Nordic Economic Policy Review 2023

Taran Fæhn

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

This review responds to the paper by Rolf Golombek and Michael Hoel with the title “Climate policy and climate goals in Norway” presented at the Nordic Economic Policy Review Conference in Oslo on 26 October 2022. It sums up the main points of my discussion of the paper at the conference. As the intention behind involving discussants and reviewers is to encourage improvements of the original manuscripts, the final published article in this journal will expectedly have been revised. This review nevertheless offers some perspectives on Norway’s climate policies that may have broader relevance and interest.

Golombek and Hoel’s paper examines the Norwegian government’s short-term policies to reduce emissions as well as its long-term strategies to cut emissions radically. The authors restrict their discussion to three key sectors that currently account for significant shares of Norwegian greenhouse gas emissions: manufacturing industries (24%), petroleum extraction (25%) and transport (33%). The paper starts by providing an overview of the complex Norwegian climate policy goals, instruments and strategies in the context of the country’s energy and emissions situation. They highlight the following policy implications: (i) Norway should carefully reconsider its goals and policies in sectors already covered by the EU emission trading system (ETS), (ii) carbon pricing in the non-ETS sectors should be uniform across all emission sources and (iii) establishing and expanding new “green” industries in Norway should be based on sound economic principles.

Although it is easy to concur with these conclusions on a more general level, it is not always exactly clear on what grounds they are reached. What, for instance, are sound economic principles? Indeed, ahead of their conclusions, the authors provide an economic theory section. Unfortunately, it is not sufficiently illuminating due to its generic form. The normative arguments would have been more useful if, instead, they were related directly to the discussions of the Norwegian policy instruments and strategies in the subsequent sections.  

I have three suggestions that I think might tease out a closer connection between conclusions and arguments. The first concerns the status of different climate policy goals, the second and third seek to add nuance to Golombek and Hoel’s presentation of some implemented and potential policy instruments for achieving the short-term 2030 targets and the long-term 2050 targets, respectively.

By making a clear distinction between Norway’s climate commitments, on the one hand, and the additional ambitions set by the government on the other, it would be easier to draw policy implications from the normative conclusions in the paper. My reasoning is that commitments must be regarded as binding, while self-imposed ambitions can more easily be adjusted in response to normative findings. Norway’s commitments are established by law in the Norwegian Climate Change Act and in international agreements. The Act quantifies the maximum greenhouse gas emissions permissible by 2030 and 2050, respectively. The 2030 target was also pledged in the Paris Agreement. Moreover, an agreement with the EU (and Iceland) splits the 2030 commitments into one for emission sources covered by the EU ETS and one for sources outside the Emission Trading System (ETS). These are currently under renegotiation to accord with the overall EU targets and the updated Norwegian Paris Agreement pledge.

Golombek and Hoel treat the net-zero ambition in 2050 as a commitment. It is not: The obligation in the Act is to become a low-emission society, quantified as a 90–95% cut from the 1990 level. The cost of moving from a 90% to a 100% cut is probably very high.

Golombek and Hoel advise that some sector-specific goals should be reconsidered, including the transformation goal that aims to cut all Norwegian ETS-covered emissions within its own borders and not purchase emission allowances under the EU ETS. These are, however, only ambitions and can be revisited at a later date. Another ambition that could be reconsidered, but that Golombek and Hoel do not mention, is the climate-neutrality goal for 2030. It would be interesting to see a discussion of how it relates to the long-term low-emission commitment, let alone the net-zero ambition for 2050.

Golombek and Hoel choose to omit a discussion of the third, and probably most difficult, commitment in the EU agreement: on the net emissions from the land use, land use change and forestry (LULUCF) sector. The EU as a whole has decided to increase the overall LULUCF goal for 2030 from a previous net zero target to a net uptake of 310 million tonnes of CO₂-equivalents. The resulting commitments for each member state, as well as their access to flexibility mechanisms, are still not clear. However, this bolstering of the goal, along with several technical adjustments, has undoubtedly increased Norway’s LULUCF challenges considerably. It will require significant reductions in land use emissions and represents a potential area of conflict with several other climate-motivated needs for energy infrastructures and installations, bioenergy production and agricultural measures.

The agreement with the EU allows for several flexibility mechanisms intended to increase the cost-effectiveness of climate policies. There is, however, one severe restriction: Norway is obliged to refrain from using credit markets outside the EU. This also applies to arrangements within the UNFCCC framework, like those under the auspices of Article 6 in the Paris Agreement as well as the Clean Development Mechanism. Golombek and Hoel misinterpret the acquisition of carbon offsets from countries/agents outside Europe being used to fulfil international commitments.

On the other hand, the EU agreement provides several new instruments. Golombek and Hoel judge a couple of the EU fit-for-55 by 2030 initiatives as promising: The Carbon Border Adjustment Mechanism (CBAM) and the new, separate ETS for buildings and transportation are examples. Recently, details of these reforms have been agreed.  

In the period 2026–2034, CBAM will gradually replace current measures against carbon leakage, the free allocation of ETS allowances and the national aid compensating for allowance costs passed on in electricity prices. This package is welcomed by Golombek and Hoel. The literature states that an ideal carbon border adjustment system would normally outperform the current system (Hoel, 1996; Fischer & Fox, 2012; Böhringer et al., 2017). However, it is important to note that the EU CBAM is not quite as recommendable in its current form. There are two main reasons: It only applies to the import side and only to direct emissions. On the export side, to the extent that the EU ETS-covered firms compete against non-regulated suppliers on other world markets, they still face the relative disadvantage of paying the ETS price. Regarding indirect emissions, no arrangement has yet been agreed for to replace the current aid designed to compensate for indirect electricity price impacts of the EU ETS. Consequently, it may make more sense for Norwegian companies to argue against the CBAM reform than Golombek and Hoel acknowledge.

