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The transition of Norway’s fossil fuel practices to a cost-efficient greener model
The transition of Norway’s fossil fuel practices to a cost-efficient greener model
Kester Ratcliff
Nathan Rueche
By Kester Ratcliff, Nathan Rueche
Mar 13 2022 · 12 min read

Energy Voices
Oil & Gas · Sustainability · Energy Transition

Norway is a signatory to the Paris Climate Accords, an agreement that aims to prevent global temperatures from rising higher than 1.5 degrees. Although a small nation, Norway is the world’s 14th largest oil-producing country and the 8th largest producer of natural gas.[1]

At COP 26, Norway released its enhanced Nationally Determined Contributions (NDC’s), essentially a roadmap for how it intends to reduce its emissions in line with the Paris Agreement. Norway has pledged “to reduce emissions by at least 50-55 per cent compared to 1990 levels by 2030”. According to Climate Action Tracker, however, ‘Norway will not be able to reach its 2030 target[2], as GHG emissions are projected to reach 44-45 MtCO2eq by 2030 or around 13-15% below 1990 levels.[3]

With much of Norway’s economy built around the exportation of fossil fuels, it is hard to comprehend how the country can stay in line with the 1.5-degree target, whilst simultaneously maintaining a strong export-oriented economy. Remaining below 1.5 degrees seems increasingly unlikely, especially because Norway has outlined in the 2021 ‘White Paper’ that oil drilling will continue until 2050. Norway’s reliance on fossil fuel exports must be addressed[4], especially because demand for oil will eventually peak and decline; how rapidly this decline will occur has yet to be established.

Background and current policies

The oil and gas sector in Norway is one of the most taxed sectors in the country. In addition to the EU Emissions Trading System (ETS), the oil and gas sector is subject to policy instruments and measures, such as CO2taxes. The current policy comprises CO2taxes on [5]

petrol, mineral oil, domestic use of natural gas and petroleum activities on the continental shelf. In 2019, the average tax per tonne of CO2 emitted was NOK 401.5 (EUR 40). [6] [7]

Norway is on the way to meeting neither, the Paris Agreement’s targets or reducing its GHG by 55% in 2030 and by 90-95 % in 2050 from 1990 levels. The current policy strategy is not strong enough to disincentivize Norway in divesting from oil and gas [8], given the major role they play in Norway’s economy, making up half of the country’s net exports. In 2021, the total export value of oil and gas was equal to NOK 333 billion (EUR 33.5 billion)[9]. If burned, the fossil fuels exported from Norway in 2019 would represent about 450 million tons of CO2.[10]

Having said that, the Norwegian Ministry of Climate and Environment is willing to apply new taxes if the country does not meet its pledges. However, Norway’s electricity is almost completely generated by renewable energy and its fossil-fuel activity is related to exportation[11]. Adding a new tax on oil and gas activities on the national level might not be relevant.

The aim of this policy proposal is to provide two cost-efficient policy recommendations that will help Norway phase out fossil fuels and replace them with a greener alternative. The two policies are interrelated as the first measure will create a direction for the second.

Policy recommendation 1: Taxing barrels

Norway is a major actor in global GHG emissions due to its intensive oil and gas activities. In 2019, about 200,000 people in Norway were employed in the petroleum sector. The Norwegian Petroleum Directorate acknowledges that the production of oil and gas will peak in 2035-2040 [12]. As fossil fuel’s assets will become stranded (no longer generating an economic return)[13], Norway should keep investing in renewable energy to create new jobs and move towards a greener economy.

Taxing exporters of oil and gas barrels would facilitate this transition as well as streamline a new direction: carbon emission accounting overseas. This is a process in which companies assess their GHG emissions related to supply-chain, import and export. This approach can take two forms under our proposal:

A Direct tax on barrels, Adding a tax for each barrel that will be exported. This tax would provide an alternative for oil and gas companies to benefit from the green transition.

B Alternative investments, Providing oil and gas companies with investment opportunities to finance renewable projects within the country. The investment price should be similar to the tax on barrels.

To approximately estimate how much this tax could bring to the Norwegian government per year, we use:

a. Average tax price per tonne of CO2 → EUR 40

b. Average CO2 emission per 42-gallon barrel → 333 kg of CO2 [14]

c. Average tax price per tonne of CO2 for a 42-gallon barrel → 33.3% of EUR 40 = EUR 13.32

d. Production of oil liquids per day multiplied by a year (crude + natural liquefied gas): 2,000,000.00 * 365

→ (13.32 * 2,000,000.00) * 365 = EUR 9,723,600,000

Norway could generate about 10 billion euros through this policy measure. This revenue can be injected into the sovereign wealth fund for the purpose of the second recommendation.

This policy would be implemented in collaboration with three Norwegian Ministries: The Ministry of Finance in charge of the tax schemes, the Ministry of Petroleum and Energy in charge of the policies in the oil and gas sector as well as the Ministry of Climate and Environment, which is responsible for the cross-sectoral coordination and implementation [15]. This measure could be applied under the 21 December 1990 CO2tax Act [16].

