Taran Fæhn*, Karl Jacobsen*, and Birger Strøm

Figure 7: Impact estimate B: Allowance purchases abroad, in million metric tonnes CO₂ equivalents


While the national allowance price enables climate policy targets to be achieved for domestic emissions, the international commitments meet the Norwegian targets Norway has assumed over and above allowance purchases. Figure 7 depicts the evolution of allowance purchasing in the EUETS markets and via the flexible mechanisms.
To fulfil EUETS commitments, the estimates show that the domestic cuts made by firms will be too small in the pre-2013 phase. After that time, however, domestic reductions will more than meet commitments and Norwegian firms will be in a position to sell emission rights on the EUETS market. Norway’s national target for global contributions requires however more substantial cuts than the national ceiling provides for. The government must therefore purchase emission rights via flexible mechanisms. In 2020, the self-imposed ceiling will require purchasing more than 13 million metric tonnes CO₂ equivalents via these mechanisms, and at a price which will likely be in the same league as the EUETS allowance price.
Social abatement costs

The cost of fulfilling the Climate Agreement equals a cut in welfare of 0.23 per cent. The leading component of welfare costs in Estimate B is costs associated with adaptive steps in firms and households to cut emissions. The marginal cost of these changes, that is the cost of reducing the final tonne, is represented for each year by the estimated national real allowance price. Its path is shown in Figure 5. It rises over time with increasing emission reductions. By 2020, the real allowance price reaches 1,528 NOK/metric tonne CO₂ equivalents.

Although firms sell EUETS allowances for much of the period up to 2020, the real value of the total allowance acquisition for the country as a whole is positive and represents macroeconomic costs. The annuity value of total allowance trading equals about 20 per cent of the total macroeconomic costs.
Since the emission prices paid by the firms for residual emissions will rise considerably in time, more government revenue will be generated by the mechanisms in this estimate than in scenario I. When this additional revenue is fed back into the economy, employers’ social security contributions fall by around 30 per cent relative to the reference path. This helps bring about higher real wages and higher labour supply and employment of between a ½ and 1 per cent. This translates, as explained above, into welfare gains.
We see macroeconomic gains as resource use in the economy shifts away from the process industry, because of their relatively low macroeconomic marginal returns. The scaling back of the industry will proceed at an even faster pace in this estimate than in Estimate A, where we only had the effects of EUETS. The most significant impact is observed in the chemical raw material industry and metal production, where activity levels and jobs fall by 39 and 28 per cent respectively.