Contents

This publication is also available online in a web-accessible version at https://pub.norden.org/nord2022-017.

Acronyms and abbreviations

Executive summary

The beginning of 2020 saw the sudden onset of the COVID-19 pandemic, a crisis which quickly overshadowed the climate emergency. As full or partial lockdowns took effect, unemployment increased, consumer spending decreased and industries beyond essential goods (e.g. aviation and tourism) were severely impacted.​^{[1]Hepburn et al., 2020} The narrative of recovering from the impacts of the pandemic by way of ‘building back better’ has dominated discussions on COVID-19 recovery. However, current efforts are lagging behind the Intergovernmental Panel on Climate Change's (IPCC) recommendation to keep global temperature increase well below 1.5–2°C above pre-industrial temperatures.

There is a strong case for COVID-19 recovery to simultaneously address both economic and climate targets, along with green transition targets more widely, through optimal co-benefits and policy design. For instance, in response to COVID-19, the Nordic countries developed recovery plans with significant acknowledgement of the green transition in mind (Figure 1).

Figure 1: Current status of green recovery in the Nordics^{[1]Global Recovery Observatory (GRO) tracking, 2022.}  (Source: South Pole, 2022)

The EU, including Denmark, Finland and Sweden, has identified the opportunity to “build back better” and has ensured that part of the NextGenerationEU (NGEU) Recovery and Resilience Facility (RRF) recovery instrument is aligned with its sustainable growth strategy. Norway and Iceland, through their proprietary recovery programmes, have also embedded 'green' measures/guidelines following the Nordic Vision 2030 objectives for a transition to a green, competitive and socially sustainable economy.

The Nordic countries have supported economic recovery through a wide range of financial instruments. With most of these instruments depending primarily on public funding, the financial burden for recovery has fallen mainly on governments. Some of the most frequently used instruments are presented in Figure 2.

Figure 2: Key financial instruments used in the COVID-19 recovery packages (Source: South Pole, 2022)

It is interesting to note that many Nordic private sector actors (i.e. financial and corporate) have simultaneously set more ambitious climate and green transition targets. However, in many cases, these changes in sustainability mandates have been driven by their clients and other key stakeholders more so than public sector recovery policies and measures. Recognising the appetite and readiness of the private sector should encourage the public sector to more actively support improvements to the green transition’s economic case and profitability, factors which the public sector is uniquely positioned to influence.

Taking a longer-term approach is crucial to ensuring that the green transition vision goes beyond COVID-19 to support green technological innovations that will have a long-term impact on the economy. Table 1 summarises some of the key barriers and solutions highlighted by Nordic stakeholders during interviews and focus group discussions.

Table 1: Barriers and solutions to a green post-COVID-19 recovery highlighted by Nordic stakeholders from the private and public sectors (Source: South Pole, 2022)

Several measures aligned with the solutions highlighted in Table 1 are being introduced and/or prepared in the Nordics, some through joint Nordic finance institutions, such as the Nordic Environment Finance Corporation (Nefco) and the Nordic Investment Bank (NIB), and others on a national level. For example, the Finnish Climate Fund, a state-owned special-assignment company launched in 2020,^{[1]https://www.ilmastorahasto.fi/en/} has been able to provide critical de-risking for multiple transformative new technology demonstration projects and industrial scale-up investments throughout the COVID-19 emergency.

There are also multiple successful case studies internationally that have leveraged private sector capital with lower amounts of public funding and which have replication potential across the Nordics, noting the common challenges identified. Some key examples mentioned in this study are presented in Figure 3.

Figure 3: International case studies leveraging private capital to support the green transition (case studies are presented in more detail in the final report, 'Financial instruments to support a green economic recovery post-COVID-19') (Source: South Pole, 2022)

There is significant potential for governments to better involve the private sector in recovery plans and further scale-up existing climate finance. Moreover, a longer-term approach to ensure that the green transition vision goes beyond COVID-19 will also be a crucial factor in realising long-term impact. Figure 4 summarises key guidelines for a green post-COVID-19 recovery through the optimisation of public funding used to mobilise private capital. This can be in the form of blended finance or de-risking private capital investments.

Figure 4: Recommendations for financing the green recovery (Source: South Pole, 2022)​^{[1]While policy and regulatory frameworks are essential to leveraging finance instruments, they are outside direct scope of this report.} 

Loan guarantees for green SMEs could be provided by the state to enable green SMEs to have access to commercial financing, particularly for clean technology ventures. The main advantage of this instrument is that it requires disbursement of public funds only in the case of default. It does not interfere with financial markets, and has the potential to mobilise private capital at scale to develop innovative new climate solutions.

