The IMF Wants the World to Embrace Sweden's Ineffective Carbon Tax
The IMF recently released a new study pushing for governments around the world to implement “a global carbon tax” that would rise to $75/ton by 2030, in order to limit global warming to at most the “safe” ceiling of 2 degrees Celsius. In order to reassure the alarmed reader that such a carbon tax is feasible, the IMF’s blog post on the new study explained, “Sweden has set a good example. Its carbon tax is $127 per ton and has reduced emissions 25 percent since 1995, while the economy has expanded 75 percent since then.”
In a future article I will dissect the IMF proposal more thoroughly, but in this initial post, I will focus just on the example of Sweden. Since the IMF writers themselves have held it up as a “good example” of how carbon taxes work, by all means let’s analyze the situation more closely. We’ll see that the United States has had comparable “success” in reducing emissions while maintaining economic growth, even though it has had much more modest government curbs on greenhouse gas emissions. The case of Sweden, far from proving the benefits of the IMF’s desired global carbon tax, if anything shows that a new carbon tax will be mostly pain and little gain.
The Carbon Tax in Sweden
The government of Sweden itself is very proud of its carbon tax, which was introduced in 1991 at a level of SEK 250 (about 24 euros at that time), and which has risen to SEK 1180 in 2019, which is about 114 euros or $126 at current exchanges rates. The Swedish government posts this graphic that illustrates the same claims made in the IMF post:
Source: The Government Offices of Sweden
The moral is clear: Even with what seems to be a pretty aggressive carbon tax, the economy still expanded 78% between 1990 and 2017, while greenhouse gas emissions are down about a quarter. Doesn’t this prove the naysayers wrong? With the appropriate political will—so it seems—you can get significant emissions cuts without destroying the economy. Take that, Fox News!
Sweden vs. the United States
But hold on a second. What if we run the same metrics on the United States?
Well, from 1990 through 2017, its real GDP expanded 93 percent, compared to Sweden’s 78 percent.
Now it’s true that the U.S. didn’t experience a drop in emissions, but even though output almost doubled, emissions were just about flat during this time period, as this chart from the EPA shows:
Source: Environmental Protection Agency
Specifically, of the greenhouse gases tracked by EPA in this chart, total annual emissions (in CO2-eq terms) from 1990-2017 only increased 1 percent.
Does that surprise readers? I bet most Americans had no idea that US annual contributions to atmospheric greenhouse gases has been roughly flat for two decades running.
Combining the Measures
So now let’s ask how Sweden and the U.S. did, when we combine the two metrics. That is, we will ask how well Sweden and the U.S. did in reducing greenhouse emissions per unit of real GDP.
In the case of Sweden, recall that its emissions dropped 26 percent while its economy grew in real terms by 78 percent. So Swedish emissions/GDP dropped 58 percent from 1990 to 2017.
In the case of the United States, its emissions increased 1 percent while its real GDP increased 93 percent. So American emissions/GDP dropped 48 percent.
And there you have it: Despite Sweden’s relatively draconian carbon tax that now stands at $126/ton—the equivalent of about $1.10 per gallon in extra tax at the gasoline pump—its progress in reducing emissions while balancing economic growth hasn’t been much better than the United States’ experience. To repeat, Sweden in the last two decades has reduced its emissions/output by 58 percent, while the US has reduced them by 48 percent.
Other Countries
We can get a better perspective by looking at the World Bank’s charts, showing CO2 emissions divided by economic output. (Note that these World Bank charts just include carbon dioxide, not other greenhouse gases, and also that their economic baselines are possibly different than in the calculations we just made, but what’s important is the relative progress among different countries. Also, the World Bank data only goes through 2014.)
First, we’ll have the World Bank generate a chart just showing Sweden, the United States, and also Germany, which has a reputation of being a strong fighter against climate change and a responsible global citizen:
Source: The World Bank
So yes, the United States emits more carbon dioxide per unit of economic output than Germany or Sweden. (This isn’t surprising, when you keep in mind how big the U.S. is, and how much more its people would like to drive, compared to Europeans.) But on the other hand, it has also made the most progress of the three countries in reducing that measure, measured in absolute terms.
Even if these three government “did nothing” more and history repeated itself, the gap would probably continue to shrink. The reason the United States would still emit more (in absolute terms) than Sweden or Germany, would be that its economy produced more stuff.
What’s really interesting, though, is when we add China to the mix. Now look at the World Bank chart:
Source: The World Bank
Once China is included, we see that the United States looks even more like Germany and Sweden. It also shows why, if environmental activists are going to be lecturing governments on restraining their emissions, they should be focusing on China, where there are the largest “gains” still to be had.
Conclusion
This post might seem very defeatist to the climate activists. And yes, I do think the case for a carbon tax is weak. On the other hand, my post should be very optimistic for those who think climate change is a serious problem, but who aren’t wedded to political solutions. As the above charts show, normal economic growth naturally brings down emissions per unit of output, and the “improvement” has been faster in the U.S. and China than it has been in the most regulated Western countries.
To get a better sense of why Sweden, for example, hasn’t seen sharper emissions drops but also hasn’t seen an economic collapse, consider this table from page 3 of the IMF study:
Source: The International Monetary Fund
So even though it currently has a carbon tax of about $127 (using their currency conversions), notice that that relatively draconian tax only applies to 40 percent of Sweden’s greenhouse gas emissions. In terms of textbook theory, it would make more sense—both economically and in terms of reducing humans’ carbon footprint—to apply a lower carbon tax rate to a wider base. And yet, political realities have limited the effectiveness of the carbon tax, even in Sweden.
Despite the IMF’s claims to the contrary, the case of Sweden actually shows that a political “solution” to climate change is ineffective. Even though certain segments of the Swedish economy have been slammed with a punitive tax, overall progress on reducing emissions while maintaining growth has been only modestly better than in the United States. And no matter what the West does, the real action on greenhouse gas emissions in the coming century will occur in China.
All in all, the case of Sweden reinforces my overall view, that human-caused climate change, though something to be monitored, is not an immediate crisis. It is a very conservative, sensible strategy to foster general economic growth, with various teams of scientists working on different strategies for dealing with climate change should they be necessary decades (or centuries) hence.
Originally published at the Institute for Energy Research
Robert P. Murphy is a Senior Fellow with the Mises Institute. He is the author of many books. His latest is Contra Krugman: Smashing the Errors of America's Most Famous Keynesian. His other works include Chaos Theory, Lessons for the Young Economist, and Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) which is a modern distillation of the essentials of Mises's thought for the layperson. Murphy is co-host, with Tom Woods, of the popular podcast Contra Krugman, which is a weekly refutation of Paul Krugman's New York Times column. He is also host of The Bob Murphy Show.