Limitations

This tax will be applied to only a certain percentage of oil and liquefied petroleum gas (LPG). 95% of gas is transported through a pipeline network and 5% is exported in barrels [17]. In 2018, 20% of crude oil was transported via a pipeline network whereas 80% was exported in tankers [18]. This tax will be applied to approximately 5% of the gas and 80% of the oil.

European Companies are not required to disclose GHG emissions related to import/export. The European Commission mentioned that “Companies should, where appropriate, consider disclosing GHG emissions”. The implementation of this policy will depend on whether or not Norway is willing to apply the measures to companies drilling inside its borders [19].

Policy recommendation 2: Subsidising foreign investments

Providing an economically sustainable alternative to fossil fuel exports is vital to both Norway’s transition away from fossil fuels and bringing the country’s emissions in line with the Paris Agreement. Norway is particularly suited to a transition centered around renewable energy as the country has the largest sovereign wealth fund, a well-educated workforce, and the strong democratic institutions necessary to implement such a transition. As the Norwegian Government recently outlined, “Norway currently has the lowest power prices in Europe, but also far lower costs associated with the operation of the power system, than most European countries”. Norway also has a surplus of renewable energy, generated mainly through hydropower and wind farms, which is exported and sold across the Scandinavian power grid [20].

With the foundation of a renewable export-oriented economy in its infant stage, we argue that significant investment to develop the renewable industry could be hugely lucrative for Norway. Our policy 2 suggests that Norway should utilise its sovereign wealth fund to subsidise companies, both domestic and foreign, to accelerate the development of renewable energy projects and improve Norway’s transmission network. An injection of money from Proposal 1 on implementing a barrel tax will further increase the likelihood of sovereign wealth investment.

This is in line with the energy transition outlined in the White Paper, which suggests Norway is already considering corporate investment into licensing renewable projects such as wind farms in the Utsira North and Southern North Sea. Our suggestion of utilising the sovereign wealth fund to subsidise investment will accelerate the development of the renewable-exportation market and thus provide a sustainable alternative to fossil fuel exportation [21].

It is important to note that the successful generation and exportation of renewable energy relies not only on the means of production but also the efficiency and scale of the transmission network. As the White Paper reports, “a common Nordic power market and power exchange with other countries through foreign cables is vital for improving exportation efficiency”. With a moderately efficient Scandinavian power grid in place, alongside new power cables connecting the UK and Germany to Norway in development [22], the foundations of a strong renewable-exportation market are strengthening [23]. To speed up the development of the transmission network, we further advise the sovereign wealth fund be utilised for subsidising corporate investment in building new electricity cables to mainland Europe; it should also fund corporate investments that improve the efficiency of the Scandinavian grid, focusing, for instance, on heat loss prevention. Improving the connectivity and efficiency of Norway’s transmission network will help the country efficiently export its surplus energy supply to a larger market and thus enhance its competitiveness in the renewable energy market.

In addition to facilitating a quick renewable energy transition for Norway, this policy proposal has another vital strength. The proposal has the potential of encouraging the development of new electricity-dependent industries. Through digitalization, robotisation and the use of new technology that requires intensive electricity, Norway can develop new industries such as the “production and use of hydrogen, offshore wind power, CO 2 management, battery production or other businesses where access to clean renewable energy is a competitive advantage”.[24] These industries have the potential to further strengthen the economy and act as another alternative income to fossil fuel exportation.

Limitations

Improving the infrastructure of the Scandinavian grid and developing new power cables to mainland Europe will depend on multilateral agreements among European states. Norway will need to provide incentives to agree upon the development of this transmission infrastructure, focusing on the mutual economic gain that the states involved will receive. With many mainland European states having an inferior renewable capacity to Norway and in need of renewable energy to counteract potential dips in domestic energy supply, we do not conceive that it will be difficult to incentivise these states to agree to transmission network improvements.

Assumptions

The Energy Charter Treaty (ECT), poses a potential threat for the green transition as it allows companies to sue governments that undertake policy measures to phase out the fossil-fuel sector. As the treaty has been discussed at COP26, we believe a consensus can be met between country members and the Energy Charter Secretariat[25].

We assume that the government is willing to use the sovereign wealth fund to attract foreign investments. The government will most likely accept to add new taxes because it sees this measure as the most efficient way forward [26].

By looking at countries’ enhanced NDCs and pledges, we believe that governments are on a path towards a greener economy. At COP26, countries such as the UK or USA decided to divert their fossil fuels assets to low-carbon investments. This is encouraging for Norway when it comes to keeping investing in renewable energy, even though the country already has an abundance of power available [27]. We assume that the government understands there will be an increase in the overall demand for renewable energy.

Norway faces grid network issues because the country is connected to a Scandinavian network. This results in limits of connectivity with continental Europe and therefore it can slow down renewable investment in the country [28]. We assume that multilateral projects will be undertaken between European countries to strengthen grid network connections, as the demand for renewable energy will increase.