Recognising the private sector’s appetite and the overall readiness of the private sector for green transition would also encourage the public sector to actively support improvements to the green transition’s economic case and profitability. In the long term, fiscal reforms (i.e. tax rebates and carbon taxes) are necessary to embed climate-related criteria in economic growth. Climate finance should be attentive to supporting green technological innovations and SMEs, including helping all industries become greener.

It is also important to track whether financial recovery packages reach the targeted stakeholders and have the desired climate impact and standardised measuring mechanisms. There is still rather limited information on tracking the finance flows of COVID-19 recovery financing. It is likely that information on green financing would only be available at a later stage, as green financial disbursement may be conditional on green targets being met. Government support for reporting mechanisms which enable (standardised) tracking and reporting of supply-chain emissions would be a tangible action to enable the private sector in the green transition and inform consumer choice. Furthermore, national and regional Nordic alignment with established, widely-used regional and international frameworks (i.e. the EU Taxonomy; the TCFD), would also aid in streamlining green transition action in the Nordics.

Finally, in parallel to the ambitious commitments of the Nordic countries, joint Nordic collaboration on policy and regulatory coordination, knowledge sharing and capacity building, and regional approaches to financing will be key in accelerating the green transition. Building on the groundwork of the Nordic ‘Vision 2030’ may help to encourage collaboration not only in each of the Nordic Countries (e.g. through national funding agencies), but also across the region (e.g. through NIB; Nordic Development Fund [NDF]; Nordic Environment Finance Corporation [NEFCO]) and extending to other countries that receive Nordic support. Cross-country, as well as sectoral and cross-sectoral cooperation, that does not hinder the innovation drive of a healthy competitive market, has already been positively received across the public, private, and finance sectors, according to the stakeholders interviewed for this report.

1 Introduction: towards a green recovery

1.1 Global stocktake: a green post-COVID-19 recovery?

The beginning of 2020 saw the sudden onset of the coronavirus (COVID-19) emergency overshadowing the climate emergency. As full or partial lockdowns took effect, unemployment increased (affecting 81% of the global workforce), consumer spending decreased and industries beyond essential goods (e.g. aviation and tourism) were severely impacted.^{[1]Hepburn et al., 2020.}

Momentum for climate action has slowed as a significant proportion of national budgets were allocated to the COVID-19 response and recovery. Despite the COVID-19 emergency, climate change remains an urgent issue. Indeed, the COVID-19 emergency has renewed the importance of climate action. The narrative of recovering from the impacts of COVID-19 by way of ‘building back better’ has dominated discussions on COVID-19 recovery in economically developed countries. However, current efforts are lagging behind the Intergovernmental Panel on Climate Change’s (IPCC’s) recommendation to keep global temperature increase well below 1.5°C to 2°C above pre-industrial temperatures. This is best illustrated by the expectation of the International Energy Agency (IEA) that energy-related emissions would rebound by 4.8% (over 1,500 mega tonnes of carbon dioxide equivalent [MtCO₂e]) as economies restarted in 2021, whereas due to growth in demand for coal, oil and gas,^{[2]IEA, 2021.} energy-related emissions in fact grew by 6% (to 36.3 Gt).^{[3]IEA, 2022.} This is the largest ever year-on-year increase in energy-related CO₂ emissions since 2010.^{[4]IEA, 2022.}

Finance is an important element in achieving green recovery and transition targets. ‘Green’ in this report refers primarily to all activities that have a positive climate mitigation or adaptation impact. These include actions that support the transition towards low-carbon and climate-resilient economies.^{[5]World Bank, 2021.} As encouraged by Article 2.1.c of the Paris Agreement, finance flows should be consistent with transitioning towards lowering greenhouse gas (GHG) emissions and climate-resilient development. However, the Global Recovery Observatory (GRO) reported that green recovery spending was minimal in 2020, with only 23.4% of recovery spending and 4.2% of total announced spending expected to contribute to GHG emission reductions.^{[6]O’Callaghan & Murdock, 2021.} The proportion of green spending from recovery spending has since increased to 31.2% (EUR 905 billion) to date.^{[7]GRO, 2022.} Further, an analysis by Hepburn et al. (2020) of COVID-19 rescue and recovery measures implemented globally indicates that only 4% of recovery policies are ‘green’, while 92% would maintain the status quo, with the remaining 4% likely to increase GHG emissions. Measures were primarily focused on ‘rescue’, i.e. to support individuals with their basic needs or in need of financial support; however, these rescue measures also included tax breaks and bailouts for emission-intensive industries.^{[8]Hepburn et al., 2020.} The pandemic’s impact on climate finance is also yet to be seen. According to the Climate Policy Initiative (CPI), the climate finance growth rate has been tepid in the last few years, and current investment levels fall short of limiting climate change to 1.5°C.

