Environmental Performance in Swedish Industry

1. Environmental Performance in Swedish Industry Runar Brännlund Tommy Lundgren Per-Olov Marklund Centre for Environmental and Resource Economics (CERE) Umeå University and Swedish University of Agricultural Sciences

2. Introduction • This study’s overall goal is to analyze environmental performance (EP) in Swedish manufacturing and explore its determinants. • Especially, we want to investigate the effectiveness of environmental policy; does a CO2 tax work in terms of lowering emissions? • The analysis also relates to the discussion concerning decoupling and the Environmental Kuznets Curve (EKC), both concepts which refers to breaking the link between environmental emissions and economic growth.

3. Introduction • Sweden was the first country to introduce an explicit CO2-tax in 1991 and may serve as a test bench for the effectiveness of environmental taxation in general. • To achieve our objective we make use of a panel data set of firm level data for the Swedish manufacturing industry covering the period 1990 to 2004. • First, we define and calculate an EP index based as ratios of Shepard-type output distance functions. • Second, we use this index as an independent variable in a regression analysis where the firm-specific CO2-tax is the key independent variable.

4. Outline • The CO2 tax in Sweden • The EP index • The determinants of EP • Results • Conclusions

5. The CO2 tax in Sweden

6. The CO2 tax in Sweden • The tax rate has nearly tripled from the introduction to present time. • Presently, the CO2 tax rate is 1.05 SEK per kg CO2 emitted, which corresponds to 2.44 SEK per liter gasoline. • Starting with the 1993 energy tax reform, the tax burden has continuously shifted from the industry sector to the non-industry sector. • Swedish industry is being exempted from a part of the tax for competitiveness reasons, and there are a few other special rules associated with the industry. • Given these exemptions and special rules it can be concluded that the tax system is rather complicated and not very transparent. • Although there is a uniform CO2-tax rate, the actual, or effective, tax rate will vary considerably between firms, both within and between sectors.

7. The CO2 tax in Sweden - Manufacturing

8. The environmental performance index • The theoretical approach for constructing an EP measure follows Färe et al. (2006) in J. Prod Anal.; A Malmquist-type of quantity or productivity index. • The basic idea is that the components of an EP index are quantity indexes, and that EP is defined as ratios of Shephard-type of output distance functions. • The distance functions are regarded as aggregator functions, i.e., they can be used to aggregate good and bad outputs, which make them suitable as building blocks for the construction of EP indexes. • Such an index then forms a simple but attractive measure on EP by measuring how much is produced per unit of emitted pollutants.

9. The environmental performance index A nice feature of this measure is that EP not only can be calculated, but also can be decomposed into two components; 1) change in the good output and 2) change in the bad output. i = firm,j = sector

10. Environmental performance and its components

11. Accumulated EP - Manufacturing

12. Energy intensive firms Non-energy intensive firms

13. Determinants of EP • It is assumed that EP is mainly governed by 1) changes in the CO2 tax, and 2) changes in price of fossil fuels. • We also control for cost share of fossil fuels, capital intensity, size, and time.

14. Determinants of EP General form Econometric specification

15. Results for sectors, manufacturing, and energy and non-energy intensive firms. EP seem to be more elastic wrt to the tax compared to the price of fuels.

16. Conclusions • The results reveals a fairly strong increase in environmental performance over the period 1991-2004 in all industrial sectors. • Furthermore, the results show that almost all sectors have experienced falling emissions while at the same time production have been rising, i.e. absolute decoupling between production and emissions of CO2. • The exceptions are Pulp/paper and Wood industry, which shows relative decoupling in the sense that emissions have increased, but at slower rate than the increase in production.

17. Conclusions • The price of fossil fuels and the actual CO2 tax have contributed significantly and positively to EP. • Manufacturing as a whole show that there is a significance difference in effect, in the sense that EP is more sensitive to a change in the tax than to a change in fuel price. On a more disaggregated level the results show similar pattern, but are more mixed. • One explanation is that the tax has a signaling effect in that the introduction of the CO2 tax provides new information about the properties of the taxed goods. This may then have more permanent effects on the production technology and input choice.