sou · GWB3105EN · 2009-01-01 00:00:00 — The assumption stems both from the findings of the studies presented earlier indicating substantial efficiency gains from international agreements and from aim of a cost-effective reduction of global emissions. The starting point for the estimates is that contri- bution to the global reduction in carbon dioxide emissions in 2030 is a reduction in emissions to a level equivalent to 70 per cent of emissions in 2005.196 In the scenarios, is thus permitted to issue emission rights in accordance with this level. Participants can then buy and sell emission rights both domestic- ally and internationally without restrictions at the prevailing international price, which from perspective is given. The results of the estimates indicate that the impact on eco- nomic growth would be relatively low. The economic effect of this policy compared with a continuation of current policy instruments and no further reduction in emissions would be equivalent to a decrease in GDP of more than 0.2 per cent by 2030. This result is well in line with the relatively low costs presented in and other analyses, where international flexibility is empha- sised as crucial to achieving the result. The base scenario does not indicate any substantial structural change as a result of pursuing a climate policy with international emissions trading. 195The taxation of fossil fuels (including the carbon dioxide tax) on vehicle fuels is, however, retained for fiscal reasons in the base scenario. As a result, the price on the emissions from these fuels is the current carbon dioxide tax added to the international carbon dioxide price. See appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). 196This reduction in emissions is largely in line with the emissions reduction required of countries to achieve the target of 450 ppm based on estimates According to these estimates, greenhouse gas emissions need to decline to 77 per cent of 2002 emissions by 2030 and continue downwards to 45 per cent by 2050. [2008a]. The Long-Term Survey 2008 Energy, Climate and Economic Growth An inefficient policy will have greater economic consequences The relatively low cost of the climate policy calculated in the base scenario of the 2008 Long-Term Survey is highly dependent on the assumption that the policy that is in place is efficient. The ability to trade emissions rights both nationally and internationally with no trade barriers is a prerequisite in order for the scheme to be efficient. It is worth pointing out that this scheme differs from many of the proposals put forward in the Swedish and European debate, such as trade restrictions, sector specific emissions trading schemes and emissions ceilings as well as differentiated carbon dioxide taxes, as parts of a future climate policy. An alternative scenario analyses the economic effect of a policy largely lacking international coordination at the same time that the EU and continue to pursue a climate policy focusing on emissions reductions in the EU and in . In the alternative scenario, the Scheme looks about the same in 2030 as it does today; see fact box 6.2. This means a two- pronged approach to climate policy: one policy for and industries in the EU emissions trading scheme governed by EU decisions and another for the rest of the economy with responsible for reducing emissions. The industries included in the Trading Scheme are free to buy and sell emissions rights at the prevailing price in the EU emissions market while other industries and consumers are regulated by the domestic carbon dioxide tax and other instruments. The policys target is that the total of the number of emission rights allocated plus actual emissions from the industries not included in emissions trading are not to exceed the emissions allowances allocated to in the base scenario. Thus actions in both scenarios should result largely in the same climate effect. The estimated cost of this policy alternative is considerably higher than that for an efficient policy. Compared with the base scenario, GDP declines by over 3.1 per cent by 2030. This may be viewed as a high cost for a single policy decision. The additional cost of the carbon dioxide tax on transport and private households will be considerably higher in this case (about per kilogram of carbon dioxide) which, in accordance with the target, results in large domestic emissions reductions, particularly emissions from Energy, Climate and Economic Growth The Long-Term Survey 2008 road transport and households.197 In the base scenario, transport and households bear the cost of the current carbon dioxide tax (which is retained) and the cost of emissions rights, which together are equivalent to almost per kilogram of carbon dioxide. It may be argued that a reduction in GDP of over 3 per cent by 2030 is a low price to pay if it leads to less risk of climate change. At the same time, it is important to point out that the cost is not negligible, particularly when one takes into consideration that the contribution to the improvement in the climate for this sum is no larger than that achieved with an efficient policy. In addition, it should be pointed out that the aggregated cost, here measured in terms of a contraction of GDP, does not reveal much about the cost of structural change and the distribution effects associated with the policy. The estimates indicate that the structural change with an efficient policy is small compared with the alternative. If households have to bear a large part of the costs directly in the form of higher carbon dioxide taxes as in the alternative policy, there is a significant risk that the distribution effects may be substantial. Studies show that the taxation of fossil fuels hits low income households harder.198 If the calculations also include these effects, it is likely that the real costs to society will be greater than the GDP figures show. A high cost or a skewed distribution of the costs also risks reducing the acceptance of the climate policy, which is unfortunate when there are high ambitions for the policy. The threat of radical climate change is one of the gravest problems facing humanity. In addition to the Kyoto Protocol, the broad international agreement which includes quantitative targets, a large number of other targets have been established that are aimed at helping reduce the risk of excessive global . Estimates of the cost of reducing emissions globally enough to halt climate change at an acceptable level indicate that there is much to be gained from international cooperation. If emissions reductions are made where they cost the least, ambitious climate targets can be 197This corresponds to over per litre of petrol in carbon dioxide tax (excluding VAT). 