, petroleum coke etc, electricity consumed during 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 programme for 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 the energy 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.


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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 conversion sectors. 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 instruments have 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 biofuels in 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 Sweden result in a corresponding rise (or higher/lower emissions, depending on the envi-ronmental performance of the industrial operations) abroad. In practice, this means that 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 in 1990. 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 tax revenue. Brännlund et al. (2005) conclude that introduction of emission allowances


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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 paper industry, 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. The report 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 over from a national carbon dioxide tax to an international carbon dioxide emissions trading 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 revenue can 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 EU regulations, 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 the other 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


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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.


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5.2.2 Financial support for wind power, including the environmental bonus

In addition to the electricity certificate scheme, financial support is available 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, known as 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 environmentalbonus 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.


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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 SEK 0.16/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) under the 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, which is 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 in comparison 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


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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 the degree 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 has shifted 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 thereby help 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 management systems, 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.


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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 the standard 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 products and 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; andassess 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


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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 in the 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 is expected 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.


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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

Companiesparticipating in PFEaccount for 29.4 TWhof 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 TWhTax revenues approx. SEK 500 million/yr

Electricity taxed at minimum rate34.9 TWhTax revenues approx. SEK 175 million/yr

Tax-exempt electricity5.3 TWhTax revenues approx. SEK 0 million/yr

Figure 10 Number of companies participating in PFE, by sector

ExperienceThe 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 of electricity 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 the minimum 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.


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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 wood productsManufacture of chemicals, chemicalproducts and plastic productsFood and drinks manufacture

Steel and metal production

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, there is 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 new technology (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


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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. Each company 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 per cent, 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 period 1945 – 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 has raised electricity prices and thus boosted power company profits. The Government determined that neither consumer prices nor power company investment decisions regarding 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 less favourably 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 environmental impact. 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 from SEK 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 reason given 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) was amended (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


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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 environmental impact 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 its costs 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 risk that 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 the Commission, 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 MW and 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.

DESIGN OF THE INSTRUMENT 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 with high emissions per quantity of useful energy lose under the system. The total amount 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 charge system 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


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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 developing cheaper 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, pure and 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 to the 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.

5.2.7 Relationship between instruments and environmental objectives and strategies The tables below list economic instruments in industry. The tables also describe the relationship between the instruments and environmental objectives and action strategies.


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Table 14 Relationship between economic instruments in industry and Swedish environmental objectives


A Non-ToxicEnvi-ronment

ZeroEutrophication

Sustainable Forests

Other objectives

Fuel tax (large rebates for manufacturingindustry)

Use of fossil fuels is indirectly mitigated.

Nitrogen oxide emissions are mitigated.

Fiscal. Lower rate taxes for industrial policy reasonsEnergy system tran-sition.

Electricity con-sumption tax (minimum tax on manufacturingindustry under the EC directive; PFE companies are exempt)

Reduces emissions from the Nordic electricity system, but not in the near term within the EU as a whole.*

Presupposes that marginal electricity production pro-duces nitrogen oxide emissions.

Fiscal. Tax exemptions for industrial policy reasons.Energy system tran-sition.

Carbon dioxide tax (manufac-turing industry +combined heat and power 21%)

Mitigates/reduces carbon dioxide emis-sions.

Nitrogen oxide emissions are indirectly mitigated.

Indirectly coun-terproductive if biofuels are not abstractedsustainably.

Lower rate taxes for industrial policy reasons.Energy system tran-sition.

Nitrogen oxide charge

Nitrogen oxide emissions are mitigated from the emission sources included.

PFE Reduces emissions from the Nordic electricity system.

Harmonisation with EU regulations. Maintain industrial competitiveness.

Operating sup-port Wind Power

Only indirectly, and provided the electric-ity certificate scheme does not help to achieve the objec-tive.

Technical develop-ment.Energy system tran-sition.

Output tax on nuclear power

Fiscal.

Property tax on industry

Reduced-rate tax on wind 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 the taxed 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

More efficient energy use and transport

Non-toxic and resource-efficient cyclical sys-tems


Fuel tax (large rebates for manufacturing industry)

Greater energy efficiency. Resource-efficient cyclical systems.

