6 Economic and administrative consequences
Achieving the 2030 and 2050 climate targets is bound to entail costs. The costs of reaching the 2030 target have previously been discussed in the white paper New emission commitment for Norway for 2030 – towards joint fulfilment with the EU (Meld. St. 13 (2014–2015)) and in a recent bill proposing a new Act relating to Norway’s climate targets (Prop. 77 L (2016–2017)).
Norway will have to go through the impending transformation process in the face of great uncertainty, both as regards the costs and social impacts, and as regards the speed of technological developments in different areas. Norway can play a part in technological advances, but is at the same time dependent on technology that is developed in the rest of the world. Unilateral action by Norway cannot be an option for Norway, since this would mean that there was no concerted global effort, which would be damaging at both national and global level.
The 2030 target is a conditional commitment for Norway to reduce its emissions by at least 40 % by 2030 compared with the 1990 level. The Government is working towards joint fulfilment of this commitment together with the EU. The EU’s climate policy is based on three pieces of legislation: the Emissions Trading System (EU ETS) and the proposed Effort Sharing Regulation and Land Use, Land-Use Change and Forestry (LULUCF) Regulation. The principle of equal treatment is important for the Government in its dialogue with the EU, not least in connection with determining national targets and the flexibility and forms of cooperation available when the legislation is implemented.
If an agreement with the EU is not reached, the Government will maintain the ambition of reducing emissions by at least 40 % by 2030 compared with 1990. This target will be conditional on the availability of flexible mechanisms under the new climate agreement and on Norway being credited for participation in the EU ETS, so that this counts towards fulfilment of the commitment.
According to projections presented in the white paper Long-term Perspectives on the Norwegian Economy 2017, Norway’s non-ETS emissions will decline from 27.3 million tonnes CO2-eq in 2015 to 23.1 million tonnes CO2-eq in 2030. The projections are based on the assumption that the current design of Norway’s climate policy is maintained. This means among other things that the tax base and tax rates for the carbon tax are kept unchanged and that support for technology development, for example through Enova, is maintained. Calculations of how current policy will influence emissions in the future are uncertain, and the level of uncertainty increases over time. The uncertainty applies not only to the economic outlook and the population trend, but also the development and availability of low- and zero-emission technologies and the costs of deploying such technologies.
The Norwegian Environment Agency has carried out technical analyses of the emission reduction potential using the emission projections in the white paper Long-term Perspectives on the Norwegian Economy 2017 as a basis, and has also estimated the economic costs of each of the measures assessed. The cost estimates are uncertain and will depend among other things on technological and economic developments. The analyses are based on a range of possible measures and do not include an evaluation of which policy instruments could be introduced to ensure that the measures are implemented.
Chapter 3 shows how the estimated emissions gap of 20–25 million tonnes can be closed by means of domestic emission reductions. If the European Commission’s legislative proposals are adopted, joint fulfilment by Norway and the EU would mean that Norway too would be assigned the target of ensuring that recorded emissions from the LULUCF sector (land use, land-use change and forestry) do not exceed the recorded removals of CO2. This means that Norway’s emission commitment may increase above the level that follows from the Effort Sharing Regulation.
The Norwegian Environment Agency has estimated that action to achieve the political goals and ambitions discussed in Chapter 3 can result in emission reductions of the order of 16 million tonnes CO2-eq over the period 2021–2030. The cost estimates for the different measures vary widely. In its analyses, the Environment Agency has divided mitigation measures into several cost categories, and has estimated that there is an emission reduction potential of about 18 million tonnes at an economic cost of less than NOK 500 per tonne CO2-eq in addition to the potential mentioned above. See Chapter 5 for more information on cost estimates.
The estimated emission reduction potentials and costs are uncertain and sensitive to the underlying assumptions. The Environment Agency’s analyses show that many of the measures that could play a part in closing the estimated emissions gap of 20–25 million tonnes CO2-eq have an estimated economic cost of less than NOK 500 per tonne CO2-eq (average annual cost up to 2030). The economic costs of the remaining measures vary: some are in the category NOK 500–1500 per tonne and others are estimated to cost more than NOK 1 500 per tonne. The estimated costs of a number of measures are considerably higher early in the period used for analysis. For example, the current cost of using advanced biofuels is estimated to be from NOK 2 000 per tonne and upwards. For 2016, the cost of phasing in electric cars is estimated at around NOK 7 000 per tonne CO2-eq for small cars and NOK 15 000 for large cars. The development of zero-emission solutions for heavy vehicles is still at an early stage, and the costs are high. The Environment Agency expects the costs of zero-emission vehicles to fall steeply towards 2030. The cost of phasing in small passenger cars is expected to be negative (in other words, economically beneficial) from 2025 onwards. In addition, there are certain non-ETS emissions that are not currently taxed or subject to other climate policy instruments, where it would be possible to achieve emission reductions by introducing economic instruments at a level equivalent to the standard carbon tax rate.
The bill proposing an Act relating to Norway’s climate targets (Prop. 77 L (2016–2017)) includes a discussion of the costs of achieving the 2030 target. According to this, the greater the emission reductions Norway makes in the domestic non-ETS sector, the higher would be the expected average cost per tonne of fulfilling the emission reduction commitment. The white paper New emission commitment for Norway for 2030 – towards joint fulfilment with the EU includes an account of analyses carried out by Statistics Norway1 based on macroeconomic modelling. These suggest emission reductions of the order of 1½–4½ million tonnes, given a carbon price that is consistent with the two-degree target. Norway’s 2017 national budget also discusses the costs of reducing non-ETS emissions. This account is based on an analysis by Statistics Norway of the economic cost for Norway of reducing non-ETS emissions by about 40 % from 2005 levels given different degrees of flexibility in the system. The economic cost is modelled through an increase in the carbon tax rate, and the calculations show that the rate may have to be increased by up to NOK 4800 per tonne CO2-eq in order to reduce non-ETS emissions by about 10 million tonnes in 2030, corresponding to a reduction of around 40 % from 2005 levels. Statistics Norway carried out the analysis before the European Commission presented its proposal for an Effort Sharing Regulation on 20 July 2016.