198See, for example, SOU 2003:2, Serret, Y. & Johnstone, N. [2006] and Fullerton, D. [2008]. The Long-Term Survey 2008 Energy, Climate and Economic Growth met at a relatively low cost. Climate policy should therefore aim to cover as many countries as possible and allow for international flexibility in emissions reductions. An international emissions trading scheme that enables economic burden sharing among countries is one way of accomplishing this. A number of studies have shown that a policy that deals with emissions from different industries and sectors risks substantially raising the cost of meeting a specific emissions target. Just as international cost sharing possibilities are key in holding down global costs, the aim at the national level should be to treat emis- sions from different sources similarly. Estimates in the Surveys alternative scenario illustrate some of the costs that arise if limits are put on flexibility nationally and internationally. In addition to these costs, there will be costs resulting from structural change and distribution effects. The conclusion reached from the scenarios in the Long-Term Survey is that a large part of national emissions should be included in international emissions trading. Energy consumption is necessary for economic growth as eco- nomic history makes clear. Energy consumption has progressively become ever more efficient over time as reflected by the decline in energy intensity, i.e. energy consumption in relation to GDP. This increase in energy efficiency has partly happened of its own accord in connection with new technological developments and structural changes in the economy. However, energy price trends are of great importance both for technological development and the pace of structural change. Carbon dioxide emissions trends have historically followed trends in energy consumption. However, the link to energy con- sumption, is not direct. For instance, large reductions in emissions have previously been achieved in connection with a change of energy without a major impact on energy intensity. Examples are the replacement of fossil fuels with nuclear power and biofuels. Trends in energy consumption and energy intensity in mostly follow trends in other industrial countries. During those periods when carbon dioxide emissions in relation to GDP have fallen more rapidly in than in other countries, the reduc- tion has largely been due to changes in the composition of the energy supply rather than reduced energy intensity. In the last decade, structural change has also been of great importance, parti- cularly for emissions reductions. Energy, Climate and Economic Growth The Long-Term Survey 2008 Given that it is possible to measure and control greenhouse gas emissions, policy should focus on pricing these emissions directly. From a climate perspective it is difficult to justify a policy focusing on reducing consumption of a particular good if it is only partly linked to emissions. Targets for energy consumption risk leading to measures that are more costly than what can be achieved with general policy instruments directly aimed at greenhouse gas emissions. The previous chapter addressed the for economic growth. Growth provides a higher standard of living, some of which we receive via the publicly funded welfare systems.201 The welfare systems face a number of challenges in the long term. One such challenge is that those of working age must in future be able to finance health care, social services and other public activities for a growing number of elderly people. The new and future demands that accompany increases in household incomes present another challenge. As material standards increase in society, people expect more from welfare services, i.e. health care, social services and education. Thus the difference between what the tax-financed systems are capable of providing and what the public would like to have gradually increases. A third challenge is the rise in the relative price of several of these services on account of weak productivity growth. These challenges have been discussed in considerable detail in the two preceding Long-Term Surveys,202 but they are still urgent since solutions for meeting them have not yet been devised. In addition, the ongoing internationalisation affects welfare systems . It is more difficult to tax mobile tax bases, thus limiting the funding possibilities for the welfare systems. Greater cross-border mobility and trade in services also makes it increase- ingly difficult to consider welfare services as an exclusively national concern. 201Here the term welfare system refers to tax-financed public systems that are used to spread risks among inhabitants and redistribute parts of welfare provision – primarily social insurances, transfers and large parts of public consumption – both among individuals and over time. Welfare itself is a broad concept that includes both material and non- material consumption (for example, leisure time). 