Recovery strategies adopted can have lasting consequences on reaching our climate targets.^{[9]Forster et al. 2020.} According to research by the IEA, governments are not building back better, yet.^{[10]IEA, 2021.} The IEA designed a sustainable recovery plan for actions to be taken from 2021 to 2023, resulting in an estimated reduction of 4.5 billion tonnes of GHG emissions in 2023. This plan targeted roughly EUR 933 billion of annual green government spending and mobilised investments. By October 2021, policies implemented globally due to the pandemic had only mobilised 40% of this envisioned monetary flow.

While the replacement of short-term rescue measures by recovery measures presents a window of opportunity for green recovery spending, countries need to embed a medium- and long-term vision of a green transformation in their recovery plans.^{[11]Dirth et al., 2021.} Thus, it remains to be seen if this crisis can be leveraged to redesign policy towards green stimulus, accelerate significant emissions reduction and help reach net zero CO₂ by 2050.^{[12]McKinsey’s explores the implications of net-zero in their report, The net-zero transition: What it would cost, what it could bring (2022).}

Based on academic research and experience from COVID-19, it is clear that economies that prioritise nature (i.e. climate and biodiversity) will sustain robust economies in the long run. Hence, the recovery trajectory of countries post-COVID-19 will be a determining, long-term factor not only in the transition to a green economy but also economic longevity. Despite COVID-19 affecting public trust in governments’ ability to handle crises, the lessons learned around the need for international cooperation, innovative science, enabling market mechanisms, systemic resilience, political leadership and action, and public support can be taken forward in addressing the climate emergency.^{[13]Hepburn et al., 2020.} With the Nordics being some of the best-positioned countries to swiftly recover from COVID-19, they have an opportunity to become role models for best practice in COVID-19 recovery and a green transition.

1.2 Europe stocktake: NextGenerationEU

In addressing the economic impacts of COVID-19, the Council of the European Union (EU) together with the European Parliament and the European Commission have designed a temporary recovery instrument called NextGenerationEU (NGEU). This instrument enables the EU to raise funds to accelerate the European recovery. It aims to address the immediate economic and social impact stemming from the COVID-19 pandemic by raising EUR 806.9 billion from capital markets.^{[1]EC, 221.} NGEU will support Europe to become greener, more digital, and resilient. The combination of the NGEU budget with the EU’s long-term budget (Multiannual Finance Framework) totals EUR 2 trillion, making it the largest stimulus package ever financed in Europe. The NGEU has seven programmes, as outlined in Table 2. The core programme is the Recovery and Resilience Facility (RRF). The aim of the EU RRF is to “mitigate the economic and social impact of the COVID-19 pandemic and make European economies and societies more green, resilient and better prepared for the challenges and opportunities of the green and digital transitions’’. The RRF provides finance through loans and grants and supports Member States’ investments and reform initiatives up until 2026.^{[2]European Commission, n.d.}

The RRF invites Member States to include investments and reforms in seven European flagship areas, in line with the Annual Sustainable Growth Strategy: clean technologies and renewables, energy efficiency of buildings, green transport and charging stations, roll-out of rapid broadband services, digitalisation of public administration, data cloud capacities and energy efficient processors, and education and training to support digital skills.^{[3]EC SWD, 2021.} Measures submitted must also do no significant harm to the environment.^{[4]European Commission, 2021.}

To access the RRF funds, each EU country must submit, to the European Commission, their recovery and resilience plans (RRPs), including reforms and investments up until 2026. The plans should elaborate how they address key challenges stemming from the COVID-19 crisis in policy areas of European relevance, including: green transition; digital transition; smart, green and inclusive growth; social and territorial cohesion; health, economic, social and institutional resilience; as well as policies for the next generation, children and youth.^{[5]EU Regulation 2021/241.} Once submitted, the European Commission assesses and endorses the plans. Each plan is assessed by the European Commission against 11 criteria of relevance, effectiveness, efficiency, and coherence. In particular, the European Commission assesses the plans against the target of a minimum of 37% of expenditure for climate investments, as well as a minimum of 20% for a digital transition. After approval, the content is translated into legally binding acts.

13% of the approved grant amount is disbursed as pre-financing following the approval of the national RRP,^{[6]EU Regulation 2021/241.} while the disbursement of the remainder of payments under the RRF is performance-based, i.e., linked to achievement of the promised measures and targets entailed in the RRP.^{[7]European Commission, 2021.} This condition for disbursement by the RRF should ensure climate commitments are upheld.