As a means of reducing efficiency losses currently originating from the large variation of marginal abatement costs across borders, Golombek and Hoel’s expectations for the new buildings and transportation ETS seem unreasonably high. In fact, its design is not intended to work in the same way as the current ETS under which Norway can, for instance, conveniently choose to substitute costly domestic abatement by purchasing relatively affordable allowances. Buildings and transportation are still subject to the non-ETS commitment that will be the binding target. Thus, buying allowances under the new ETS will not reduce the obligation to mitigate greenhouse gas emissions from non-ETS sources on Norwegian territory. Rather, the price established in the new ETS will work as a minimum, EU-wide tax on these emissions. This price is expected to be relatively low and has little impact on the already highly taxed fossil fuel prices in Norway.

This brings me to another claim by Golombek and Hoel that warrants discussion. They are concerned about the significant carbon price variation across the non-ETS sectors, implying an inefficient allocation of emissions. They explain this variation by “sectors being exempted from taxation and sectors being exposed to additional taxation.” As a matter of fact, recent state budgets have made considerable progress toward levelling up carbon tax rates across non-ETS sectors, as seen in Figure 1.

Figure 1 CO₂ tax rates in Norwegian non-ETS sectors, 2022

Roughly 90% of the CO₂-emissions had the general full rate of NOK 766 /t in 2022. Moreover, several non-CO₂ greenhouse gas sources also face this tax rate. It is nevertheless true that other taxes apply to some of the emission sources, but these are motivated by considerations other than mitigating climate change. In particular, market intervention against the local environmental impacts of transport activities can explain the highest effective tax rates imposed on households reported by Golombek and Hoel. In general, since externalities associated with economic activities differ, it is far from obvious that sizable efficiency gains can be achieved by making the total effective rates uniform.

Golombek and Hoel’s extensive discussion of Norway’s long-term prospects for radical reductions in emissions reveals many interesting details relating to emerging green markets and technologies. The authors offer impressive insight and convincingly substantiate some of the future comparative advantages of the Norwegian economy.

The main conclusion from this section is that new green industries’ expansion in Norway towards 2050 should be based on sound economic principles. Partly due to the structure of the paper, it is not always easy to distinguish between description and advice: nor is it clear what constitutes sound economic principles, nor grasp whether, in this context, Norway refers to the central government. It is also unclear whether an intervening state should go beyond carbon pricing. The theory section introduces the following reasons for using a more ample toolbox than carbon pricing alone: Distributional considerations, commitment problems, knowledge spillovers and co-ordination problems. A key question is posed: Should policies generate industry-neutral incentives or actively promote specific investments and industries, i.e., pick winners? However, neither the answer nor the arguments provided are clearly laid out.

A closer reading brings the following arguments to the surface: CCS and hydrogen production are examples of technological fields suffering from co-ordination challenges that can legitimise state involvement beyond just carbon pricing. The justification for subsidising electricity as a source in new green industries, including offshore wind power and batteries for storage, is less obvious in their view.

Golombek and Hoel’s reflections on long-term climate policies address electrification, power generation and hydrogen production. These foci are natural given their expertise and the direction set by government through formulating its transformation ambition in terms of domestic abatement of the emissions covered by the EU ETS.

I would like to have seen a discussion of two other areas of technological development that are expected to play crucial roles in the net-zero transformation of the Norwegian, European and global economies: The circular economy and carbon dioxide removal. Establishing a circular industry will call for co-operation and co-ordination across and beyond existing value chains, innovation of products, processes and organisations and a local focus. Economic thinking is essential, and Norwegian public and private initiatives are, so far, lagging behind. Carbon dioxide removal measures span from well-known LULUCF-associated low-tech practices to intensely science-based, immature, large-scale technologies. It will inevitably form part of net-zero strategies, as gross emissions will not be eliminated by 2050.   

My recommendation to distinguish commitments from ambitions is partly rooted in the advantages I see for a small, open country of entering into international agreements. Norway’s coalition with the EU renders it among the most ambitious and serious climate policy agents in the world. There are also several valid reasons for cost savings to be expected. Beyond reducing carbon leakage when joining forces, binding agreements and other legal arrangements like the Climate Change Act decrease the commitment problem described by Golombek and Hoel.

On the downside, many targets, regulations and instruments implemented by the EU do not always naturally fit Norwegian particularities and priorities. This can generate political tension and additional economic costs. However, as Golombek and Hoel point out, many national initiatives have their own disadvantages, too.

Böhringer, C., Bye, B., Fæhn, T., & Rosendahl K. E.(2017). Targeted carbon tariffs – Carbon leakage and welfare effects. Resource and Energy Economics, 50, 51–73

Fischer, C., & Fox, A.K. (2012) . Comparing policies to combat emissions leakage: border carbon adjustments versus rebates. J. Environ. Econ. Manage, 64 (2), 199–216

Hoel, M. (1996). Should a carbon tax be differentiated across sectors? J. Public Econ, 59, 17-32