Nordic Economic Policy Review 2023

Linda Nøstbakken

This comment refers to an initial draft of the article published for the peer review conference in November, 2022.

Norway co-operates closely with the EU on climate policies, and in November 2022, following the EU lead, Norway bolstered its nationally determined contribution target under the Paris Agreement to reduce greenhouse gas emissions by at least 55% compared to 1990 levels by 2030 (previously, the target was to reduce emissions by at least 50% and towards 55%). In addition, Norway aims to reduce emissions by 90–95% by 2050. Norwegian greenhouse gas emissions have been relatively stable since 1990. In 2021, they were 4.7% below 1990 levels, although this figure does not include the effects of forestry and agriculture. This underscores the level of climate target ambitions that Norway has set itself and its continued reliance on EU co-operation to reach them.

Golombek and Hoel’s article gives an overview of Norway’s climate goals and the current and proposed policies to reach them. The paper starts by reviewing some key findings from the literature on carbon emissions reduction; the authors argue that carbon pricing should be the main policy instrument, and they briefly discuss why and under which circumstances policymakers could consider additional measures. This section also touches on some political economy issues related to climate policy. The following section provides an overview of Norway’s climate targets and policies, placing emphasis on the period to 2030, and shows the close link between Norway’s and the EU’s climate policies. In the fourth section of the paper, Golombek and Hoel discuss the current government’s plans and ambitions to transform the Norwegian economy into a low-emissions future, as outlined in the government’s coalition agreement (the Hurdal platform). More specifically, this section presents and discusses plans for the oil and gas sector, carbon capture and storage (CCS), hydrogen and batteries.

Golombek and Hoel’s paper gives readers a solid overview of Norway’s current climate goals and policies, its collaboration with the EU and its overall plans and ambitions to transform the energy industry and move towards a low-emissions future. In the following, I will provide some comments on the paper and some of the topics it discusses.

The section of the paper entitled Norwegian climate goals and climate policy provides a concise overview of Norway’s climate goals for 2030 and 2050 and of the key policies necessary to reach the 2030 targets. The authors deftly describe the use of carbon pricing to regulate emissions both in sectors that are part of the EU emissions trading system (EU ETS) and in non-ETS sectors. However, I would like to have seen an introduction to the third main pillar of the EU climate policy; the Land Use, Land-Use Change and Forestry (LULUCF) regulation, which commits Norway and other European countries to emissions reductions and carbon removal in the land use and forestry sectors. A presentation of the LULUCF regulation and how this element of European policy affects Norway would benefit this part of the paper.

In line with standard economic thinking, the authors argue against imposing national carbon taxes on sectors that are part of the EU ETS. To understand their reasoning, consider the case of the offshore petroleum sector in Norway, which is currently subject to a national carbon tax in addition to the EU ETS. This extra taxation forces the industry to abate more, at a higher (marginal) abatement cost than if they were solely subject to the EU ETS. However, the overall impact on total European emissions is negligible. Additional emission cuts in the Norwegian petroleum sector leave more EU ETS credits for others in the carbon permit market. If we disregard the possibility that these additional emission cuts trigger the market stability reserve mechanism (permit removal), the emission cuts in Norway’s offshore petroleum sector will be offset by higher emissions from other companies and sectors in the EU ETS. Consequently, a national carbon tax, in addition to the EU ETS, will not only increase the abatement cost of the affected sector but also the total European abatement cost while having little or no impact on the aggregate emissions level.

Despite this and given the Norwegian government’s stated aim of promoting the creation of value chains for CCS and hydrogen offshore, I wonder whether this could be an argument in favour of a special carbon tax on offshore oil and gas activities. Even though the effect on total emissions is limited in the short term, longer-term effects could prove positive if the higher carbon price in this sector encourages the industry to develop and implement new and improved CCS technologies. As I will return to below, some solid arguments can be made for opposing policies that try to pick winners and stimulate development in specific industries rather than providing industry-neutral incentives. However, as Golombek and Hoel discuss in the latter part of their paper there is also an argument that Norway has some advantages in the development of technologies such as large-scale CCS. Hence, the literature on second-best policies might be relevant here (see e.g. Goulder et al., 1999; Fischer et al., 2021).

An aspect that Golombek and Hoel pay little attention to is whether Norway’s climate goals and ambitions are realistic. As mentioned above, Norway has thus far (as of 2021) reduced its greenhouse gas emissions by about 5% compared to 1990 levels, which is very far from the 55% reduction target for 2030. To reduce emissions in non-ETS sectors, the government has announced that it will gradually raise carbon taxes to about NOK 2,000 by 2030 in constant 2020 prices. It would be interesting if the authors could say something about whether this price path will be sufficient in itself to meet the targets or to what extent Norway will rely on the flexibility mechanism of the EU Effort Sharing Regulation (ESR), for example by buying emissions reductions from other countries that are part of the EU ESR.

In the fourth section of their paper, Golombek and Hoel present ambitious policy measures related to Norway’s transition to a low-carbon economy, as outlined in the current government’s coalition agreement. More specifically, they consider the part of this agreement that describes measures to actively stimulate a transition away from oil and gas and toward other offshore and energy-related activities. In addition to petroleum extraction, Golombek and Hoel discuss CCS, the production of blue and green hydrogen, battery production and offshore wind power.

