Published 02 December 2014

Policy instruments to combat climate change: the transformation of enterprise and industry

– a survey of the climate policy framework

The Swedish climate policy framework is comprehensive in that it covers the entire Swedish industry. It is dominated by general economic policy instruments, complemented by specific instruments with the purpose of creating incentives for technological innovation. The cost-effectiveness of the economic policy instruments are however weakened by numerous exemptions. Improving the cost-effectiveness and increasing the pressure on industry is necessary to achieve the government’s climate goal of no net emissions by 2050.

A good understanding of the available political tools is essential in formulating efficient and effective climate policy for the transformation of enterprise and industry. Growth Analysis has, as part of our government assignment Prerequisites for a Green Structural Transformation, analysed how existing instruments in the field affect enterprise and industry. The purpose of this study is to identify government budgetary funds and policy instruments to combat climate change through the transformation of enterprise and industry (henceforth, the Climate Policy Framework). The aim of the study is to create an overview rather than an analysis of the framework's effectiveness. One intention has, however, been to develop a measurement of the pressure that carbon pricing instruments exert on enterprise and industry to transform.

General policy instruments predominate

Around forty policy instruments aimed to combat climate change through the transformation in enterprise and industry. The most common type of policy instrument, in both 2010 and 2013, were economic ones. The most common purpose of the policy instruments was to reduce climate impact through improvements in energy efficiency. Most of the policy instruments were aimed at the supply side, i.e. companies rather than users are meant to act. Almost 90 per cent of the government funds (revenues and expenditures), for the transformation of enterprise and industry to combat climate change, go to general policy instruments, i.e. instruments that affect all industries.

Cost of carbon emissions vary and policy instruments exert weak pressure to transform

The major part of emissions from enterprise and industry are covered by either energy and carbon taxes or the EU Emissions Trading System. However, the carbon tax (generally 1005 SEK per tonne) varies greatly between different industries as a result of abatements and exemptions. Half of all industries pay less than one third of the standard carbon tax per tonne of emissions.

Many of the industries that have low carbon tax expenses are covered by the EU Emissions Trading System. However, in general, the price of carbon dioxide is low within the trading system and most companies that are covered by it show a surplus of emission allowances.

In order to gain some understanding of the pressure the carbon tax exerts, we have calculated how large a share of total operating costs that the carbon tax constitutes. On average, the tax constitutes 0.3 per cent of a company's operating costs, but the variation is also great in this case.

Overall, climate policy means considerably greater revenues than expenditures for the state

Growth Analysis has performed a survey of government revenues and expenditures from the climate policy framework. It shows that, overall, these policy instruments are a source of revenue for the Swedish government. Tax instruments (tax revenues from general policy instruments such as the carbon tax as well as tax expenditures) are from a government budget perspective significantly more important compared to the expenditures linked to appropriation-funded policy instruments (support channelled through e.g. national authorities).

Tax revenue from climate policy instruments for the transformation of enterprise and industry were lower in 2013 than in 2010. The lower tax revenues for 2013 are, however, not the result of lower tax rates but rather due to lower energy consumption and fossil fuel use within the parts of industry in question. This could be the result of a transformation of business operations, but may also be due to macroeconomic or temperature fluctuations. Government expenditure for climate related transformation of enterprise and industry were also lower in 2013 than in 2010. This means that the government provided less support and gave lower incentives for the climate transformation of enterprise and industry in 2013 compared to in 2010.

Continued study and analysis of the climate policy framework for the transformation of enterprise and industry

The objective of this study was primarily explorative and descriptive. It has, however, brought to light some interesting lines of inquiry that should be the subject of further analysis.

One overarching question is whether extensive exemptions from the use of cost-effective general policy instruments have meant that the climate policy framework is not only lacking in cost-effectiveness but also is not efficient, in practice.

Our study points to a need to increase both the cost-effectiveness and the efficiency within the climate policy framework. This may be done by reducing variation in the cost of carbon dioxide emissions for major actors of the economy, and by increasing the pressure and/or incentives for transformation of enterprise and industry.

It is, however, necessary to consider the conditions in specific industries, including the risk of carbon-leakage. A climate policy framework that is effective in practice will need to depart from what is theoretically optimal.