In the September 2014 national election, the radically anti-immigrant Sweden Democrat party made substantial electoral gains (+29 seats, out of 349) at the expense of the governing center-right coalition of four parties (collectively, they lost 31 seats). The coalition lost its majority, but no single party or alliance of parties had won it. Every other party refused to cooperate with the Sweden Democrats, due to their anti-immigrant stance. In theory, they could be ignored, since they only held 49 seats. But the only governing coalition that could be formed without them was a minority government consisting of the Social Democrats (who are left-wing), which had gained one seat, and the (anti-nuclear) Green Party, which had gained zero seats. Collectively, they hold only 40% of the seats in the current parliament. Hardly a mandate for sweeping change.



Immediately after taking office, this coalition floated a proposal to ratchet up the existing tax on the thermal capacity of Sweden’s nuclear reactors, from 12,648 kronor per MWth per month up to 14,770 kronor per MWth per month. That’s a 16.8% increase. To put that in more intuitive terms, that’s an increase from $53.6 million per year to $62.7 million per year for a single 1000 MWe reactor. Nuclear power plant owners immediately made it clear that this increase would force earlier retirements and fought the law in court with an argument that it violated EU free market requirements. A year later, they lost, and the tax was confirmed. The official retirement pronouncements quickly followed:

These retirements sum to a staggering 2,800 MWe of generating capacity. So here’s the question that popped into my mind when I read the news: will Sweden take in more tax revenue or less tax revenue as a result of this tax increase? Obviously, so long as all the currently plants continue operating, their owners are liable for the tax and will be forced to pay it, providing more tax revenue to the Swedish treasury. But the more interesting question is in the long-run, after the retirements. So I did the math. To keep it simple, I assumed any corporate income taxes no longer paid by the retired reactors would be made up for by corporate income tax paid by “whatever source of energy replaces nuclear” (mostly likely, nearly entirely fossil fuels). To keep it conservative, I ignored the loss of tax revenue that would occur, due to subsidies, if any additional renewables are built to bridge the gap (above and beyond the level of renewable deployment that is already mandated to occur). I also did not examine the fiscal impact on the nuclear waste trust fund, for the sake of simplicity, but there is quite a bit of concern that these retirements will cause it become underfunded.



My math shows an appalling result. Sweden is on the wrong side of the Laffer Curve. This 16.8% tax hike will reduce the tax’s long-run revenue by 17.8%. Perhaps this will prove wrong if Swedish utilities go ahead with new nuclear build as planned, but the current political and tax environment seems highly unfavorable. I would not be surprised if those plans are abandoned.



I should mention, for those interested, that there is substantial dispute in the economics literature over whether the Laffer Curve is a realistic model for the personal income tax, and more generally, where various national tax systems are located on the Laffer curve. To the left of the apex of the curve means raising tax rates will raise revenue; to the right means raising tax rates will lower revenue. (The consensus among economists is that the United States would not reap higher tax revenues from lower tax rates.) Regardless of the politics of the Laffer Curve, I think the case of Sweden’s nuclear capacity tax is a textbook illustration of the general model.

