An international CO, tax would reduce the Norwegian resource rent (oil, gas) by 15%. A combined CO,- and energy tax would reduce the exports of natural gas and hydro power compared to a simple CO, tax on fossil fuels, and an environmental tax on nuclear energy.

In Norway, hydro power has 67% of the heating market, and oil has 17%. Even during periods when oil is cheaper, electricity tends to substitute it. The deregulation of the power market entailed a downward pressure on power prices. A CO, tax of lO$/barrei further weakened the heating oil market. This tax has an adverse effect on the environment. The demand for oil products will fall, and Norway becomes a net importer of coal generated electricity. 1 TWh of hydropower exported to replace coal power would reduce CO, emissions by 0.9 million tonne. 1 TWh consumed domestically to substitute heating oil would reduce emissions by 0.3 million tonne. Some Norwegian hydro power should therefore be exported to thermal systems, rather than being used domestically to further electrification.

A harmonized CO, tax would entail exports of Norwegian hydro power and thus reduce the overall emissions. A harmonized tax is therefore preferred to combined tax. This also implies a cost effective reduction of the CO, emissions. 1. BACKGROUND AND APPROACH 1.1. Noway as energy producer With a population of a mere 4 million, Norway was the 8th largest producer of oil and gas in the world in 1992 and has more than half of Western Europe's proven reserves. Electricity production is based 100% on hydro power. Due to a number of years with high precipitation and mild winters, recent production has been high. Together with a decline in economic activity in industry, this has resulted in high export levels, mainly in the form of spot electricity at low prices. Production during a normal year is 108 TWh, whereas production during 1992 was 9% higher. Export was 10 TWh. A development potential of 20 TWh remains within the limits the authorities have set based on environmental considerations. 1.2. Norwegian energy market Energy consumption in Norway has undergone considerable change. Electricity is used to a steadily increasing extent for space heating. Oil consumption has dropped significantly, whereas consumption of firewood has remained constant.

During recent years, two large developments have further weakened the competitive position of oil.

First, the electricity market has been deregulated.

Owners of the transmission and distribution networks are obliged to make their system available for power traders (buyers and sellers). In principle, the customer should have the opportunity to buy power from any level of the supply system. Thus, competition is encouraged for production and trading.

Natural mon

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