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Economic Incentives for Pollution Control

Sweden's nitrogen oxide emission charge of 40 SEK ($5.9) per kg ($5,400 per short ton) imposed in 1992 on energy producers with a capacity in excess of 10 MW and production of over 50 GwH is intended to have a significant incentive effect. Some 120 heating plants and industrial facilities, with about 180 boilers, are subject to the tax.

One interesting aspect of this tax is that revenues are rebated to taxpayers based on their energy generation. At the beginning of every year, facilities report their NOx emissions and energy production for the previous year to the Swedish Environmental Protection Agency (SEPA). On the basis of these reports, SEPA calculates total revenues and refunds per generated MwH. Those facilities facing a net charge must pay by October, and those entitled to rebates receive them in December. The charge system in effect transfers income from high-emitting to low-emitting plants. In 1992, for example, approximately 15,300 metric tons on NOx emissions were subject to the charge, generating about 610 million SEK ($90 million). As a result of the revenue and rebate calculations, over 100 million SEK ($15 million) was transferred from high-emitting to low-emitting facilities.

Most facilities subject to the taxes have installed measuring equipment so that the tax can be properly assessed. The annual cost of such equipment is estimated at 300,000 SEK ($44,000). For facilities that either have no measuring equipment or whose equipment is temporarily out of order, a standard of approximately 1.5 times the average emission level applies. This standard rate, 600 mg NOx/MJ for gas turbines and 250 mg NOx/MJ for other installations, gives polluters a strong incentive to install measuring equipment. Measuring equipment must be inspected once a year by an accredited laboratory. Measuring and reporting are monitored by SEPA.

Since other factors, including the planned introduction of tighter emissions standards in 1995, can influence NOx emissions in Sweden, it is difficult to determine the effect of the NOx charge. However, emission reductions appear to have been greater than they would have been without the charge. Incentive effects were evident as early as 1990 when many plants took measures to reduce emissions in anticipation of the charge. In 1992, the first year in which the charge was in effect, emissions from taxed plants were 15,300 metric tons, down 36% from their 1990 level of 24,000 metric tons. This decrease was not due to a decrease in energy consumption: emissions per mega-joule fell from 150 mg NOx/MJ in 1990 to 99 mg NOx/MJ in 1992. Some plants have even linked staff compensation with emissions reductions.

The charge was set at 40 SEK ($5.9) per kg because studies by the Swedish Environmental Protection Agency (SEPA) had indicated that control costs varied from 20 to 80 SEK ($2.9-11.8) per kg. SEPA has stated that the value of NOx emission reductions is at least as high as the amount of the charge. The taxed plants were able to reduce emissions at an average cost per kg of approximately 10 SEK ($1.5) in 1992. Costs have ranged from 5 to 20 SEK ($0.7-2.9) per kg. Since these costs are significantly lower than the 40 SEK per kg charge, rational facilities will probably implement more abatement options in future years. Abatement measures used since the introduction of the charge include not only investments in new equipment but also measures to limit emissions by optimizing combustion.

Table 11-4 shows SEPA's estimates of the net benefit of the NOx charge for the 1992 emissions reductions. It is not clear how the benefit of at least 40 SEK per kg ($5,400 per short ton) was estimated. Annual administrative costs of the charge are approximately 2 million SEK ($290,000) for SEPA and 300,000 SEK ($44,000) for each firm using measurement equipment. (SEPA appears not to have included its 2 million SEK administrative cost in its cost-benefit table, but this exclusion does not have a significant effect on the conclusions of its analysis.) Assuming 2 million SEK in administrative costs for SEPA and 18 million SEK ($2.6 million) in measurement costs for those taxed facilities that have installed measuring equipment, the annual monitoring and administrative costs amount to 20 million SEK ($3 million), or roughly 3% of charge revenue.

One limitation of the charge is that it reportedly covers only about 6.5% of total NOx emissions, partly due to some energy producers' tendency to supply just under 50 GwH to avoid the tax. (Because of the 50 GwH threshold, the marginal taxation of quantities of energy just over 50 GwH is high.) The threshold will be lowered gradually to 25 GwH by January 1, 1997. Another potential problem is that the charge on NOx may cause some plants to increase emissions of other substances, but other control standards are in place to limit such emissions.

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