^{[1]European Commission, n.d. [2]React-EU, 2021. [3]Horizon Europe, 2021. [4]InvestEU, 2021. [1] IVL, 2021. [5]The European Agricultural Fund for Rural Development, 2021. [6]JTF, 2021. [7]Union Civil Protection Mechanism (rescEU), 2021. [8]These databases document the COVID-19 rescue and/or recovery spending commitments from each country as the pandemic unfolded, as there were no formal commitments made in 2020. As trackers are updated regularly, the final review dates of access to trackers is 31 May 2022.}

Table 2: NextGenerationEU (NGEU) programmes (Source: EC, 2021)

1.3 Green recovery trackers and databases

There are several databases tracking and ranking green recovery measures globally.^{[1]These databases document the COVID-19 rescue and/or recovery spending commitments from each country as the pandemic unfolded, as there were no formal commitments made in 2020. As trackers are updated regularly, the final review dates of access to trackers is 31 May 2022.} These include the Green Recovery Tracker, the GRO, the OECD Green Recovery Database, Energy Policy Tracker and the Vivid Economics Global Greenness of Stimulus Index (GSI). These organisations use a range of different methodologies to categorise and assess the climate benefits of COVID-19 recovery measures; however, they all suggest that green recovery efforts have been insufficient.

The trackers found that very few of the wide variety of measures announced worldwide contribute to climate targets. For instance, Vivid Economics assessed that responses to the crisis have not been enough to reverse negative environmental trends.^{[2]Vivid Economics, 2021.} In 2021, the Energy Policy Tracker assessed that 41% of all public money committed to energy-related activities was committed to fossil fuels.^{[3]Energy Policy Tracker, 2021.} This committed spending on fossil fuels has since been decreased to 38% (EUR 378.7 billion), with committed spending on clean energy increased to 40% (EUR 400.4 billion) according to the Energy Policy Tracker’s last update in May 2022. Vivid Economics also found that all announced measures related to innovation and skills development have not been enough to achieve the rapid transition required to achieve net zero emissions.^{[4]OECD Green Recovery Database, 2021.}

GRO was the main database used for this report, as it provided comprehensive detail on financial instruments and policies implemented, and offered strong comparability among countries, with the exception of Iceland. It should also be noted that certain actions, specifically in non-green industries (e.g. the airline industry), are earmarked as green in the database. While this may be related to the greening of those sectors, a precautionary approach will be taken in considering these as non-green.

2 Nordic green recovery

Economic recovery will remain a priority in years to come as COVID-19 continues to disrupt global markets. In addition, climate change, and by extension a green transition, are deemed necessary aspects of an inclusive and fair economic transition.

The Nordic countries continue to be recognised internationally as leading examples for economic growth and climate, environmental and social policies^{[1]See Box 1 noting the choice of the climate finance instruments historically used in the Nordics.} – the Nordic economies have grown by 28% since 2000 whilst reducing CO₂ emissions by 18%.^{[2]IISD, 2020.}  In addition to current action, the Nordic ‘Vision 2030’, launched in 2019, aims to make the Nordic Region the most environmentally sustainable and integrated region in the world. Figure 5 outlines the three objectives for the Nordic Region in the Nordic ‘Vision 2030’.^{[3]NCM, 2019.}

Figure 5: Nordic ‘Vision 2030’ objectives (Source: NCM, 2019)

Regarding the Vision’s green component, Norway aims to reach carbon neutrality^{[1]The terms carbon neutrality, climate positive or negative, net zero etc. have been used as worded by the initiative’s host. However, there is no common definition on these terms and their specific meaning may differ between countries.} in 2030, Finland in 2035, Iceland in 2040, Sweden in 2045, while the Danish government made the goal of a low carbon society a legal responsibility to be achieved by 2050.^{[2] Danish Energy Agency, n.d.,[3]NCM, 2020. The Road towards Carbon Neutrality in the different Nordic Countries. Each countries’ definitions of climate neutrality may vary.} However, how successful the Nordics will be in its green transition, as promoted in its Nordic ‘Vision 2030’, will depend on finance flows, i.e., whether these flows are reaching climate-positive or negative initiatives. Also, it is important to ensure that the initiatives are synergetic, or at least aligned with other green transition objectives, and do no significant harm to other environmental objectives. Moreover, how climate change goals are financed will also influence the overall success of the Vision’s outcomes. Through leadership in the green recovery agenda, the Nordics can influence other countries, and demonstrate their determination to become the most sustainable region in the world.

