Norwegian abatement targets for 2035: A CGE analysis
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2024-11Metadata
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Abstract
The Norwegian government is in the process of specifying abatement targets applying to the period
between 2030 and 2050 and will submit new pledges to the United Nations in 2025. To inform these
processes, this report examines and discusses the costs and macroeconomic impacts on the
Norwegian economy of introducing different greenhouse gas (GHG) emissions targets and target
structures for 2035. A cost-effective implementation is assumed, where the abatement is achieved
by replacing the current CO2-tax system and GHG price in the EU Emissions Trading System (EU ETS)
with uniform emissions pricing. The analysis is conducted by means of Statistics Norway’s
computable general equilibrium (CGE) model SNOW-NO of the Norwegian economy. With a
perspective of more than ten years, we consider an equilibrium approach to be relevant to capture
the long run adaptation to climate policy. The CGE model allows us to study the interaction among
many simultaneous measures and how they interplay with pre-existing distortions. We also study
the impacts of recycling the revenue from the emissions pricing in a way that dampens pre-existing
distortions, namely reduces the labour taxation.
The analysis is split into two phases. In phase 1, various 2035 policy scenarios are simulated and
compared to a common reference scenario, with a focus on constructing economy-wide marginal
abatement cost curves for two different target structures. In the first, Policy i), various economy wide targets for 2035 are to be met solely through domestic abatement measures. In the second,
Policy ii), the abatement is split into two sub-targets, one for emissions currently covered by the EU
ETS, and one for remaining emissions, which are covered by EU’s effort-sharing regulation (ESR). The
Policy ii) target structure allows for purchases of allowances in the EU ETS, if cost effective. However,
it disregards similar cross-border options for the abatement in the ESR-covered sector. This is
motivated by limited practical access in the current cooperation with the EU.
In the second phase of the analysis, we examine the macroeconomic and industry-specific
implications of one of the policy scenarios from the first phase in detail. The selected scenario has a
GHG abatement target of 60 per cent compared to the 1990 level which is to be achieved solely by
domestic abatement, i.e., by conducting Policy i). The selected policy scenario is analysed given two
different recycling options for the revenue from emission pricing: a lump sum, non-distortive
transfer back to the household sector, and by reducing labour taxation. The latter option illustrates
how the revenue from carbon pricing can be used to reduce distortive taxes, thus obtaining a
double dividend.
The main results of the analysis are that the uniform emission prices span from 2,900 to 12,300 NOK
(in fixed 2022 prices) per tonne of abated GHG emissions across the simulated 2035 policy
scenarios. We observe that, for the same economy-wide abatement target of 65 per cent cut relative
to 1990, the marginal abatement cost (MAC) is more than doubled if Policy i) is chosen instead of
Policy ii). Further, in the detailed assessment of the selected 60 per cent abatement scenario in the
second phase, we find that revenue recycling via reduced labour taxation can bisect the social cost
as compared with the lump-sum recycling case. This reflects that in the lump-sum case, the
interaction between the GHG emission price and the pre-existing labour taxation adds significantly
to the social cost. The explanation is that labour taxation encourages households to choose more
leisure than socially beneficial, and when an emission price is introduced, even more leisure will be
preferred by the households. The driver behind increased leisure is a drop in the real wage and,
thus, in the marginal benefit of working.