202See the main report to the Long-Term Survey 1999/2000 (SOU 2000:7) and the Long- Term Survey 2003/04 (SOU 2004:19). The Long-Term Survey 2008 In order for it to be possible to further develop welfare services in the long term, this chapter notes that the form of financing for some of the welfare systems needs to be changed. Increasing the number of hours worked in the economy could contribute to their financing in the short term. However, since in future there will also be a wish to take out some of this welfare increase in the form of leisure time, more hours worked is not a realistic long-term solution. The Long-Term Survey 2008 therefore recommends establishing a parliamentary inquiry to further explore how to change the form of financing for some of the tax-financed activities. 7.1Limited possibilities for tax financing the growth of welfare services The preceding Long-Term Survey noted that it will be difficult to finance ambitious improvements in welfare services with taxes. Here welfare services are defined as health care, social services and education. These services represent a substantial part of public consumption, i.e. tax-financed goods and services. Welfare services are produced either publicly – mostly at the local government level – or privately. Welfare services are to a lesser extent financed by fees. Public consumption amounted to more than 26 per cent of GDP and accounted for 50 per cent of public expenditure in 2007. Figure 7.1 shows the distribution of public consumption according to purpose. The other large expenditure item in the public sector is transfers, which make up about 40 per cent of public expendi- ture.203 The transfers include social insurances and various forms of benefits that are also important parts of the welfare system. The social insurances are constructed quite differently than the welfare services. Revenues and costs in social insurance systems can be expected to follow each other more closely. The task of the social insurances is to ensure against loss of income, and premium payments are linked to the size of the wage. If the risk of a loss of income increases or decreases, there may be changes in the 203 The remainder of public expenditure consists of interest payments and investment, primarily in infrastructure. See also chapter 2. The Long-Term Survey 2008 premiums and/or the benefit terms. The pension system, which is another important part of the welfare system, is considered stable. In this chapter, the focus is therefore on the welfare services and the possibilities of improving them when the standard of living rises.204 Figure 7.1 Distribution of public consumption by various activities 2007 Note: Other includes, inter alia, general administration, judicial systems and defence. Source: Statistics [e]. 7.1.1Unchanged tax rates mean an unchanged standard Chapter 2 describes long-term trends in public finances according to the base scenario. The scenario is based on no changes to policy, 204 Increased demand for other publicly financed services such as culture, recreational services, and environmental improvements also cannot be ruled out when living standards rise. In the event, it would exacerbate the problem discussed in this chapter. The Long-Term Survey 2008 which also means that tax rates would remain the same.205 At current tax rates, public resources are estimated to just cover the increased demand ensuing from the growing number of elderly people. Public consumption is estimated to grow by an average of 0.7 per cent a year between 2005 and 2030. Table 7.1 shows that expenditure increases are primarily for elder care and treatment. Table 7.1 Demographically warranted trends in public consumption 2005–2030 and secondary) school Source: Statistics [e] and calculations. The trends described assume that resources can be redistributed in a flexible way from those activities that need to be reduced to those activity areas that are increasing, for example from schools to elder care. In practice, it is likely that such an adjustment will involve some costs, but it is unclear how large they will be. 205 The assumption in the estimates is that tax rates are in relation to the tax bases, which will reflect unchanged tax regulations. This in principle results in an unchanged tax ratio. See also chapter 2 and appendix 1 to the Survey (SOU 2008:108). The Long-Term Survey 2008 is well positioned from an international perspective According to the estimates in the base scenario, it would be possible to meet future expenditure pressure from an increased percentage of elderly in the population with no change in tax rates. is relatively well positioned in this respect compared with other industrial countries with similar demographic trends. According to the , the reforms that followed the financial crisis in the early 1990s have helped put in this relatively good position.206 implemented a number of structural reforms at that time: a stricter fiscal policy framework was implemented, some parts of the public sector were downsized and markets such as electricity and telecommunications were deregu- lated. The pension reform at the end of the 1990s is another reason why is relatively well equipped to cope with the demographic challenge.207 Despite this more positive picture, it may be more difficult for than for other countries to further strengthen public finances by increasing employment. Unlike many other industri- alised countries, has no large unused labour force potential in the form of women who are not yet in the labour force. but the financing problem will increase in the long term Despite good position from an international perspective, there is good reason to delve more deeply into the future financing of the welfare systems. The estimate in the Surveys base scenario implies that coverage will remain unchanged – in terms of quantity and quality – of welfare services per person. There is thus no room for growth in the welfare services. Growth in public consumption averages 0.7 per cent a year compared with an estimated growth in private consumption of 3.1 per cent a year until 2030. Figure 7.2 shows how this growing gap develops until 2050 under the base scenario. specifically it shows the cost of caring for the sick and elderly in relation to private consumption, assuming that the former grows at the pace warranted on demo- graphic grounds. If tax rates are unchanged, tax-financed consump- tion of health and elderly care will decline somewhat as a per- 206OECD []. 