Electricity consumption tax (minimum tax on manufacturing industry under the EC directive; PFE companies are exempt)

Greater energy efficiency. Resource-efficient cyclical systems.

Carbon dioxide tax (manufacturing industry + combined heat and power 21%)

Greater use of renewable energy. Counterproductive if greater use of renewable energy reduces energy-efficiency.

Indirectly encourages resource-efficient con-sumption.

Scope for greater use of renewable energy. Counterproductive if biofuels are ab-stracted non-sustainably.

Nitrogen oxide charge Reduced eutrophication, acidification and cleaner air.

PFE More efficient use of electric-ity.

Resource-efficient cyclical systems.

Operating support Wind Power

Only if required to ensure that the electricity certificate scheme helps to achieve the objective.

Encourages resource-efficient technology.

Counterproductive if developmentcauses deterioration of the physical environment.

Output tax on nuclear power

Property tax on industry Reduced-rate tax on wind farms.


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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 the emissions 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 scheme indirectly 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 for fossil 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 of the 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


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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 power more 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 that two 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 efficiency improvements, 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.


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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 sector16.

PROPERTY TAX IN COMBINATION WITH OTHER INSTRUMENTS The environmental element of property tax comprises the different tax rates forhydropower 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. The Government 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 has a 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 the levels 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 40 MWh electricity/SEK 1 million sales.


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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 representing manufacturing 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 instruments having 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 com-pany'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 reduce energy 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 interest to 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 appreciable extent. Several companies stated that technological breakthroughs are needed for this 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.


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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 from Sweden to countries with lower energy prices. They did not think that this would happen overnight, because of the major fixed investments that have 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 ap-proach 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 ap-plication) and PFE during the initial phase. Lobbying accounts for a large part of the administration of instruments.


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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 direction that 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 fossil fuel-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 reduced coal 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 eligi-ble 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,


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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 to the 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 in 2004. 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.


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8%

9%

1%

33%32%

17%

Biofuels

Oil

Gas

District heating

Household andOperating electricity

Electric heating

Figure 13 Energy consumption in 2004 in housing and commercial premises, with percentage breakdown 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 22 TWh, 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 com-pounds). 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 and services sector

It may be assumed that taxes have had a pronounced impact on energy use 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.


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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 trading scheme. But the prime purposes of the energy tax are fiscal and energy system 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 services sector 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 of fossil 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 to accelerate the pace of conversion.

AGENCY COMMENTS Since the inception of the emissions trading scheme the energy tax on electricity no longer 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.


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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 reliefHouseholders 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 of the 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 in 2011/2012.

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.


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Table 16 Applications for tax relief, income year 2004. Income year 2004 Number registered Number granted Number rejected Windows Heating Windows Heating Windows Heating 9,569 757 5,331 61 4,235 696

Source: Swedish Tax Agency

The Energy Agency has conducted a series of interviews about the schemes with 10 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 that demand 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


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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 the information 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 Government considered 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


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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 is SEK 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 or heat 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


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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 Buildings can 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 grants or 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 for additional 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 the tax 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.


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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 cause overheating, 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 im-proved 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 between income 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


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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 is SEK 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 and Planning 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 converting from 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 most applicants 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 converting from 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.


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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 the conversion; 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 reduce the 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 of the 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.


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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 the higher 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. Measures such 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 the same 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 differently depending on whether the house is located in a higher or lower valuation zone.


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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 of the 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 grant18

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 systems installed in houses.


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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 the county 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 grants During 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 plans for 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 of the latter kind. Holiday homes and lighthouses are two examples of applications.


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ElectricityOilSolid fuels District 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 State Grants 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 be of 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


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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 solar heating. 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 and Planning, 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 contact will 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 an evaluation 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 Swedish innovation 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.


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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 the schemes 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.

5.3.7 Relationship between instruments and environmental objectives and strategies The tables below list economic instruments in the housing sector. They also de-scribe the relationship between the instruments and environmental objectives and action strategies.

Table 17 Relationship between economic instruments in the housing sector and Swedish environmental objectives



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 aremitigated.