In 2020, in the Nordic-Baltic eight meeting, the Nordic prime ministers declared that the Nordics can and should take the lead on green recovery. This declaration also highlighted the need for private finance mobilisation and cooperation between public and private actors. Recovery packages offer an opportunity for the Nordic countries to work towards their Nordic ‘Vision 2030’ objective, namely strengthening R&D and promoting climate neutral solutions in the transport, construction, food, and energy sectors.^{[4]NCM, 2020.}

Box 1: The Nordics’ strong track record in climate finance

The Nordics have a track record of leveraging energy-centred climate finance, which has been a recurrent theme in recovery initiatives, particularly in using energy and emissions taxation in place of income tax, as well as renewable energy certificates (RECs) and voluntary agreements. In particular, taxation has remained key to the Nordic strategy. The Nordic countries were some of the first to implement the concept of energy taxation, with a reduction in income tax in some cases, in response to the Nordic economic recession resulting from financial deregulation and low oil prices in the early 1990s. Sweden and Norway pioneered some of the most innovative energy taxes of that time, such as the taxation on carbon, sulphur and nitrogen oxide emissions. Norway also has one of the highest tax rates on the oil and gas sector in the world.^{[1]IISD, 2020.} In 1990, Finland was the first country in the world to introduce carbon pricing, followed by Norway and Sweden in 1991 and Denmark in 1992 – these countries are also members of the Friends of Fossil Fuel Subsidy Reform (FFFSR).^{[2]Global Subsidies Initiative, 2020.} In Denmark, electricity taxes were planned to be used in subsidising wind energy whilst providing carbon tax rebates for businesses that had energy efficiency/saving commitments. RECs (e.g. Sweden) and voluntary agreements (e.g. Finland: biofuel and biogas from wood waste and energy efficiency investments) have also been used in the Nordics.^{[3]IISD, 2020.}

As seen from the Nordics, taxation can be a useful mechanism in facilitating emissions reductions. That said, fossil fuel subsidies (FFS) should be eliminated as they are equivalent to a ‘negative’ carbon tax, despite many governments continuing to use them.^{[4]Global Subsidies Initiative, 2020.} Subsidies could instead be allocated to fund budget deficits and in favour of just/green transitions.​

There is a strong case for COVID-19 recovery to simultaneously address both economic and climate targets, along with green transition targets more widely, through optimal co-benefits and policy design. For instance, in response to COVID-19, the Nordic countries developed recovery plans with significant acknowledgement of the green transition in mind (Figure 6). The next section explores the evaluation of the Nordic countries by the global green recovery trackers.

Figure 6: Current status of green recovery in the Nordics^{[1]Global Recovery Observatory (GRO) tracking, 2022.} (Source: South Pole, 2022)

2.1 The Nordics in the global green recovery trackers

The Nordic countries rank high in several global trackers and indices that evaluate the ‘greenness’ of country recovery plans and recovery spending. According to GRO, green spending makes up as much as 41% to 62% of the total recovery spending in each of the Nordic countries.^{[1] Iceland is not included in the GRO database.} Meanwhile, green spending makes up just 7.6% of total recovery spending in Iceland.^{[2]It could be noted that green transition measures in Iceland are led more by the private sector than the public sector, which may explain the above deviation of green spending patterns from other Nordic countries.} This is in contrast to the global average of 18% of green recovery spending (excluding some uncertain packages from the European Commission).^{[3]UNEP, 2021.} Furthermore, Finland, Denmark, and Norway were 2021’s green recovery spending leaders, according to GRO.^{[4]Not in any particular order. As Iceland was not included in the GRO database, whether it is included is unknown.} Denmark is also the overall leader of Vivid Economics’ GSI report;^{[5]Vivid Economics, 2021.} while Finland and Sweden also achieved high GSI results.

An overview of each Nordic country based on the global green recovery trackers is provided below. The GRO and Asian Development Bank (ADB) databases were selected for analysis as they compile policy responses to COVID-19, with the GRO database also providing classification of ‘green’ policies. Figures 7 to 11 and Table 3 are shared in USD to be directly comparable to the GRO database.

2.1.1 Sweden

Figure 7: Sweden – Proportion of green spending to other COVID-19-related spending (Source: South Pole; data from GRO, 2022)

According to the ADB, Swedish COVID-19-related fiscal stimulus measures include liquidity support (e.g. short-term lending), credit creation (e.g. loan guarantees), direct long-term lending, equity support, and income support (e.g. subsidies to business).^{[1]ADB, 2021.}

According to the GRO, Sweden’s green recovery stimulus includes various topical policy areas such as clean energy, clean transport, energy efficiency infrastructure and building upgrades, green market creation, green spaces^{[2]Green spaces are defined as outdoor recreational spaces according to Platform for REDESIGN 2020 (https://platform2020redesign.org/countries/norway/).} and natural parks, green worker training and job creation, and green R&D.

