Politicians of all stripes have argued for years that high carbon taxes are harmful to economic growth. This assertion needs to be examined, and Sweden is an example that warrants a closer look. According to the IMF’s Fiscal Monitor, Sweden was one of the earliest adopters of taxes explicitly tied to carbon emissions. In 2019 it had the highest carbon taxes in the world by a wide margin, at US$127/t CO2e.
Many factors affect GDP growth, and carbon tax policies are not applied evenly to all sectors of the economy, so it is challenging to attribute causal links between them, especially in the short term. Fortunately, Sweden’s policies date back over 30 years, and the trends are clear. By 2017, Sweden had reduced GHG emissions 26% compared to the 1990 baseline set under the Kyoto Protocol, significantly better than the average of OECD countries. Over the same period, its GDP growth was 78%, well above the OECD average.
While data for the same timeframe are not readily available for all countries, the OECD does have normalized data for GDP (2000-2017) and GHG emissions (1990-2012). In the figures below, the white zones contain data from the 2000-2012 period. The blue zones on the left figure contain GDP data from after this period and on the right figure contain GHG data from before this period.
Sweden substantially outperformed the average of OECD countries in GDP growth as well as GHG emissions reduction. This is a clear demonstration that carbon pricing does not adversely effect growth. In fact, the right policies achieve their intended objectives and accelerate growth. Yet another clear signal that it’s high time for countries to increase their climate ambition. #ClimateAmbition