Tax effective in reducing emissions

Without a carbon tax, greenhouse gas emissions from Swedish manufacturing companies would have been about 30 per cent higher in 2015, according to calculations in a study led by Christian Thomann , a researcher in industrial technology, who explains:

“It becomes profitable to reduce emissions. Companies reduce their tax costs if they can reduce emissions.”

The researchers looked at the effects of carbon pricing over 26 years, up to 2015. Sweden was one of the first countries to introduce a carbon tax in 1991. Since 2005, large Swedish production facilities have been included in the EU Emissions Trading Scheme to reduce greenhouse gas emissions.

“As emissions have been reduced, the tax is clearly working in practice. And heavy industry still remains in Sweden - so even in a small open economy like Sweden's, it is possible to make these changes with the desired effect,” says Thomann.

Functioning capital market

The idea is that the system will motivate companies to take their own initiatives to reduce their emissions, for example by investing in fossil-free technology. The study shows that it works in most, but not all, cases. Companies with high emissions but with little access to financing are at a disadvantage.

“No one has been able to show this in previous studies, so these are important facts for politicians and decision-makers to recognise.”

The risk is that the tax will only be a cost if companies are not given any real opportunity to reduce emissions, emphasises Thomann. Without a functioning capital market, large emitters cannot make the necessary investments in green technology.

“Some form of government support, such as subsidies, may also be needed. The state usually contributes to major transitions in society. But this should be done in a cautious way. Some government credit guarantees may be needed,” says Thomann.

Competition on equal terms

In a previous study, Thomann was able to show that companies turn to research in order to reduce emissions. They hire researchers from universities to fix and modernise existing facilities.

How have companies gone about reducing emissions?
“We will investigate this in more detail in future studies. But it's probably about stopping using coal and switching to electricity. They have replaced machines or learnt how to use them more efficiently.”

How emission reductions affect industrial production and profitability is another important question that Thomann will study in future research projects.

When the price of emissions increases in Europe, it may be justified to have robust rules for importing goods into Europe from countries without a climate tax, he points out.

“This is to ensure equal competition between countries with and without a carbon tax.”

Text: Christer Gummeson

The research in brief

- The research published in the Review of Financial Studies  compiles unique data that maps carbon dioxide emissions from Swedish manufacturing companies over 26 years. The aim is to estimate the effect of carbon pricing on emissions intensity at the firm level.

- The emissions data covers 4000 companies in 23 manufacturing sectors, ranging from steel and cement industries to food production. A simple calibration suggests that carbon emissions from the Swedish manufacturing industry in 2015 would have been about 30 per cent higher without carbon pricing.

- The Swedish carbon tax is an excise tax on fossil fuels used by companies. The level of the tax is based on how much carbon dioxide is produced when, for example, one tonne of coal is burned - the company pays the corresponding amount in tax. Swedish plants with high emissions are currently included in the EU's Emissions Trading Scheme (ETS). Smaller plants pay Swedish carbon tax.