Some important instruments used for green recovery in Sweden include grants for energy efficiency improvements in apartment buildings.^{[3]Swedish Infrastructure Department, 2021.}

2.1.2 Finland

Figure 8: Finland – Proportion of green spending to other COVID-19-related spending (Source: South Pole; data from GRO, 2022)^{[1] According to the Green Recovery Tracker, green spending accounts for 42% of total recovery spending in Finland´s RRP.}​

Finland’s COVID-19 support measures include liquidity support (such as short-term lending), credit creation (e.g. loan guarantees), direct long-term lending, equity support and health and income support (such as tax and contribution deferrals and policy changes).​^{[1]ADB, 2021.}

According to GRO, Finnish policy domains that are labelled green include transport, support for agriculture, forestry and fishing, clean transport infrastructure investment, green market creation, clean energy infrastructure investment, natural infrastructure and green spaces, building upgrades and energy efficiency, clean R&D, and disaster preparedness.

2.1.3 Denmark

Figure 9: Denmark – Proportion of green spending to other COVID-19-related spending (Source: South Pole; data from GRO, 2022)

According to GRO, fiscal stimulus instruments include liquidity support for large businesses, as well as start-ups and small and medium-sized enterprises (SMEs).

Policy focus areas that are green include building upgrades and energy efficiency infrastructure investment, clean energy, infrastructure investment, green transport funding, clean R&D investment, and green market creation. Other less significant areas include natural infrastructure and green spaces investment, and clean transport infrastructure investment and new public transport systems or line expansions.

2.1.4 Norway

Figure 10: Norway – Proportion of green spending to other COVID-19-related spending (Source: South Pole; GRO, 2022)

According to GRO, the fiscal stimulus instruments prioritised by Norway are liquidity support for start-ups and SMEs, as well as large businesses, and to a lesser extent value-added tax (VAT) and other goods and services tax cuts.

Green policy areas of focus include clean energy and infrastructure investment, with a particular focus on carbon capture and storage (CCS), clean R&D investment, and clean transport infrastructure investment (i.e. expanding existing infrastructure capacity, improving efficiency in dirty transport, and electric vehicle [EV] charging infrastructure). Other areas include natural infrastructure and green spaces investment, green market creation and provision of basic needs.

2.1.5 Iceland

Figure 11: Iceland – Proportion of green spending to other COVID-19-related spending^{[1]Total COVID-related spending is based on Vivid Economics, 2021. Estimates vary between USD 1.3 billion to USD 2 billion.} (Source: South Pole, 2022; Vivid Economics, 2021; Iceland’s Ministry of Finance and Economic Affairs, 2022)

According to the GSI, Iceland’s stimulus measures prioritise employment-focused initiatives. Iceland has passed EUR 1.8 billion (USD 2 billion) in total fiscal stimulus packages in response to COVID-19. A rise in car tax (January 2021) contributed positively to Iceland’s index score. However, overall Iceland’s performance is insufficient to achieve the environmental targets of the index.^{[1]Vivid Economics, 2021.}

Iceland is not included in the GRO database nor the ADB database.

2.1.6 Summary

Table 3 and Figure 1 summarises GRO data, calculating green spending and portion of green spending to total COVID-19-related spending per country. While the percentage of green COVID-19-related recovery spending between the countries is relatively aligned (Figures 7 to 10), with the exception of Iceland (Figure 11), there is more variation in actual green spending (in billion USD) and percentage of green spending to total COVID-19-related spending. Accordingly, Denmark, followed by Norway, emerge as the countries with the highest green COVID-19-related spending in the Nordics.

Table 3: Comparing green recovery spending commitments among the Nordics (Source: calculations based on data from GRO, 2022; Vivid Economics, 2021; Iceland’s Ministry of Finance and Economic Affairs, 2022)

2.2 Nordic green RRPs

EU Member States in the Nordic Region include Denmark, Finland, and Sweden, which together can receive a maximum of EUR 7 billion in grants from the RRF.^{[1]EU RRF allocation, 2021.} All three of these countries have submitted their plans, which have already been endorsed by the European Commission.^{[2]Sweden’s RRF plan was more recently approved on 4 May 2022.} To understand the Nordic green RRPs of each of the Nordic EU Member States, the official plans were consulted and are summarised below. These plans were reviewed in December 2021, and changes to the plans made in 2022 were not reflected here.

