Avoiding adverse employment effects from electricity taxation in Norway: What does it cost?

Welfare analyses of energy taxes typically show that systems with uniform rates perform better than differentiated systems. However, most western countries include some exemptions for their energy-intensive export industries and thereby avoid this potential welfare gain. Böhringer and Rutherford (1997) find that uniform taxation of carbon emissions in combination with a wage subsidy preserves jobs in these industries at a lower welfare cost compared with a differentiated system. The wage subsidy scheme generates a substantial welfare gain per job saved. This study, however, finds that welfare costs are substantial when less accurate policy measures, represented by production-dependent subsidies, protect jobs in Norwegian electricity-intensive industries. The welfare cost per job preserved by this subsidy scheme amounts to approximately 60% of the wage cost per job, suggesting that these jobs are expensive to preserve. A uniform electricity tax combined with production-dependent subsidies preserves jobs at a lower welfare cost compared with the current differentiated electricity tax system.