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.*


Carbon dioxide tax

The relative price of fossil fuels rises in comparison with biofuels and electricity.

Nitrogen oxide emis-sions areindirectly mitigated.

Indirectly counter-productive if biofu-els are not ab-stracted sustaina-bly.


Tax relief for energy-efficient windows and biofuel systems

More efficient energy use and support for renewable energy.

Nitrogen oxide emis-sions areindirectly mitigated.

Compensation for higherproperty tax.

Tax relief for improved energy efficiency and conversion in public buildings

Support for reduced use of fossil fuels.

Nitrogen oxide emis-sions are indirectly mitigated.

Employment.

Conversion grants for apart-ment buildings

Reduces oil use. Nitrogen oxide emis-sions are indirectly mitigated.


Property taxation May act counter to environ-mental investments in prop-erties

Nitrogen oxide emis-sions are indirectly mitigated.

Energy system transtion.

Grants for solar heating/solar cells

Encourages the use of new technology.


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*During the current trading period (in the EU emissions trading scheme) reduced emissions in the electricity production sector in one country allow a potential increase in emissions in another country.

Table 18 Relationship between economic instruments in the housing sector and the three action strategies.




Energy tax Incentive for improved energy efficiency and conversion to re-newable energy.

Increased used of district heating helps towards resource-efficient cyclical systems.

Increases use of renewable energy. Counterproductive if biofuels are abstracted non-sustainably.

Electricityconsumption tax

Incentive for improved energy efficiency and conversion to re-newable energy.

Increased used of district heating and low energy appliances help towards resource-efficient cyclical systems.


Carbon dioxide tax Incentive for improved energy efficiency and conversion to re-newable energy.



Tax relief for energy-efficient windows and biofuel systems


Insulated glass windows help towards resource-efficient cyclical systems.

Tax relief for im-proved energy effi-ciency and conver-sion in public build-ings



Conversion grants for apartment build-ings

Incentive for improved energy efficiency (heat pumps) and con-version to renewable energy.


Counterproductive if development causes deterioration of the physi-cal environment.

Property taxation May be counteractive; see above. Grants for solar heating/solar cells

Improved energy efficiency and renewable 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.


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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 sector Developments 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 travel has 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 foreign travel, 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).

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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 in Sweden 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


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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 the total 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).

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Figure 16 Transport (tonne kilometres) in Sweden between 1980 and 2001, and projected trend between 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 per cent 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 compared with 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.


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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 form of 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.


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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, in addition 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 depending on 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 environmental objective. 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 every case 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 above indexation 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 dioxide

taxPetrol (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 emissions from 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.


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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.

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Figure 19 Energy tax and carbon dioxide tax on diesel (MK 2 until 1996, thereafter MK1) 1990 - 2005.

Source: Swedish Tax Agency 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 the carbon 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.

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Figure 20 Historical tax rates on petrol, 1924 – 2006, (2005 prices). Tax rate on 1 January each year. (Prices have been adjusted in line with 2005 prices using Statistics Sweden's historical consumer prices index (KPI).

Source: Swedish Tax Agency.


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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 by choosing 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 thereby improves 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 basis for 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 be reduced.

The energy and carbon dioxide taxes generated total tax revenues of just over SEK 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 short term 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


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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 a supplementary 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/year21 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 goal achievement 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 the consumer 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.


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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 a low-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 num-ber 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.


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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 performance of 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 put an 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" (SOU 2004:133) 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 it faltered 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 a sharp 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


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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 entirecomplex 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 of carbon 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


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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 a tax rebate for new diesel-driven cars with particulate filters should be evaluated 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, motorised equipment 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 that are 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 vehicle or 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's emissions 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. The vehicle 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 new heavy-duty vehicles with even better environmental performance. The Government is working to implement the new provisions with effect from 1 October 2006.


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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 kilometre

exceeding 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 reason for 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 emission standards 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 the EU. 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


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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 other societal consequences.

The idea of increasing the environmental impact of vehicle tax on cars to im-prove 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 pro-posed 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 Energy Agency 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 (Swedish EPA, 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 dioxide emissions 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 the same environmental effects could have been achieved by introducing a kilometre


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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 highly cost-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 taxdifferentiation

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 more environmental 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


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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 review of 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. "European diesel" 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 1 diesel.

