The challenge
Sweden needed to cut carbon emissions without damaging its economy.
The case
Sweden introduced a carbon tax in 1991 and raised it steadily, to over 100 euros per ton of CO2, among the highest in the world. To keep it politically acceptable, it was introduced alongside cuts to other taxes, and some industries initially got lower rates. Around the same time, Sweden also added value-added tax to transport fuel. A study comparing Sweden with a synthetic control built from similar OECD countries found that after the carbon tax and the fuel VAT were introduced, carbon dioxide emissions from transport declined almost 11 percent, with the largest share due to the carbon tax alone.
Why it worked
A predictable, gradually rising price on carbon changed behavior without derailing the economy. Pairing it with tax cuts elsewhere helped it survive changes of government.
Sources
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