The January 2026 EU’s carbon border tax will require importers and non-EU manufacturers to pay EUR 75 per metric of CO2 emissions. In light of this mechanism, we assume that Norway is expecting more carbon price tools on import/export in the future and therefore needs to prepare for this new dynamic [29].

Conclusion

This policy proposal acknowledges the reality that Norway will continue its practices of exporting fossil fuels as a major income source for the country in the coming decades . However, both policy proposals have suggested concrete ways in which the state reliance on fossil-fuel exportation can be reduced, whilst simultaneously providing a market based alternative to fossil fuel exportation in the form of accelerated investment in renewable energy. Strengthening the sovereign wealth fund through a barrel tax is vital to ensuring continued investment in renewable projects and improved transmission infrastructure. Not only will accelerated investment in renewable energy provide a profitable alternative to fossil fuel exportation, but it also gives Norway the opportunity to develop profitable green industries for the future. We argue that these policy proposals help to build the foundation of lucrative and sustainable societal and natural systems, whilst effectively reducing the country's emissions to better align themselves with the terms of the Paris Agreement and the discussions at COP26.

Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.

References

[1] Joe Lo, “Norway eyes expansion of oil and gas industry under policy proposal”, Climate Home News, 2021.

[2] Ministry of Petroleum and Energy, “White Paper”, Report. St. 36, 2021.

[3] Climateactiontracker.org. Available at: https://climateactiontracker.org/countries/norway/ [Accessed 6 December 2021].

[4] Ministry of Petroleum and Energy, “White Paper”, Report. St. 36, 2021.

[5] Norwegian Ministry of Climate and Environment, “Norway's Fourth Biennial Report”, 2020.

[6] Norwegian Ministry of Climate and Environment, “Norway's Fourth Biennial Report”, 2020.

[7] Norwegian Ministry of Climate and Environment, “Norway's Fourth Biennial Report”, 2020.

[8] Ministry of Climate and Environment, “Act relating to Norway's climate targets (Climate Change Act)”, 2021.

[9] Norwegian Petroleum Directorate, “EXPORTS OF OIL AND GAS”, 2021.

[10] Jesper Starn and Lars Erik Taraldsen, “Norway’s Oil Fields to Run on Green Power as They Export Carbon”, Bloomberg, 2021.

[11] Norwegian Ministry of Climate and Environment, “Norway's Fourth Biennial Report”, 2020

[12] Norwegian Petroleum Directorate, “Everything you need to know about Norwegian petroleum activities”, 2021.

[13] Norwegian Petroleum Directorate, “EXPORTS OF OIL AND GAS”, 2021.

[14] United States Environmental Protection Agency, “Greenhouse Gases Equivalencies Calculator - Calculations and References”, n.d.

[15] UNFCCC, “Update of Norway's nationally determined contribution”, 2020.

[16] Norwegian Petroleum Directorate, “Act 21 December 1990 no 72 relating to tax on discharge of CO2in the petroleum activities on the continental shelf”, 2021.

[17] Norwegian Petroleum Directorate, “EXPORTS OF OIL AND GAS”, 2021.

[18] Norwegian Petroleum Directorate, “EXPORTS OF OIL AND GAS”, 2021.

[19] European Commission, “Guidelines on reporting climate-related information”, 2019 20 Ministry of Petroleum and Energy, “White Paper”, Report. St. 36, 2021.

[21] Ministry of Petroleum and Energy, “White Paper”, Report. St. 36, 2021.

[22] Ministry of Petroleum and Energy, “White Paper”, Report. St. 36, 2021.

[23] Farmer, M., 2021. How Norway became Europe’s biggest power exporter. [online] Power-technology.com. Available at: https://www.power-technology.com/features/how-norway-became-europes-biggest-power-exporter/ [Accessed 6 December 2021].

[24] Ministry of Petroleum and Energy, “White Paper”, Report. St. 36, 2021.

[25] Jennifer Rankin, “Secretive court system poses threat to Paris climate deal, says whistleblower”, The Guardian, 2021.

[26] Norwegian Ministry of Climate and Environment, “Norway's Fourth Biennial Report”, 2020.

[27] Fiona Harvey, “Twenty countries pledge end to finance for overseas fossil fuel projects”, The Guardian, 2021.

[28] Mattew Farmer, “How Norway became Europe’s biggest power exporter”, Power Technology, 2021.

[29] Tim Figures et al., “The EU’s Carbon Border Tax Will Redefine Global Value Chains”, Boston Consulting Group, 2021.

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Kester Ratcliff
About the authors

Kester Ratcliff is now pursuing a MSc in Environment, Politics and Development at King's College London, with a keen interest in sustainability and environmental policy. He graduated from the University of Kent with a BA in Politics and International Relations.

Nathan Rueche

Nathan Rueche is pursuing an MSc in Climate Change: Environment, Science and Policy at King’s College London. He graduated with an MSc in Law, Economics and Management at the Paris XII University. His research interests cover climate change, environmental economics and policymaking.

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