Emissions of greenhouse gases and other pollutants are often closely related to the use of fossil energy. In an unregulated market, the environmental costs of emissions are not reflected in energy prices. This means that polluters are not made responsible for the full costs to society of their energy-using activities, and encourages excessive use of fossil energy.
Properly designed taxes correct this situation by increasing the price of using fossil energy to reflect the full costs to society as a whole. Over time, this will result in changes to production and consumption patterns and encourage the development and deployment of new technology. The emissions trading system has similar effects.
The CO2 tax and the emissions trading system
About 80 % of greenhouse gas emissions in Norway are taxed and/or regulated through the emissions trading system (Norway takes part in the EU ETS). These apply mainly to emissions from the use of fossil energy sources.
The ETS covers greenhouse gas emissions from most land-based industry sectors, the oil and gas industry and aviation, and the price of emission allowances is currently equivalent to around NOK 50 per tonne CO2-eq. The petroleum sector and domestic aviation are also required to pay the Norwegian CO2 tax, and the current tax rate is almost NOK 500 per tonne CO2.
Tax rates in the non-ETS sectors vary. The general CO2 tax on mineral oil is about NOK 450 per tonne CO2, and petrol and domestic gas consumption are taxed at a similar rate. However, certain industries and uses are exempted from the CO2 tax or are taxed at a reduced rate. Emissions of greenhouse gases other than CO2 make up a relatively large share of emissions in non-ETS sectors, and these emissions are not taxed.
Norway’s taxation rates for fossil energy are some of the highest in the world. Total taxes on fuel for road vehicles, including the road use duty, correspond to NOK 1 900–2 700 per tonne CO2. Fuel oil is subject to a basic tax in addition to the CO2 tax, giving a total tax rate of about NOK 1 050 per tonne CO2. Although the road use duty and the basic tax on fuel oil are not directly climate-related, these taxes also influence consumption of fossil fuels and thus greenhouse gas emissions. The OECD has compared different countries’ tax rates in the transport sector, and found that only the UK taxes fuel use in this sector more heavily than Norway. Tax rates in Switzerland are similar to those in Norway. In the US, the tax rate is equivalent to barely NOK 100 per tonne CO2.
The ETS also influences Norwegian electricity prices because Norway trades electricity with the rest of Europe. The effect of the ETS is to raise the cost of fossil electricity production in Europe, thus pushing up electricity prices. This has an effect on electricity prices in Norway as well, even though production is hydropower-based. More information on how the power market functions can be found here.
Tax on electricity consumption
This tax applies to electricity delivered to consumers and is collected by the grid companies. In 2017, the tax rate is NOK 0.1632 per kWh. Certain industrial processes (chemical reduction and electrolytic, metallurgical and mineralogical processes), greenhouse nurseries and rail-based transport are not required to pay the tax. Households and the public sector in the far north of the country (Finnmark and the northern part of Troms) are also exempt. A reduced tax rate (NOK 0.0048 per kWh) applies to other manufacturing industries, mining and quarrying, onshore oil and gas facilities, district heating production, large data centres, commercial shipping and to all business and industry in Finnmark and northern Troms. There is an additional levy on the grid tariff of NOK 0.01 per kWh for households and NOK 800 per year for other end users, which is used to finance the Energy Fund managed by Enova.
More information on the Norwegian taxation system is available in the 2017 budget.