In June 2022, the Norwegian government launched a roadmap that provides more detail on how they plan to promote green industries

Roadmap - The green industrial initiative, June 2022, available from: https://www.regjeringen.no/en/dokumenter/roadmap-the-green-industrial-initiative/id2920286/

. This identifies seven areas that the government will prioritise as part of the green industrial initiative. In addition to value chains for offshore wind, batteries, hydrogen, and CCS (areas discussed by Golombek and Hoel), the roadmap outlines the government’s plans for a clean and energy-efficient process industry, a green maritime industry, and forestry/timber and other bioeconomy sectors. Thus, it would be possible for Golombek and Hoel to broaden the scope of their paper beyond the energy sectors by also covering these initiatives and other areas that perhaps should have been higher on the government’s agenda.

In terms of policy evaluation, Golombek and Hoel raise the dilemma of whether to use industry-neutral incentives to promote climate-friendly activities or make active investments in specific industries. They recommend letting “sound economic principles” guide policy measures encouraging new green industries. It is hard to disagree, but it would have been helpful if the authors could have been slightly more specific on what this actually implies, both in more general terms and in the specific cases they discuss in this part of their paper.

While green technology investments will probably be inadequate without direct policy intervention (Greaker & Popp, 2022), many economists are sceptical of governments' attempts to pick winners in the green transition. History provides numerous examples of such failures, while the prospect of subsidies or direct public investments in projects and technologies increases the potential for rent-seeking behaviour (see e.g. Baldwin & Robert-Nicoud, 2007). However, others argue that governments trying to single out winners is a necessary policy facet to combat climate change. Meckling et al. (2022) state that in a climate change context, this approach is warranted and offer some advice on how to choose suitable projects, including recommendations for limiting rent-seeking behaviour. They present three main arguments for the importance of picking winners through public investments: (i) it is unlikely that governments on their own will implement sufficient carbon pricing to drive technological change at the required pace, (ii) some technologies have significant future emissions reduction potential, but high capital investments are needed today to drive down the cost curve, and (iii) picking winners can encourage governments to shift the balance of power from polluters to the beneficiaries of decarbonisation. Meckling et al. (2022) argue that many governments are already (directly or indirectly) trying to pick winners, and hence, it is important that they do this effectively. They recommend that in the early stages of an evolving new technology, policymakers should pick companies or consortia that are involved in bringing them to market, and then, as the technologies mature, the shift should be towards supporting their wider deployment. They also argue that policymakers should prioritise technologies with the greatest potential for emissions reductions and that investment decisions should be rules and goals based. I believe that more specific advice on how to pick winners while minimising rent-seeking behaviour would strengthen the active industry measures discussion and provide a clearer basis for the policy recommendations offered by Golombek and Hoel.

This section of Golombek and Hoel’s paper also includes a detailed discussion of calculations from previous research papers, assessing the potential scale of the (future) European battery market. While this is undoubtedly interesting, I think it receives more attention (and space) than deserved, given the paper’s overall subject matter. I believe that in assessing the government’s initiative to set up a battery value chain, the question of whether Norway has any inherent advantages in battery production compared to other potential producers is more important than the exact size of the market. Key factors for battery production include labour, competence and considerable amounts of available electricity. I would have preferred a discussion that focussed on some of these issues. For example: How can Norway best utilise its electricity resources, given the demands of new green projects and the ongoing electrification of society.

Finally, I am curious as to how the Norwegian government’s long-term plans correlate with those of the European Union and how international co-operation can reach common climate goals in an efficient way.

Golombek and Hoel’s paper shows that there are many climate-related aspirations, goals and policies in Norway and that the level of ambition is high. Climate policies in Norway are typically expected to deliver on far more than just climate goals, for example, by stimulating new green industries, increasing exports, creating new jobs, and boosting economic activity in rural areas. However, resources are scarce (both human and energy resources), even for an energy-rich country like Norway. It is vital to define a set of well-founded priorities and invest and implement policies based on these. Golombek and Hoel discuss some important issues related to this, with particular emphasis on the energy sector.

Baldwin, R. E., & Robert-Nicoud, F. (2007). Entry and asymmetric lobbying: why governments pick losers. Journal of the European Economic Association, 5(5), 1064– 1093.

Fischer, C., Hübler, M., & Schenker, O. (2021). More birds than stones–a framework for second-best energy and climate policy adjustments. Journal of Public Economics, 203, 104515.

Goulder, L. H., Parry, I. W., Williams III, R. C., & Burtraw, D. (1999). The cost-effectiveness of alternative instruments for environmental protection in a second-best setting. Journal of Public Economics, 72(3), 329–360.

Greaker, M., & Popp, D. (2022). Environmental Economics, Regulation, and Innovation. Working paper No. w30415, National Bureau of Economic Research.

Meckling, J., Aldy, J. E., Kotchen, M. J., Carley, S., Esty, D. C., Raymond, P. A., Tonkonogy, B., Harper, C., Sawyer, G., & Sweatman, J. (2022). Busting the myths around public investment in clean energy. Nature Energy, 7(7), 563–565.