Textbox 6.1 Projected emission trends in Norway and the EU up to 2030
The 2030 targets for individual countries under the Effort Sharing Regulation are determined partly since simulations that provide information on projected emission levels in 2030. The simulations show that in a business-as-usual scenario, the overall non-ETS emissions of the EU countries will be about 24 % lower than in 2005. There are wide variations between the EU countries. The European Commission has not so far calculated figures for Norway, but the projections in the white paper Long-term Perspectives on the Norwegian Economy 2017 indicate that Norway’s emissions will decline by about 16 % in the same period.
The sectors of the economy that will be most important for trends in non-ETS emissions are different in Norway and the EU. Many EU countries use fossil fuels to heat buildings, whereas Norway mainly uses electricity and biofuels. Reducing emissions from buildings will continue to be important for most EU countries up to 2030. On the other hand, a high proportion of emissions in Norway are from transport. Per capita emissions from transport are also higher in Norway than in the EU as a whole. This is explained partly by the scattered pattern of population, the large fishing fleet and the substantial transport needs of the petroleum industry. However, there are also large variations between countries within the EU.
These differences between Norway and the EU must also be considered in the context of higher economic growth and population growth in Norway than in the EU as a whole. Since 2005, growth in GDP has been about 7 percentage points higher in the Norwegian mainland economy than the overall EU figure. In the same period, population growth has been about 9 percentage points higher in Norway than in the EU. As a result of these trends, non-ETS emissions have remained more or less unchanged in Norway since 2005, whereas they have been reduced by about 12 % in the EU. However, there are wide variations between countries in the EU.
Estimates of the emission reduction potentials and costs of measures are highly uncertain, and will depend to a large extent on further developments in low- and zero-emission technology for the transport sector. The assumptions used about international climate policy and the development of climate-friendly technology are of crucial importance. As regards non-ETS emissions, where transport is the dominant source of emissions, Norway is dependent on technology development in other countries, and the costs of such technology where it is developed will determine the cost level in Norway as well. It is possible for example that it will take longer to phase in new zero-emission vehicles or that it is more difficult to realise the potential for reduction of non-ETS emissions from the petroleum sector than the Environment Agency has assumed. The Environment Agency has not assessed the policy instruments that would be needed or how they should be applied, and this is another source of uncertainty.
The potential for emission reductions and the associated costs may depend on which policy instruments are chosen. The most effective policy instruments are considered to be either a standard carbon tax applied across sectors or emissions trading, because they provide incentives to reduce emissions where the costs are lowest. In addition to reducing emissions, a carbon tax generates state revenue that can be used for other purposes. Certain policy instruments may cause unintentional distortion of production and consumption that is not to the benefit of society as a whole. For example, a support scheme or subsidy for a specific technological solution may result in excessive production and consumption of these goods. This involves costs to society, and in addition, any support scheme must be funded. The Ministry of Finance currently assumes that an increase in the tax level in Norway results in an economic loss of NOK 0.2 per NOK levied. Furthermore, support schemes and subsidies may have different distributional effects from taxation and emissions trading. The effects of specific policy instruments are also uncertain. The emission reduction potential may be lower than estimated if it is found that there are no appropriate policy instruments that can be used to ensure that a measure is fully implemented.
According to the polluter-pays principle, the costs of the necessary emission reductions will largely have to be met by businesses that generate non-ETS emissions and by individuals. The way the costs are split between individuals, the private sector and the public sector will depend on the policy instruments chosen to achieve the emission targets.
The policy instruments that are chosen will also have implications for the level of administrative costs. These costs will largely be paid by the state, or in some cases by the municipalities and counties, depending on which instruments are chosen. The proposals in this white paper will have limited administrative consequences. The use of policy instruments is considered in connection with the annual budgetary processes.
A number of measures and policy instruments will also have other benefits in addition to reducing greenhouse gas emissions. This applies for example to instruments that play a part in reducing local emissions to air and thus have health benefits. Measures to limit traffic will reduce the number of accidents and result in less congestion and less wear on roads. Win-win measures for the climate and biodiversity include restoration of peatland and other ecosystem-based measures. Instruments designed to reduce greenhouse gas emissions from the agricultural sector can also reduce runoff, improve water quality in nearby river systems and reduce emissions of ammonia to air. In addition, if the authorities’ dietary recommendations are followed, there will be health benefits for society as a whole.
However, even if a cost-effective approach is taken to achieving the 2030 target, the necessary action to reduce emissions will entail costs for the state, local authorities and the private sector.
For the world as a whole, the costs of not pursuing a climate policy in line with the goals of the Paris Agreement are potentially very high. For example, further global warming will increase the risk of irreversible damage such as loss of biodiversity and rising sea levels. Costs of this kind will probably be far greater than the costs of the necessary action to achieve the long-term objective set out in the Paris Agreement.
Statistics Norway (2013). Kostnadseffektive tilpasninger til togradersmålet i Norge og EU fram mot 2050 [Cost-effective adaptation to the two-degree target in Norway and the EU up to 2050], Reports 39/2013.