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 that it 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 an economic viewpoint, it would be more appropriate to base the difference on a valuation of the external effects caused by each environmental class. However, a


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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 car taxation 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 fuel consumption. 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 formulary method, not including fuel, as follows:


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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 by the 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 fairly limited, 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 or can 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 com-pared 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


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(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. The environmentally 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 to establish 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 ca-pable 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, the dynamic efficiency achieved by offering incentives to develop more carbon diox-ide-efficient cars will be limited. Since company cars are usually new cars, changes


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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.

DESIGN OF THE INSTRUMENT 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 are always 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 Two or three Euro 1 7,741 Two or three Euro 2 6,831 Four or more Euro 0 14,117 Four or more Euro 1 12,751 Four or more Euro 2 11,385

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. Revenues of 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.


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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) have fluctuated over the years. Generally speaking, subsidies from county councils and others 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 public transport 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 travelled without 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 without the 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?


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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 in which 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


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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, SEKCar and motorcycle tyres 13Swedish retread car tyres 8Construction machinery and large tractor tyres 350Construction machinery tyres larger than 29" 800Truck 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 sub-ject 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 the comparison. 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 mooted at 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.


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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 scrap-ping 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 be replaced 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 PURPOSE Transport 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.

DESIGN OF THE INSTRUMENT 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 per cent 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.


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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 (which are 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 to determine 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 greatemphasis 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 than full-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 taxed at 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 a total 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.


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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 for changing 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 almost twice 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


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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.


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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 meet their 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 of waste 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.

DESIGN OF THE INSTRUMENT 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 harbour fees 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.


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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, Switzerland and 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 before making 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 always numerous variables influencing an airline's choice of aircraft type.


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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 wider use 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 in more 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 that too 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.


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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

ZeroEutrophication

Sustainable Forests

Other objectives

Energy tax The used of fossil fuels is indirectly limited.

Differential petrol tax helps.

Nitrogen oxide emissions are indirectly miti-gated.


Clean Air and a Good Built Envi-ronment. Fiscally significant.

Carbon dioxide tax

Carbon dioxide emissions are miti-gated/reduced.


Nitrogen oxide emissions are indirectly miti-gated.Counterproduc-tive if biofuels are not ab-stracted sus-tainably.

Clean Air and a Good Built Envi-ronment Fiscally significant.

Tax exemption of biofuels for motor vehicles

Carbon dioxide emissions are miti-gated/reduced.

Nitrogen oxide emissions are mitigated.

Counterproduc-tive if biofuels are not ab-stracted sus-tainably.

Supply security, regional develop-ment

Carbon dioxide differentiatedvehicle tax

More carbon diox-ide-efficient cars.

Nitrogen oxide emissions from heavy-duty vehi-cles are mitigated.

Clean Air and Natural Acidifica-tion Only (exhaust regulations for heavy-duty vehi-cles).

Tax differentiation according to environmental class

Counterproductive: Energy-intensive fuel production.

Lower aromaticand PAH emissions.

Clean Air.

Taxation of com-pany cars

Counterproductive: Encourages the sale of large, heavy cars and greater mileage (lower tax for eco-cars is positive).

Counterproduc-tive: Indirectly in-creases nitrogen oxide emissions.

Road charges for heavy vehicles

Subsidised public transport

Marginal decrease in road traffic.

Car tyres charge Increased collectionof tyres.

Car scrapping premium

Speeds up the rate at which old "dirty" cars are scrapped.

A cleaner environ-ment.

Tax reduction for alkylate petrol

Lower emissions of PAHs and un-burnt


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petrol.Transport support Regional devel-

opment.Internationalshipping and aviation

Environmental shipping lane dues

Reduced NOx emissions

Natural Acidifica-tion Only and Clean Air.

Environmental landing charges

Indirect impact if landing charges influence choice of aircraft type.

Indirect impact if landing charges influence choice of aircraft type.

Table 21 Relationship between economic instruments in the transport sector and the three action strategies.




