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November, 2015

A key role for economic instruments in Nordic environmental policies

Fran Weaver

The Nordic Countries have a long history of applying economic instruments as a key element of their environmental policies. Their results show how such policies can change behaviour and reduce emissions, while also stimulating the economy.

Carefully targeted measures make it possible to combine environmental improvements with economic growth by creating opportunities for clean-tech businesses. Between 1990 and 2011 the Nordic region’s carbon dioxide emissions from domestic sources declined by 9% while total GDP rose by 55%.

Economic instruments are designed to correct market failures by adjusting the prices of goods and services so that they also reflect non-monetary costs such as environmental impacts, according to the principle that “the polluter pays”. The Nordic Countries widely apply all the main kinds of economic instruments, including “carrots” such as subsidies and “sticks” like targeted taxes, as well as emissions trading to reduce the cost of curbing emissions.

Especially when it comes to mitigating climate change, economic instruments can encourage and complement technological developments and programmes that promote energy efficiency and renewable energy, by changing the ways people use energy, goods and services.

Forerunners in carbon taxation

The Nordic Countries have particularly pioneered carbon taxes since the early 1990s, giving energy users incentives to improve efficiency and switch to low-carbon or renewable energy sources. Taxation levels on energy and especially on fossil fuels are generally considerably higher in the Nordic Countries than elsewhere in Europe. Norway, Sweden and Denmark also impose taxes and fees on emissions of sulphur dioxide and nitrogen oxides.

Norway taxes carbon dioxide emissions from offshore oil facilities, while Sweden is one of just two countries in the world where landing fees at state-owned airports are environmentally differentiated with regard to the nitrogen oxide emissions of different aircraft types.  

Such taxes are today applied in sectors not covered by the EU Emissions Trading Scheme (EU ETS), which is the main policy instrument for curbing greenhouse gas emissions in many key sectors across the Nordic Countries. Even though they are not EU-members Norway and Iceland have also implemented the EU ETS, which today is also applied in the aviation sector and in Norway’s offshore oil and gas industry.    

Favouring low-carbon cars

National road vehicle taxes across the Nordic region are widely based on emission levels, to favour low-carbon cars. Vehicle registration taxes are typically based on specific fuel use or carbon dioxide emissions. In Sweden, cars with low CO2 emissions are exempt from vehicle tax for the first 5 years, and given favourable tax rates thereafter. Such inducements help to boost fuel efficiency as well as the use of biofuels, hybrids and electric cars.

Norway leads the world in promoting the use of electric cars with more than 65,000 electric cars on the road, encouraged by tax breaks, free parking and exemptions from road tolls and ferry charges.

Sweden has additionally pioneered inner city road congestion tolls by imposing charges on most vehicles entering central districts of Stockholm and Gothenburg. In addition to reducing emissions, these schemes have other demonstrable environmental and aesthetic benefits for both cities.  

Combining sticks and carrots to shape energy use

Environmental taxes raise valuable revenue for national budgets. This can help to justify the use of public funds to promote greener behaviour among consumers and industry – for instance by heavily subsidising and enhancing public transport systems, or supporting conversions to renewable energy. 

Economic incentives such as feed-in tariffs can at the same time encourage renewable energy producers to invest in generation capacity for sources such as bioenergy or wind power, as demonstrated by Finland and Denmark. In Denmark a world record 39% of the country’s electricity was produced from wind power in 2014. 

Sweden and Norway contrastingly support renewable energy producers through a unique market-based green electricity certification scheme covering both countries.

Finland also supports energy efficiency improvements through a voluntary scheme where industries and other organisations conduct subsidised energy audits to identify possible energy savings, and then apply for support to facilitate the consequent energy-saving investments. A Swedish national investment programme focuses on renewable energy, energy efficiency, public transport, greener cars and local emission reduction initiatives.

Reducing waste and promoting biodiversity

Waste taxes have been progressively raised across the Nordic region to promote the reuse of materials and reduce landfill. Most of the Nordic Countries tax landfill waste disposal, while Denmark additionally taxes waste incineration. Ambitious deposit-refund systems applied across the region effectively promote the recycling of drink cans and bottles.

Denmark additionally taxes fertilisers and pesticides based on their environmental impacts, as well as taxing water use and releases of effluent into water to raise revenue for water protection measures.

In Finland’s forestry sector, innovative voluntary incentive schemes are applied to conserve biodiversity in privately owned forests. Meanwhile in Iceland’s key fishing industry a unique national fishing catch quota trading system is run to encourage marine conservation.  

Economic instruments are thus used by each of the Nordic Countries to address specific local and regional issues, as well as in more concerted responses to global problems. 

Working towards ambitious targets with progressive economic instruments 

A detailed report on The Use of Economic Instruments in Nordic Environmental Policy 2010-2013, was published by the Nordic Council of Ministers in 2014. The report emphasises how the economic instruments applied in the Nordic Countries’ energy, climate and environmental policies have been progressively toughened to enhance their steering effect with regard to national targets that are often considerably more ambitious than EU targets.

The report highlights how economic instruments can effectively change the behaviour of both people and companies. Environmental and energy taxes have particularly become key tools for reducing emissions and promoting environmentally friendly cars, energy savings and the use of domestic renewable energy resources.

Link to the report

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