Environmental tax reform: The Swedish experience

Abstract

AbstractIn the 1980s the Swedish tax system was in severe trouble. With large segments of the population paying 80% marginal tax rates it became a priority issue for government to reduce tax levels on income but without incurring too large a budget deficit. In this context and as part of a general tax reform (the main focus of which was to reduce marginal taxes and broaden the tax base) environmental taxes had a special chance of gaining acceptance and taxes on energy and transport were increased heavily around 1991. The following year industry succeeded in repealing a number of the increased taxes on energy. This reform was however, financed by further increasing the energy taxes for the household and transport sectors. This increase was designed so as to safeguard the competitivity of Swedish industry without reducing energy tax revenues.Generally it appears that the energy tax and the carbon tax are successful as revenue raisers while their environmental effect will only be seen in the long run (and furthermore only if other countries follow suit since the environmental problems such as the greenhouse effect are truly global in character). On the other hand such taxes as on sulphur and the tax differentiation on leaded fuel, as well as the tax differentiation between different qualities of diesel and fuel oil, have been very successful in an environmental sense, but have ‐ for the same reason ‐ not given any substantial revenue contributions. The differentiation between industrial and other consumers has had at least one unfortunate side‐effect: that of creating a considerable disparity between industrial and other consumers' prices for some energy carriers. This type of price wedge always creates undesirable incentives for tax evasion.