Energy tax More efficient energy use. Resource-efficient cyclical systems.

Carbon dioxide tax Increased use of renewable energy. Counterproductive if increased used of renewable energy reduces energy effi-ciency.


Counterproductive if biofuels are abstracted non-sustainably.

Tax exemption of biofuels for motor vehicles

Increased use of renewable energy. Counterproductive if increased used of renewable energy reduces energy effi-ciency.

Counterproductive if biofuels are abstracted non-sustainably.

Taxation of company cars Counterproductive: Less efficient 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 heavy vehicles

Subsidised public trans-port

Marginal decrease in road traffic.

Car tyres charge Increased collection of tyres.

Car scrapping premium Speeds up the rate at which old "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 dues

Reduced NOx and SOx emissions.

Environmental landing charges

Reduced NOx emissions.


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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 effects of 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 carbon dioxide 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 car use. 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 on car 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, sulphur emissions 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.


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5.5 Agriculture and fisheries 5.5.1 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. When Sweden 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 in the 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 proba-bly 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 is often spruce forest. The extent of the positive external effects depends on where cultivation takes 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 the most important instruments as far as agriculture is concerned.


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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 is grown 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 canary grass, 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 by Erik Hedar, Energy Agency).

Energy forest production costs (not including grants) for a well-run plantation are 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 grower and the municipality (Energy Agency, 2003). But one disadvantage of using waste water 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 different machinery 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 show that 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.


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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 to avoid 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. The Swedish 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, the emissions 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 factor inhibiting 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 area of 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 price for 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 additional support 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 and cultural 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 of natural 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 specific evaluation 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.


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DESIGN OF THE INSTRUMENT 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 per cent 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 natural assets 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 high degree 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. 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 treb-led since 2000, and was approximately SEK 300 million in 2006. Financial monitoring of land management needs to be improved, among other things as regards the cost of various management methods and their 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 to man, 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 by felling.

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 and forest 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.

DESIGN OF THE INSTRUMENT Creating nature reserves involves interplay between the Swedish EPA and county administrative boards in consultation with the landowners concerned and other


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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 approximately SEK 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 effects The 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 also emphasises 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 the loss 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 question was 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, the Swedish 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


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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 and analyses. 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 as administrative 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


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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 com-parison 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 of 60 – 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).


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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.

DESIGN OF THE INSTRUMENT 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. Landowners receive 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 be carried 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 and a 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.


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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 at which 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 the first 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


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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 the forest. 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 protection target:

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. The agencies 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 to account 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 reserves and 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


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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 is obliged 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, the rules 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 from taking 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 the income 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 they are 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 over the years. It thus increases the scope for pursuing economically sustainable for-estry, which in turn provides scope for ecologically sustainable forestry.


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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.

DESIGN OF THE INSTRUMENT Tax on cadmium is payable by anyone who is approved to hold a stock or who otherwise 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 (SOU 2003:9), 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


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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 refunded to 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 development to 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.

DESIGN OF THE INSTRUMENT 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


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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 per cent 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 studies with 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-economic cost 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 kg nitrogen 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


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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 advisory services, research and development on ways of reducing pesticide use.

DESIGN OF THE INSTRUMENT 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 the tax. 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 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.

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 of agents posing less hazard from a health and environmental viewpoint. The pro-


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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 the area 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 environmental grant 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, reaching 1,793 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


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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 studies have 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 be expected 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 in that 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 the main 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 2003:9 considers that pesticide tax has had little impact in this respect.


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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 made for 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 National Heritage Board. The present EU agricultural support regime does much to create over-production 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.

DESIGN OF THE INSTRUMENT 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


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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 that it 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 cultivated landscapes, 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.


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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 was adopted 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 gain greater 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 coupled to 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".


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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 the dairy 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 promotion measures 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 reveals that 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 reform adopted 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


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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 of decoupling. Calves are important production means for grazing on pasture. The report also states that "Other relevant environmental quality objectives that may be affected 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 largely used 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. Some subsidies 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 been reached. 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


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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 carbon dioxide 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 agriculture and 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 (Bill 1999/2000:1). 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.


