Distribution of emission costs under different regulation schemes in Norway
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- CICERO Working Papers 
The main aim of this paper is to describe how today's carbon dioxide (CO2) tax scheme affects the various sectors of the Norwegian economy. Furthermore, we want to illuminate some possible distributive consequences that various climate policy designs could involve. The common denominator for the chosen alternative policies are that the large cross-sectoral variations in tax rates that exists today are reduced and replaced by more equal and uniform regulation schemes. The effects on the distribution of costs of implementing policies where emissions are regulated more equally can contribute to understand the positions that were taken by the various members of the Green Tax Commission when these matters were discussed. According to the Kyoto Protocol Norway is allowed to increase its emissions of greenhouse gases (GHGs) by one percent from 1990 to the first commitment period 2008-2012. The Norwegian emissions were in 1990, 55.2 million tonnes CO2-equivalents (Mt CO2-eqv.) and should consequently be below 55.8 Mt CO2-eqv. as an average in the first commitment period. Although the Norwegian emissions are allowed to increase, the Kyoto protocol constitutes a challenge also for Norway because the Norwegian emissions already in 1996 amounted to 59 Mt CO2-eqv. Furthermore, they are expected to increase to 68.1 Mt in 2010 according to prognoses published by the Norwegian Ministry of Environment (St. meld. nr. 29, 1997-98). Hence, the emissions have to be reduced by 12.3 Mt relative to the business as usual scenario. As Norway is part of the Kyoto-agreement, the debate on how Norway is to fulfil its commitments has recently gained momentum. It is advocated by an increasing number of actors that the present set of measures is neither sufficient nor appropriate in order to reduce emissions sufficiently. The present carbon dioxide tax varies both across the different fuels and across sectors emitting the gas, which in turn leads to a cost-ineffective distribution of the emissions. As shown by our second numerical example, the average greenhouse gas tax in Norway currently is 104 NOK pr tonne CO2-eqvivalent, while the implemented tax rates vary between NOK 358 and zero. It is reasonable to assume that sectors and sources being subject to the CO2-tax of NOK 358 have implemented several high-cost abatement efforts, while sectors exempted from the CO2-tax correspondingly have implemented few measures. A set of measures that broadens the basis of the emissions that are subject to restrictions will undoubtedly change the distribution of the costs that Norway must take in order to reach the agreed level of emissions. Due to the conventional wisdom that abatement cost curves are likely to have a strongly convex form, it is likely that a broader basis for the GHG emission tax together with uniform tax levels could trigger considerably increased efficiency in the Norwegian economy. The size of the efficiency gains is not calculated due to lack of data. There are several ways in which today’s tax regime can be changed in order to secure a more cost-effective reduction of emissions. We present some numerical examples with more uniform emission tax rates. It is, however, important to underline that for the purpose of this analysis it is not of major importance whether the new measures are based on taxes or tradable quotas. Because tradable quotas and emission taxes are quite similar policy instruments, a system with tradable emission permits will have the same distributional effects as a taxation regime. This depends however on the assumptions that the permits are distributed by auctions, that tax payments are not refunded and that the systems cover the same set of gases and activities. Throughout this paper the price of one unit emission will be denoted as ‘tax rate’ regardless of the policy instrument applied. We also find it necessary to define the ambiguous term ‘emission cost’ as it is frequently used throughout the paper. In a tax regime a firm or household’s emission cost is equal to the amount of emission taxes transferred to the government. In a regime with tradable quotas it will equal the quota price multiplied by the number of quotas held by the firm or the household. It is important to note that the price of a quota will equal the tax rate as long as the quota-market is well functioning and the total emissions are the same.