February 4, 2020

The price of emitting carbon dioxide increases sixfold

From the first of May the Swedish Transport Agency increases the price of emitting carbon dioxide by more than 500 % in their social economic analysis for potential infrastructure investments. This increase will have consequences for how Sweden invests in ports, railroads, roads and airports. The cost of emitting will be more than 14 times that of mitigating emissions.

Both the Swedish parliament and government conducts different calculation efforts to estimate the societal cost of emitting one kilogram of carbon dioxide. The state has engaged the question as it has become apparent that the emission of greenhouse gases damages the environment without any direct costs incurred on the emitter, what is known as externalities.

 

Externalities, as a phenomenon, has been known to economists for more than a century. In the 19th century Cambridge professor Henry Sedgwick described the market failure of spillover effects. However, it was another Cambridge professor who came to coin the term externalities, Arthur Cecil Pigou. Pigou also introduced Pigovian Taxes as a policy tool to counter the social costs incurred by externalities.

 

The Carbon Dioxide Tax and the Reduction Duty are examples of Swedish law that considers the external cost of emitting carbon dioxide into the atmosphere. The Carbon Dioxide Tax is a tax on fossil fuel levered on the price on e.g. petrol and diesel. For 2020 the Carbon Dioxide Tax on petrol is 2,67 kr/L (0,25 €/L), different rates apply to different types of fuel. The Reduction Duty is a law to propel the use of biofuels by continuously increasing its share in petrol and diesel sold at filling stations. The suppliers who fail to meet the required quota, 2,6 % for petrol and 20 % for diesel, are charged a fee.

The price of emitting CO2 increases from 108 €/tonne CO2 to 664 €/tonne CO2.

The Carbon Dioxide Tax and the Reduction Duty have consequences outside the direct implications. The Swedish Transport Agency conducts social economic analyses prior to investments in different infrastructure ventures. Input data to these calculations are provided by the ASEK-group (short for “Analysis Method and Social

 

Economic Calculation Values for the Transport Sector”). Among other values ASEK provides the externality cost of emitting CO2.

ASEK emphasises the difficulties of calculating the cost of the externalities caused by the emission of carbon dioxide. Instead, the base their figures on relevant laws. The Reduction Duty fee will be the law which ASEK base their calculations on from the 1st of May 2020, instead of the Carbon Dioxide Tax. The price of emitting a tonne of carbon dioxide will skyrocket from 108 €/tonne CO2 to 664 €/tonne CO2. The new price is based on the maximum fee charged under the Reduction Duty. The Swedish Transport Agency will however stop increasing the price by 1,5 % yearly.

The increase would have take more than 120 years to achieve with a 1,5 % growth rate, so it is, altogether, a move in favor of the climate.

 

The differences in Swedish law indicates about the difficulties and discrepancies that exists globally when externalities, which cause climate change, are priced. Globally, nations yet have to put a price on emitting carbon dioxide and in some places where a price has been determined it can be as low as 5 $/tonne CO2, as in some states in the USA. Europe in general and Sweden in particular are trailblazers for putting a price on that which harms other humans, animals, nature and the climate. The possibilities to reduce emissions exists - a Dorights subscription mitigates a tonne of CO2 for the price of about 46 € which yields social economic gains of approx. 618 €. There no doubt in my mind that - together - we can reduce emissions to sustainable levels, and it is also the economically sensible thing to do.