Norway's tax on emissions

In 1991, Norway became one of the first countries in the world to impose a stiff tax on harmful greenhouse gas emissions. Since then, the country's emissions have risen by 15%.

By making it more expensive to pollute, carbon taxes should spur companies and individuals to clean up. Norway's sobering experience shows how difficult it is to cut emissions in the real world

Norway gave exemptions to some local industries, such as fishing, because it feared the tax would damage economic growth and hurt employment. On the other hand, it levied on the oil and gas industry a $65 tax per ton of carbon emitted. In contrast, the cost of a permit to emit the equivalent of one ton of carbon in Europe's current cap-and-trade system is $35.

After the tax was passed, domestic oil and gas giant StatoilHydro was forced to rethink nearly every aspect of its drilling cycle.

Around the time the tax was being debated, Statoil was developing a new gas field in the North Sea. At the Sleipner field, the natural gas Statoil extracts from under the sea bed contains 9% carbon dioxide. That's too high for Statoil's customers, whose power plants are designed to burn gas with only 2% carbon dioxide. Before Statoil can sell the gas, it has to separate and discard some of the carbon dioxide. Usually the excess carbon dioxide is spewed directly into the air.

Statoil spent two years and some $200 million on the project, which was launched in 1996. Since then, some 10 million tons of carbon dioxide have been buried, saving Statoil about $60 million on its carbon tax bill every year.

Other industries that were successful in negotiating exceptions for themselves have made little progress. Paper manufacturers were given a low tax rate of between $16 and $18.40 per ton -- less than a third what the oil sector pays. For the country's biggest paper company, Norske Skog, the carbon tax amounted to only about $200,000 a year, it didn't have a major influence on its investments or project decisions

The carbon tax's most glaring failure was in the transportation sector. The tax has also done little to quench Norwegians' thirst for automobiles. The number of registered cars has risen 27% in the past decade. Norwegians are used to paying high prices at the pump: a gallon of gasoline costs around $9 to $10, and about 6% of the price comes from the carbon tax. Yet since two-thirds of Norwegians live in the countryside, they pay up and keep driving.

Europe struggled with a similar dilemma as it set up its "cap-and-trade" system to reduce greenhouse gas emissions by utilities and heavy industry. Regulators cushioned industry in the early years of the system, giving them little incentive to improve. As a result, emissions have crept up 1% a year since 2005.

A few countries have cut emissions without injuring their economies. Sweden and Denmark, both of which introduced a carbon tax, have reduced their greenhouse gas emissions by 14% and 8% respectively since 1990 while maintaining growth. Their emission reductions can't be attributed to the tax alone, economists say. Additional moves to encourage energy efficiency and renewable energy, which are government-subsidized, played a part.

Norway's strong economic growth -- gross domestic product has swelled 70% since 1990 -- has far outstripped its 15% rise in greenhouse-gas emissions, according to the Norwegian government. Since the tax hasn't reduced emissions enough, the country voluntarily joined the bloc's cap-and-trade system earlier this year.

Source: WSJ, 30/09/08