The history of green taxes in Norway

The history of green taxes in Norway

Norway has a long experience with environmental taxation. Taxes have been introduced to reduce environmentally harmful emissions to air and water, and to reduce the amount of waste generated. Taxation had of course an environmental impact long before taxes was established as an instrument in environmental policy. Already in 1931 Norway introduced a petrol tax. The first tax that had an explicit environmental purpose was levied on sulphur in mineral oil in 1971. However, a wide-spread use of environmental taxes was not seen until the late 1980s and early 1990s. Taxes on mineral fertilisers, pesticides and lubricant oil were introduced in 1988, CO ₂ tax on petrol, auto diesel oil, mineral oil and the petroleum sector (only offshore) in 1991, while the sulphur tax on mineral oil was increased substantially. Since the early 1990s tax instruments have played an important role in providing incentives for cleaner production and consumption patterns, even though regulation has remained the main policy instrument to abate environmental damage.

Developments the last years have been comparably minor in revenue terms, but important concerning introduction and improvement of taxes with environmentally-friendly incentive effects. The main achievements have been introduction of environment tax on beverage packaging (1994) and tax on final waste disposal (2000), both differentiated according to environmental impacts. A low sulphur tax on coal, coke and refineries was removed by the end of 2001, after only two years in operation. The last years there has also been some reduction of rates (in the CO ₂ tax on petrol and offshore petroleum activities, which was brought more in line with rates for other fuels/sectors).

In Norway, 4.2 per cent of central government tax revenue is due to environmental and energy taxes, equivalent to 1.6 per cent of GDP (estimates based on the 2006 budget). A main part of this revenue is taxes on energy consumption, not only having an environmental purpose, but nevertheless having a positive impact on the environment. The level of green taxation is one of the highest in the OECD area. Environmental taxes, as discussed in the following, refer to taxes with an explicit environmental purpose (e.g. CO ₂ and sulphur taxes).

Box 1. Environmental taxes in Norway – main developments

Note: Years fully or partly in operation. Source: Ministry of Finance.

Use of environmental taxes has been assessed and evaluated by a number of official commissions. Already in 1977 the Government appointed a preparatory committee to study possibilities of using emission charges and make proposals for environmental taxes, which submitted an official report in 1982 ( NOU 1982: 23 “Emission Charges”). The committee found limited scope for replacing regulation by taxes, especially as variations in recipients required adjustment of measures to local conditions. According to the committee, taxes could supplement regulations in abating only certain emissions with a more general environmental impact, SO ₂ in particular. These views are reflected in the following Government long-term programme, St.meld. nr. 83 (1984–1985) “the Norwegian Long-Term Programme 1986–1989”. The Government could not advocate use of emission charges as a general instrument in environmental policy. However, the Ministry of the Environment would consider possibilities for a more limited use of emission charges.

By the end of the 1980s the Government’s opinion on the use of environmental taxation had become markedly more positive. In the next long-term programme, St.meld. nr. 4 (1988–1989) “the Norwegian Long-Term Programme 1990–1993”, environmental taxes are seen as a means for improving resource allocation in the economy. The Government envisaged that increased revenue from environmental taxation could be used for reducing other taxes. At the end of 1989 the Government appointed a preparatory committee to prepare a basis for decision-making concerning the use of economic instruments in environmental policy in the 1990s, the “Environmental Tax Commission”. In its report, NOU 1992: 3 “Towards more Cost-effective Environmental policies in the 1990s”, the Commission advocated the gradual development of a comprehensive and cost-effective system for pricing of fossil fuel emissions. The Commission noticed that 40 per cent of CO ₂ emissions and 60 per cent of SO ₂ emissions were exempt from taxation. It also criticised the weak correspondence between the CO ₂ tax rate and the carbon content of different fuels. The CO ₂ tax should in principle be applied at the same rate for emissions from all fossil fuels and uses. However, costs of restructuring in industries and adaptation in local communities should be considered when introducing and increasing CO ₂ taxation.

In 1992, as a follow up of the Environmental Tax Commission, the Ministry of the Environment appointed a preparatory committee on environmental policy instruments. Especially the use of administrative regulations is assessed in its report, NOU 1995: 4 “Instruments in Environmental Policy”. The committee found the concession system of licensing industrial plants (individual emission permits) had worked well in reducing local pollution from industrial emissions. However, the committee advised the environmental authorities to consider possibilities of simplification and increased flexibility of licensing. The committee assessed possible alternatives to the concession system: Environmental taxes, tradable emission quotas, legislation (general rules), voluntary agreements, and environmental quality standards. It advised continued use of the concession system for most local pollution from industrial sources. Concerning regional and global environmental problems, however, the committee recommended the use of general instruments, i.e. economic instruments or general regulation, in preference to individual permits.