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Oil52%

Biofuels6%

Coal and coke 0%

Natural gas19%

LP gas1%

District heat5%

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 COMMENTSThere 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 for trade 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.


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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 Swedish enterprise 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 the same 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 metres mainly 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 and Swedish environmental objectives

Reduced Cli-mate Impact


ZeroEutrophication

Sustainable Forests

Other objectives

Support for en-ergy forest

No net emis-sions of CO2 from combus-tion.

May remove cadmium from arable soils.

Reduction in eutrophying emis-sions and NOx emissions.

Natural Acidifica-tion Only. Clean Air.

Grants for con-servation of na-ture and cultural heritage, and deciduous for-estry

Improves biodi-versity and protects cultural heritage

A Rich Diversity of Plant and Animal Life.

Tax incentives in the forestry sector

Sustainable use of forest land.

Fiscal. Forestry sector


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Counteractsconservation of particularly valuable bio-topes.

production targets.

Nature conserva-tion agreements and biotope pro-tection areas

Increasedcarbon sink due to less felling.

Some reduction in nitrogen leaching owing to less felling.

Conserve, develop and create areas of valuable natural assets and cultural heri-tage.


Purchase and management of forest land

Increasedcarbon sink due to less felling.

Some reduction in nitrogen leaching owing to less felling.

Conserve, develop and create areas of valuable natural assets and cultural heri-tage.


Tax on cadmium in artificial fertil-iser

Reduces input of cadmium to arable soils.

Good Quality Groundwater. A Non-Toxic Envi-ronment.Counteracts:Agricultural com-petitiveness.

Tax on nitrogen in artificial fertiliser

Reduced nitrogen leaching.

Counteracts: Agricultural com-petitiveness.

Pesticide tax Reduced pesticide use.

Flourishing Lakes and Streams. Good Quality Groundwater. A Varied Agricul-tural Landscape. Counteracts:Agricultural com-petitiveness.

Agriculturally-related environ-mental support

Unclear. A Varied Agricul-tural Landscape. Agricultural com-petitiveness.

Tax relief on light heating oil

Counteractive: Increased use of EO1 in-creases CO2 emissions.

Counteractive: Incentive for increased SO2 and NOx emis-sions.

Counteractive: Increased emis-sions of acidifying substances.

Tax relief on die-sel

Counteractive: Increased use of diesel in-creases CO2 emissions.

Counteractive: Incentives in-creased use of diesel increase SO2 and NOx emissions.

Competition fac-tors.Counteractive: Energy efficiency and use of renew-able energy. Clean Air and Natural Acidifica-tion Only.


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Table 23 Relationship between economic instruments in agriculture and fisheries and the three action strategies.




Support for energy forest Reduced used of non-renewable energy.

Salix cultivation helps to create non-toxic and resource-efficient cyclical systems.

Increased biodiversity.

Grants for conservation of nature and cultural heri-tage, and deciduous for-estry

Rich natural environment and cultural heritage; biodiversity.

Tax incentives in the for-estry sector

Sustainable use of forest land.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 particularly valuable natural environ-ments and cultural heri-tage.

Purchase and management of forest land

Conservation and sus-tainable use of particularly valuable 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 artificial fertiliser

Reduces the nutrient load.

Pesticide tax Reduces toxins in terres-trial and aquatic areas.

Agriculturally-related envi-ronmental support

Unclear.

Tax relief on light heating oil

Counteractive: Incentive for increased use of EO1.

Tax relief on diesel Counteractive: Incentive for increased use of EO1.

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 fuel use 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


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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 the landowner tries to extract a higher price as compensation for the tax. This leads to long-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 transfer of 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 a transition 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 often interlinked. 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


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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 crops and legumes These crops, which require heavy use of pesticides, are now more widely 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 environmental subsidies 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 instruments 5.6.1 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.


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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 advantages gained 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."

DESIGN OF THE INSTRUMENT 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.


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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 or non-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 wider range of offences should be subject to the environmental penalty, including failure to comply with permit and notification obligations for private sewers, the duty of notification 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.


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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.

DESIGN OF THE INSTRUMENT 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 EC Waste 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 facilities in 2004.