207NBER [2006]. The Long-Term Survey 2008 centage of GDP. At the same time, economic growth makes possible a substantial increase in private consumption as a percentage of GDP. The higher standard of living in the years ahead will probably create tension between the desired coverage and quality of the welfare services and what is possible to provide without any change in the tax rates. Figure 7.2 Public and private consumption of health and elder care as a percentage of GDP Health care and elder care (left axis) Private consumption (right axis) Note: Consumption is shown in volume terms (fixed prices), a measure that better illustrates how standards develop in public consumption. Current prices include increases in wage costs which to varying degrees are matched by higher productivity in public and private production. See also section 7.2.2. However, current prices are relevant in reflecting the development of total actual costs in the public sector. Source: Appendix 1 to the Long-Term Survey 2008 (SOU 2008:108). 7.1.2Tax financing limits additional resources Historically, an increase in the tax ratio has been able to some extent to meet an increase in the demand for welfare services. In the 1960s and 1970s, when the large expansion of the welfare systems occurred, the tax ratio increased sharply from just under 30 per cent to over 50 per cent of GDP. The tax ratio thereafter has The Long-Term Survey 2008 remained at about 50 per cent. In 2007 the tax ratio fell to 47.9 per cent of GDP, owing to such measures as the introduction of the in-work tax credit, the abolition of the wealth tax and tax relief in the form of a reduction in the tax take from the property tax.208 An increase in demand is not normally seen as a problem in a market, but tax financing involves special conditions. It means that there is a limit on how high the tax can be without the tax take leading to excessive inefficiencies. Taxes may give rise to tax wedges whereby resources are not used in an efficient . International mobility of tax bases is also an obstacle to tax increases. However, it is difficult to specify exactly at what level the tax ratio gives rise to problems with falling tax revenues and excessive inefficiencies in the economy. Distribution and efficiency are the underlying reasons for tax financing Welfare services are financed by taxes and supplied free of cost – or for a low fee – partly for reasons of distribution. The aim is that all who need these services will be guaranteed them regardless of their ability to pay. Also part of this principle is that all citizens are to have equal access to welfare services of equal quality. There are also efficiency arguments that justify tax financing since there are external effects linked to some welfare services. This applies, for example, to education, which is expected to have a favourable impact on economic development in various ways.209 There are also external effects from health care since a healthy citizenry is positive for society in general. It leads to less spread of infections and a larger labour supply. There are also insurance arguments for financing health care and social services with taxes. Some people are sick more often and more seriously than others. State subsidies distribute the costs more evenly. There are therefore good, and from an economic perspective reasonable, reasons for financing a large part of these services with taxes. The downside is that this form of financing makes it more difficult to expand the supply of services at the same pace as the increase in demand. In the preceding Long-Term Survey, the possibilities of gradually raising the tax take in order to increase 208Government communication 2007/08:101. 209For a review of this research, see , A. & , M. [2005]. The Long-Term Survey 2008 public sector resources were discussed.210 The opinion expressed in the Survey was that a steady rise in the tax take could not finance the growth of the welfare services in the long term since it would have negative effects on the labour supply. The Long-Term Survey 2008 does not see any reason for taking any other position.211 7.2Costs will probably increase more than in the base scenario The base scenario is not a forecast of the demand for welfare services in the years ahead but rather only an expression of what unchanged tax rates are capable of financing. Under the base scenario, revenues will be sufficient to finance a growth in demand in line with population trends. However, indications are that the cost of welfare services may be expected to increase more than in the base scenario. In the last two decades, the cost of the welfare services has risen substantially more than warranted by demographic trends. Many welfare services are labour intensive activities, which make it difficult to limit cost increases by increasing productivity. In addition, there is a risk that personnel shortages in the public sector may help drive up wage costs in the years ahead. It is difficult to judge how health trends among the elderly will affect the cost of health care and social services. The elderly certainly appear to be healthier, but the cost of treatment will also increase as new methods of treatment become available. 210The Long-Term Survey 2003/04 (SOU 2004:19). 211Estimates by the Authorities[2002] have shown that it would require annual increases in the local government tax of 0.35–0.4 percentage points to enable local government consumption to increase as rapidly as private consumption. The calculations are simplified and do not include the impact of higher taxes on the labour supply. The Long-Term Survey 2008