Sectoral EU-trading and other Climate Policy Options: Impacts on the Swedish Economy

A recent Government bill suggests a sharpening of Sweden’s climate policy goals. Most importantly, Sweden’s Kyoto-commitment of emitting +4% carbon relative to the 1990 level has been revised. The new target translates into a reduction of carbon emissions by -4% relative to 1990. The policy package supporting the new target includes various subsidies and tax-swaps, but precludes the use of flexible mechanisms such as multilateral emission permit markets. A partial system for CO2 emission trading in selected energy sectors among member states is being developed by the EU-commission and is scheduled to be launched by 2005. This paper analyzes the effects on the Swedish economy of using different climate policy options, including an analysis of the “price tag” of abstaining from entering the EU-market. Our Computable General Equilibrium (CGE) model indicates that a strictly domestic emission target, such as the one proposed in the government bill, is likely to be substantially more costly than by reaching the same aggregate CO2 target through the use of international permit trading. Emission trading is, however, not necessarily welfare enhancing if a partial system is used. Because the EU-proposal effectively covers only about 30% of Swedish carbon emissions, some potential efficiency gains are unavailable. We find that there are different “winners” and “losers” at the sector level, depending on which policy option is used. Because other countries have an incentive to “use” the emissions that Sweden now voluntarily abstains from, the climate policy proposals in the 2002 Government Bill may, after all, not reduce carbon emissions in Europe. We conclude that Sweden should actively take part in international discussions regarding multilateral climate agreements, and should promote proposals that have a broad coverage.