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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 part in 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 have slowed 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 higher than 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 (which was 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 tax is 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.


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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 some 11,000 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.

DESIGN OF THE INSTRUMENT 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


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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 Swedish Defence, 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 just over 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


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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 considering that 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 alternative materials more competitive, thus reducing natural gravel abstraction.

DESIGN OF THE INSTRUMENT 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 earth largely 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.


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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 ballast deliveries 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 natural gravel is far too valuable to be used for unsophisticated purposes, has helped to reduce 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

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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 to the 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 other words, 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).

DESIGN OF THE INSTRUMENT 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 the Swedish 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. For instance, 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


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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 confirmed

discharges Number of water

pollution charges Total charges,

SEK1999 326 21 1,000,0002000 294 19 325,0002001 1762002 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 international surveillance 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 there is 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 number of 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 and recycling 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;


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collection of lead accumulator batteries; provision by the Swedish EPA of the information to be filed on hazard-ous batteries.

DESIGN OF THE INSTRUMENT 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.

EVALUATIONS The 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)

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Figure 25 Number of mercury batteries sold and collected in Sweden 1995 - 2002 (tonnes). Source: Swedish EPA (2003a)

Figure 26 Number of Ni-Cd batteries sold and collected in Sweden 1995 - 2002 (tonnes). Source: Swedish EPA (2003a)

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 to cadmium. 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

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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. Source: Swedish EPA (2003a)

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.


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DESIGN OF THE INSTRUMENT 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 exceed 200 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 peaked in 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. The report (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 the house. Readings have been taken that show that many municipalities have a large number of houses with radon. Nonetheless, only a few grants have been approved since 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


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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 where action was taken, radon levels were reduced to below this limit, but in 12 per cent of 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 was introduced.There are signs of lower acidification, but recovery is slow. Less acidification in surface water has resulted in less liming in northern Sweden, 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.

DESIGN OF THE INSTRUMENT Government grants are approved as available for liming and biological restoration of 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 that have disappeared owing to acidification. Grants are paid primarily to municipalities


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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 lakes and 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) of approximately 350 lakes showed that recovery began in the 1980s and accelerated in 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)

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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 that are/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 far more 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 to the various pH liming targets.

Lakes Lakes Watercourses Number Goal

achievement, % Lake

surfacearea,km2

Goalachievement, %

km Goal achievement, %

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 pH targets 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. One exception 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


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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 increase fish 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 government funding 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 Fisheries charges under s 6.6 of the former Water Act 6.6 Special appropriation (older) 0.08 Fisheries charges under s 6.9 of the former Water Act 0.48 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).


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DESIGN OF THE INSTRUMENT 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 to restore 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 to demonstrate 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 conservation appropriation 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 INSTRUMENT The 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.


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5.6.10 Relationship between the instruments and environmental objectives and strategies

Table 27 Relationship between other economic instruments and the environmental objec-tives.

Reduced Climate Im-pact

A Non-Toxic Envi-ronment

ZeroEutrophication

Sustainable Forests

Other objectives

Landfill tax Reduced meth-ane emissions.

Closed nitrogen and phosphorus cycles.

A Good Built Envi-ronment, interim target for waste.

Environmental penalty

Several, particularly A Protective Ozone Layer.

Site remediation appropriation

Reduces risks posed by contami-nated land.

Tax on natural gravel

A Good Built Envi-ronment, interim target for natural gravel abstraction.Good Quality Groundwater.

Water pollution charge

Reduced oil dis-charges.

A Balanced Marine Environment. Flourishing Coastal Areas and Archipela-gos.

Batteries charge Safe disposal of more discarded batteries.

Radon grant A Good Built Envi-ronment, good quality indoor environment. A Safe Radiation Environment.

Government lake liming grant

Natural Acidification Only. Flourishing Lakes and Streams.

Government funding of fisheries conser-vation

Flourishing Lakes and Streams: restoration of watercourses.


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Table 28 Relationship between other economic instruments and the three action strategies.



Management of land, water and the built envi-ronment

Landfill tax Increases conservation of resources.

Environmental penalty Makes contaminated land available for use.