2.2.1 Sweden

In 2021, Sweden submitted to the European Commission their national RRP applying for EUR 3.3 billion (SEK 33 billion).^{[3]At the time of writing, the Swedish RRP has not been endorsed by the European Commission.} In accordance with the RRF criteria, the Swedish plan attributes 40% of the cost – EUR 1.3 billion (SEK 13.5 billion) – to addressing climate change. The plan has six pillars: 1) green transition; 2) digital transition; 3) smart, sustainable, and inclusive economic growth; 4) social and regional cohesion; 5) health, economic, social, and institutional resilience investment for growth; and 6) housing construction. The cost of ‘green transition’, the first pillar, amounts to EUR 1.6 billion and focuses mainly on enabling investments that contribute to the technological shift required for a climate transition.

The green transition pillar has five main measures, as outlined below:

1. Local and regional climate investments (Klimatklivet). This programme gives grants to companies, municipalities, county councils, tenant-owner associations, and other organisations for physical investments with climate benefits. The measures can be very diverse and includes measures in transport and EV charging infrastructure, energy and industry, agriculture, real estate, and recycling.
2. Industrial sector climate investments (Industriklivet). This programme was created to support Sweden's climate target of net zero GHG emissions by 2045, and thereafter its target of negative emissions. This programme gives grants for feasibility studies, research, industrial pilots, and demonstration projects of innovative technologies. The key focus areas for the technological innovation are:
   • direct GHG emission abatement in industry (e.g. iron and steel, mineral, chemical and cement industries);
   • negative emission technologies, such as separation, transportation, and geological storage of biogenic carbon (e.g. from the pulp and paper industry and combined heat and power plants); and
   • industries contributing to the green transition (e.g. battery, biofuel, hydrogen, and recycling industries).
3. Energy efficiency investments in existing building stock, specifically existing apartment buildings. This support targets property owners with incentives to invest in energy efficiency renovation. This is according to the recently developed ordinance which proposes support for investments that improve energy performance by at least 20% in apartment buildings with a primary energy (EPpet) number of over 100 kilowatt-hours (kWh)/square metre (m²)/year^{[4]Government offices of Sweden (Fi2021/00200), 2021.}. Secondary target groups are contractors and material suppliers in the construction sector.
4. Railway investments to upgrade the conditions and reliability of the infrastructure. This will enable companies and individuals to increase the use of railway transportation.
5. Establishment of formally protected natural areas, such as nature reserves. This measure aims to contribute to biodiversity and ecosystem services.

The remaining pillars, which constitute EUR 1.7 billion in investment, involve only one pillar (housing construction) identified to contribute to climate targets. Specifically, this corresponds to investment in the construction of new student housing. This will contribute to climate action since new buildings are required to have high energy efficiency standards. Furthermore, the measure includes the possibility of a subsidy increase if energy consumption is 56% or less than established by Swedish building regulations.

The Swedish RRP also outlines a set of reforms which are assessed to significantly contribute to a green and climate-resilient recovery. These reforms include:

• Legal changes to reduce carbon emissions from some fossil fuels (reduktionsplikten). The purpose of this law is to reduce GHG emissions from domestic transport and aviation by obliging fuel suppliers to blend renewable fuels with petrol and diesel. The reform entails a gradual increase in the blending of biofuels in petrol and diesel by 2030. From 1 July 2021, this obligation to blend renewable fuels will also apply to aviation kerosene.
• Energy tax reform i.e. terminating the reduction of energy tax on heating for the manufacturing, agriculture, forestry, and aquaculture sectors. This reform on current fuel tax regimes is proposed to incentivise industries to shift to using renewable energy. Specifically, the plan proposes phasing out current energy tax reductions on fuel consumed for heating and other on-site combustion in the aforementioned sectors.
• Reinforce and simplify the bonus-malus system for lightweight vehicles (i.e. cars). A bonus-malus system is a market mechanism for incentivising certain actions through reward and penalisation. The main purpose of this bonus-malus system, as applied to vehicles, is to increase the proportion of vehicles with low GHG emissions to reduce the transport sector’s climate impact. This policy instrument aims to achieve its goal by providing a grant for the purchase of cars with low emission rates and higher taxation for the purchase of cars with high emission rates. Some changes include a bonus increase for cars with zero emissions.
• Benefit taxation for company car benefits (bilförmån). This instrument is a taxable salary benefit that arises when employees or business owners use company cars (owned or leased) for private use. The reform increases the relative cost of having such a car, reflecting the environmental cost of its use compared to other means of transport.

The division of fundings among investment measures with climate benefits and sectors impacted are summarised in Table 4 below.

