WSJ September 30, 2008; page A18.
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 should have dropped. Instead, they have risen by 15%.
Although the tax forced Norway's oil and gas sector to become among the greenest in the world, soaring energy prices led to a boom in offshore production, which in turn boosted overall emissions. So did drivers. Norwegians, who already pay nearly $10 a gallon, took the tax in stride, buying more cars and driving them more. And numerous industries won exemptions from the tax, carrying on unchanged.
It wasn't supposed to be this way. 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, where elegant theoretical solutions are complicated by economic changes, entrenched behaviors and political realities.
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. In the U.S., the Senate voted down cap-and-trade legislation in July, won over by arguments that the system would hurt industry and boost consumer prices. But the measure could be revived, since both presidential candidates support it.
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 policymakers say they gave exemptions to some local industries because they feared the tax would damage economic growth and hurt employment. "We had to find ways to spur environmental change without shooting ourselves in the foot," says Gro Harlem Brundtland, who devised the tax when she was Norwegian prime minister in the 1990s.
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.
Norway's carbon tax was born when Ms. Brundtland took over as prime minister in 1990. One of her first moves was to present a plan for an across-the-board tax on carbon dioxide emissions generated by the burning of fuels.
Norwegian industry balked, arguing that the levy would cripple its ability to compete internationally and threaten jobs. For some sectors, Ms. Brundtland abandoned the battle. Fishermen complained that their catches of cod, herring and salmon would become unattractive if they were forced to raise prices. The fishing industry was too central to the Norwegian local economy and too potent a political symbol to threaten with a tax. It got a full exemption.
Some of the heaviest pushback came from oil and gas companies, which argued that the government risked crippling Norway's most lucrative business. Drilling on the Continental Shelf has been the primary engine of economic growth in Norway since the 1960s, generating some 24% of the country's annual GDP. Taxes on the sector account for 31% of the nation's revenues, financing a generous social welfare system that includes universal health care and state-funded pensions.
But Ms. Brundtland didn't budge in the face of Norway's oil and gas industry -- the country's biggest polluters by far -- levying on it 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.
Because of the looming carbon tax, Olav Karstaad, a chemical engineer at Statoil, got to work on another solution. Mr. Karstaad and his team adapted technology to push carbon dioxide under the sea floor and store it there.
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. The carbon storage facility cost less than what it would have spent on taxes, says Mr. Karstaad. "This is a money-saving operation for us," he says.
As a result of that and other carbon-reducing measures, the company's carbon dioxide emissions per ton of oil and gas it extracts are 39% of the industry average, according to the company.
Nevertheless, Statoil's overall emissions have more than quadrupled since 1990 to reach 8.9 million tons annually, fueled by a huge expansion in drilling. Without the tax, the increase would have been even worse, according to Statoil and the Norwegian government.
There were other bright spots. Although the metal industry wasn't required to pay the carbon tax, the government did sign a voluntary agreement with the country's three biggest aluminum firms, including Norsk Hydro SA, to cut emissions 55% from 1990 levels by 2005. While there were no explicit penalties, "we would lose all credibility if we didn't do the work," says Bernt Alfred Malme, Hydro's environmental officer.
Hydro, now part of StatoilHydro, spent $45 million in new technology for four of its smelters, changing a key step in the production process during which anode gas, a harmful greenhouse gas, is created. With other changes, Hydro also managed to reduce carbon emissions about 34% to 2.1 million tons in 2005, from 1990 levels. That, combined with reductions at the two other companies, allowed the industry to meet its 55% goal. "The voluntary agreement worked really well for us," said Mr. Malme.
Other industries that were successful in negotiating exceptions for themselves have made little progress.
Take paper manufacturers, which 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 our investments or our project decisions," says Georg Carlberg, vice president for environmental policies.
The carbon tax's most glaring failure was in the transportation sector. Norway's Post Office transports 95% of the country's mail on heavy-polluting trucks. Geir Riise, environmental officer at Norway Post, says the company is trying to modernize its fleet of trucks, train its drivers and optimize its routes to reduce mileage. But "it's very difficult for us to reduce our emissions and still deliver the mail to every home and every village in Norway," he says.
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.
Mathias Lund, a 37-year-old accountant from Stavanger, drives half an hour every morning from his farm. "I like the lifestyle and the outdoors," he says, "but that means I have to drive to get everywhere."
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WSJ September 30, 2008