Tax on natural gravel Conservation of natural gravel and groundwater reservoir resources.

Water pollutioncharge

Reduced oil discharges.

Batteries charge Safe disposal of more discarded batteries.

Radon grant Reduces risks in existing housing stock.

Government lake liming grant

Restores acidified lakes.

Government funding of fisheries conservation

Restoration of water-courses.


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6 List of evaluation requirements The following is a list of the evaluations that the agencies consider are lacking, having reviewed existing evaluations. The priority areas for evaluation or study are marked in bold. Other evaluation proposals have been set out under the various sections of this report.

GeneralFurther 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 on industrial competitiveness. The effect of energy and carbon dioxide taxes on industrial profitability and competitiveness (business studies).

TransportA 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 below should 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.


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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 sustainably abstracted, as well as the rate of sustainable abstraction. The rules on accrual accounting of income under nature conservation agreements, 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 is needed.

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-


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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 of agriculture 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.


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Appendix 1: Tax AgencyMemorandum 5 June 2006

FactsPesticide 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 SEK 20,000 a year, who can report once a year. Accounting dates are determined by the companies' 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.


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The number of days worked breaks down as follows.

Tax Desktop review Audit* Day-to-day admini-stration

Pesticides** 2 1 14 Energy taxes 858 95 1,925 Fertiliser 24 7 3 Natural gravel** 2 4 14

* Includes audit support and post-audit decisions. Audits are performed by auditors at-tached to other sections of the Tax Agency. ** Taxes are administered using the new KULING data support, which includes scanning of documents and minor day-to-day administration.

During the year a special monitoring system was introduced for diesel tax refunds to agricultural, forestry and aquaculture enterprises Desktop Day-to-day administration 149 415

Day-to-day administration includes all tasks required to enter individual matters in the system and matters that can be processed without investigation or with just a few additions, such as a signature or information provided over the telephone. Re-view of a tax assessment at the taxpayer's request, amendment of information by the taxpayer, where we do not examine the underlying documents. Decision-making in certain cases, such as extensions of time limits, consideration of arrears penalties, screening, processing of complaints and interest charges. Not processing of tax returns, diarisation, dispatch, filing (see below).

Central day-to-day administration of selective taxes: 1,540 days.

Central administration of the entire Ludvika section, i.e. all selective taxes, in-cludes day-to-day administration (see above) that cannot be attributed to a given selective tax. All processing of tax returns, diarisation, dispatch, filing.

Number of matters I have summarised various incoming "energy matters" per month throughout 2005 and to May 2006 in a separate Excel appendix. They are presented here in some-what simplified form. They are not broken down here into types of matter as they are in the Excel spreadsheet. The term "tax" means matters relating to taxpayers. "Refunds" are all matters relating to a refund application, from the application itself to appeal.


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Tax 2005 2006 Energy tax on electricity 2,028 806 "Nuclear power" 1 0 Oil, LP gas & Methane 1,302 716 Natural gas, Coal & Petroleum coke 96 45Petrol 119 56 Lower-rate energy tax on manufacturing processes 1,312 1,023Sulphur 81 58 Raw tall oil 1 1

Matter type tax-exempt user 2005 2006 Energy tax 756 376 Refunds 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 explain the 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


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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 time a 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-DEMANDINGThe refund system is resource-demanding because of the high number of applica-tions. The present BRIS data support system requires a considerable amount of manual 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 refunds of tax on diesel require additional information or checks. Approximately 75 per cent 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 is expected 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 and Malmö. The National Audit Office has recently examined selective purchase tax


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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 LEGISLATION The 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/purchases until 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 be introduced. 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 the Swedish 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.


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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 taxation model. 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 refunds of 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 COMPANIESBoth 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 contain errors and lack necessary information, probably due to ignorance. Many people do not 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


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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).


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Documents

%CONOMIC )NSTRUMENTSIN %NVIRONMENTAL0OLICY · Internet: ISBN 91-620-5678-6.pdf ISSN 0282-7298 ... Therese Karlsson (Swedish Energy Agency), Henrik Scharin (Swedish EPA), Ul- ... and