Abating greenhouse gases in the Norwegian non-ETS sector by 50 per cent by 2030

This report is a response to the separate mandate for Statistics Norway (SSB) in the Climate Cure 2030 initiative of the Norwegian government (see footnote 1). SSB was requested to conduct a macroeconomic analysis of a scenario in which the Norwegian greenhouse gas (GHG) emissions not covered by the European emission trading system (ETS) are cut to 50 per cent of their 2005 level by 2030. This is a larger cut than the 40 per cent to which Norway is currently committed.

The analysis examines long-run macroeconomic impacts by means of the computable general equilibrium, multi-sector SNOW model of the Norwegian economy. The abatement is achieved by replacing the CO2-tax system of today with a uniform price on all non-ETS GHG emissions. Two abatement scenarios are simulated. In the first, we identify the level of the greenhouse gas price necessary to obtain the required abatement responses, where and how the abatement will take place, and the overall cost and macroeconomic implications without any other policy changes. In the second abatement scenario, the same climate policies are introduced. In addition, it is assumed that the extra revenue generated is recycled back to households by reducing the labour income tax rate. This scenario exemplifies how the overall social costs of the climate policy can be reduced by targeted revenue recycling that counteracts existing tax wedges, in this case a significant distortion in the labour market caused by labour taxation.

The macroeconomic impacts are assessed relative to a long-run projection where current policies are extended to 2030. This reference scenario is based on the government’s projection of economic trends and emissions in the National Budget for 2020. Since the emission levels already decline significantly towards 2030 in the National Budget projection, the remaining task for the GHG price reforms in our scenarios is to reduce non-ETS GHG emissions by 27.4 per cent, or 5.6 million tonnes of CO2-equivalent (MtCO2eq) from the reference scenario by 2030.

In the first abatement scenario, the necessary emission price comes to NOK 3 200tCO2eq in 2030 (real 2013 price). 90 per cent of the abatement takes place within four economic areas: private and commercial road transportation (47 per cent), waste and district heating (19 per cent), agriculture and forestry (17 per cent) and construction (7 per cent). The direct abatement costs facing firms and households that implement abatement measures add up to a total of NOK 7.6 bn by 2030. These direct costs translate into a marked macroeconomic contraction: by 2030, GDP, employment and private consumption have fallen by 0.4, 0.3 and 1.1 per cent, respectively, compared to the reference scenario. The utility of the consumer takes the form of enjoyment of both leisure and consumption. It falls by 0.8 per cent in 2030. The utility loss is a metric for social costs.

Scrutinising this loss further uncovers that it is significantly larger than the direct abatement cost mentioned above. There are indirect costs for society that are primarily attributable to numerous governmental interventions already present in the economy. Many of these have unfavourable impacts on economic efficiency. The considered abatement policies cause activity changes that may either reinforce or counteract these distortions. In this first abatement scenario, two main areas of government intervention become more distortive and explain about 60 per cent of the social costs: i) an increase in the purchase and use of electric vehicles that is already stimulated by implicit subsidies, and ii) a further reduction in labour supply, which is already discouraged by taxes. The latter is a reflection of higher costs and lower private sector demand for labour.

In the second abatement scenario, the cut in the labour income tax rate reduces the labour market distortion directly and dampens the negative impact of the remaining labour taxes. The result is that social costs (utility) are halved compared to the first scenario. This emerges despite higher direct abatement costs in this scenario amounting to NOK 8.0 bn in 2030. This is due to generally higher economic activity, which calls for a more stringent GHG price of NOK 3 500/tCO2eq. GDP, employment and private consumption all increase compared with the reference scenario, by 0.3, 0.9 and 0.2 per cent, respectively.

The SNOW model’s macroeconomic approach complements the analysis in Climate Cure 2030 (2020) in three main respects: it is able to take into account the impacts of many simultaneous measures, it links measures directly to policy instruments via the behavioural responses of modelling agents, and it accounts for the productivity impacts of existing distortions and possible revenue recycling choices that are present in any real economy. Cost metrics in the two approaches are different, both with their respective qualities. The bottom-up methodology used in Climate Cure 2030 (2020) is the most appropriate for examining the details of abatement options This analysis has provided the macroeconomic study with qualitative and quantitative knowledge. It is used most actively to quantify abatement data on agriculture and some commercial transportation.