In 1994 the Storting asked for the establishment of a preparatory committee to assess taxation as an instrument for both improving the environment and increasing employment. The Green Tax Commission was appointed late in the year, and assessed how to change the tax system away from taxation on labour and towards activities that imply increased use of resources and harmful emissions in a long term perspective. In its report, NOU 1996: 9 “Green taxes – policies for a better environment and high employment” the Commission recommends a large number of changes and increases over a broad range of environmental and energy taxes, a main motive being to transfer well established principles of cost-effictiveness into practical policies for a better environment and high employment.

The Commission assumed that cost efficiency is a fundamental principle in the formulation of climate policy. This means that policies should be formulated in a cost efficient manner across greenhouse gases (GHGs), sectors and countries. In the case of CO ₂ emissions, this means that all products/uses of fossil fuels in principle should bear the same tax per unit emission in all countries. The Commission admitted that it will be difficult in the short run to ensure an optimal policy structure across countries. Norwegian CO ₂ taxes should therefore be considered as an element of Norway’s role as an instigator in the area of climate policy. This complicates the task of formulating a cost efficient structure of CO ₂ taxes in Norway. The level of taxation must therefore be determined on a more pragmatic basis, in which the requirements of the instigator role are weighted against the costs for Norway of being the pioneer in this area. The majority of the Commission proposed a low CO ₂ tax rate for fuels and sectors that were exempted, while a minority opposed any expansion of the CO ₂ tax.

Other proposals (by a majority) to be introduced in the short run, were inter alia a low SO ₂ tax rate for uses and products that were exempted, harmonisation of fuel taxes and sales taxes on vehicles, peak-load pricing of road tolls, and reduction of government expenditure and subsidies on environmentally harmful activities. Revenue increases should be used to reduce employers’ social security contributions (pay-roll tax) or for other measures that will ease adjustment and structural problems in the labour market. The Commission also proposed measures requiring further elaboration, including inter alia tax on residual treatment of waste and taxes on substances hazardous to health and environment.

In the Proposition no. 54 (1997–1998) “Green Taxes”, the Government proposed eliminating nearly all exemptions from CO ₂ and SO ₂ taxes. However, CO ₂ tax on process emissions would be fully compensated based on past emission intensities for each product (i.e. reduced specific emissions would increase relative compensation). Net revenue after the compensation scheme, would be used to reduce employers’ social security contributions. While the Storting approved a general expansion of the SO ₂ tax, the CO ₂ tax was extended only to air transport (later withdrawn due to international air transport agreements), domestic sea transport of goods, and the supply fleet in the North Sea, leaving CO ₂ emissions from most processing industries and fisheries untaxed as before. The Storting endorsed most other proposals, inter alia tax on waste delivered to landfills or combustion plants, and removing exemptions from fuel taxes. The Storting also required the Government to appoint an official commission to assess a system for domestic GHG emissions trading, taking the Kyoto Protocol as the point of departure. The Parliament emphasised that the system at least should include manufacturing industries that are exempted from CO ₂ tax.

As a further follow up of the Green Tax Commission, tax on health and environment damaging chemicals were introduced in 2000, so far comprising only trichloroethene and tetrachloroethene.

The SO ₂ tax on coal, coke and refineries was removed in the 2002 budget. The ferroalloys and carbide industries have especially high SO ₂ emissions, and subsequently bore most of the tax burden. None of these plants installed scrubbers in the two years the tax existed, but there was some use of less sulphurous coal. A letter of intent between The Ministry of Environment and the Federation of Process Industries (PIL) stipulates further reduction of SO ₂ emission in processing industries till 2010.

As an adjustment towards more rigid state aid rules determined by the EFTA Surveillance Authority (ESA), the CO ₂ tax on coal and coke was abolished from 1 January 2003. Subsequently the CO ₂ tax only covers the use of petrol, auto diesel oil and mineral oil (except fisheries), and CO ₂ emissions from offshore petroleum activities.

On 1 January 2003 taxes on the greenhouse gases HFCs (hydrofluorcarbons) and PFCs (perfluorcarbons) are introduced. The tax rates are around 180 NOK per tonne CO ₂ equivalents.

In the 2005 budget the Government proposes some tax changes with environmental effects, hereunder abolish the exemption from annual weight-based vehicle tax for buses on licensed routes. This will increase revenue by about NOK 45 million accrued.

Expand the environmental differentiation of the annual weight-based vehicle tax for vehicles in excess of 20 tonnes to also include EU emission requirements to be introduced during the course of 2005 and 2008. The change is expected to increase revenue by about NOK 15 million accrued. Emission-free hydrogen cars to be exempted from vehicle registration tax and annual vehicle tax.

During the autumn 2005 the Government has also proposed a trading system with allowances of CO2 gas emissions. The system is similar to the European system, but emissions witch are covered by the CO2-tax is exempted. Together with the greenhouse-tax these mechanisms will cover about 70 pct. of Norways total greenhouse gases.

The Nordic Council of Ministers has financed a report on green taxes in the Nordic countries, which contains summaries of most studies and evaluations by 1999, see “An Evaluation of the Impact of Green Taxes in the Nordic Countries”. http://www.norden.org/pub/ebook/2001-566.pdf