^{[1]Total costs for measures classified as less than 100% beneficial for climate have been multiplied by the percentage of climate contribution. For example, the measure ‘Support for renovation of existing apartment buildings’ has been identified as 40% climate beneficial. Therefore, in Table 4, the total budget of EUR 390 million (SEK 4.0 billion) allocated to this measure has been multiplied by 40%.}

Table 4: Measures with climate benefits proposed in the Swedish national RRP for the EU’s RRF grant (Source: Swedish RRP, 2021)

While it is not clear where funding for the Klimatklivet programme is allocated, it is anticipated that most climate investments are directed to the industrial and building sectors. It is also anticipated that most of the reforms are targeted at reducing emissions from the transport sector.

In line with EU recommendations, Sweden has also incorporated the promotion of private investment to foster economic recovery. It has done so by expanding the Industriklivet programme, which includes encouraging private investments to support strategic industrial initiatives for the climate transition.

2.2.2 Finland

On 15 March 2021, Finland’s preliminary RRP was submitted to the European Commission.^{[1]The Government of Finland, 2021.} The European Commission approved Finland’s RRP on 4 October 2021, allowing Finland EUR 2.1 billion in grants through the RRF.^{[2]European Commission Press release, 4 October 2021.} The ‘Sustainable Growth Programme for Finland’ outlines five general objectives of 1) reducing GHG emissions; 2) productivity growth; 3) raising the employment rate; 4) access to treatment at hospitals; and 5) progress in equality. The Programme directs at least 50% of its funding to measures in support of the green transition and over 20% towards digital transformation. There are four main pillars in the plan, with distinct reforms and investments.^{[3]The Government of Finland, 2021.}

Pillar 1: a green transition will support structural adjustment of the economy and underpin a carbon-neutral welfare society.

The actions under Pillar 1 align with the EU Green Deal and ensure Finland’s global leadership in hydrogen and circular economy, high added-value bioproducts, zero-emission energy systems and other environmental solutions, enhanced energy efficiency, and transition towards fossil-free transport and heating. Pillar 1 has five separate component areas, as outline below:

1. Energy system transition: facilitates green and digital transition with reforms for reduction of energy use of coal by 2026 and energy taxation reform. The component investments, totalling EUR 318.7 million, include:
   • EUR 155 million in energy infrastructure investments for energy transmission and distribution. In particular, the investments focus on enterprises investing in building infrastructure.
   • EUR 161 million in emerging energy technology, namely, technologies for offshore wind power, renewable transport fuels and for non-combustion heating production as well as other renewable energy products. The aid is processed by Business Finland and the Energy Department of the Ministry of the Economic Affairs and Employment.
   • EUR 2.7 million in renewable energy investment in Åland, to establish an energy system based on offshore wind power and non-fossil energy production in Åland.
      
2. Industry renewal and investments supporting the green and digital transition: aims to further green transition, jobs, business structure reform, sustainable growth, and exports; and introduces reforms of the Climate Change Act, low carbon industry renewal, strategic promotion of circular economy and reform of the Waste Act. The component investments, totalling EUR 326, include:
   • EUR 156 million towards clean hydrogen and CCS in industry will support investments to scale-up technologies for pure hydrogen production and storage, potential important projects of common European interest (IPCEI) (e.g. hydrogen process participation^{[4]With matched funding expectation of 80%–95% by the participating enterprises.}) and research, development and innovation (RDI) programmes run by Business Finland. The investment targets major corporations, suppliers and SMEs commercialising innovations in the energy technology and energy-intensive industries.
   • EUR 60 million towards direct electrification and low carbonisation of industrial processes. The aid is processed by Business Finland and the Energy Department of the Ministry of Economic Affairs and Employment, targeting enterprises investing in electrification and energy efficiency in industrial processes.
   • EUR 110 million towards reuse and recycling of key materials and industrial residues, including EUR 30 million in bioeconomy and EUR 30 million in recycling solutions in battery manufacturing. The funding through Business Finland targets public and private enterprises and research institutions.
      
3. Reducing the climate and environmental impacts of the building stock: includes reforms of the Land Use and Building Act and an action plan to phase out fossil-based oil heating. The component investments, totalling EUR 110 million, include:
   • EUR 70 million towards the conversion of building heating systems from fossil-based oil heating to energy-efficient heating. The investment supports the government programme to phase out fossil-based heating by 2030 through an existing aid system, and targets owners of low-rise homes, local authorities, suppliers, among other actors.
   • EUR 40 million in low-carbon built-environment programmes. The aid is channelled through three existing Business Finland funding instruments: RDI aid programme, procurements for a knowledge base supporting climate-favourable and low-carbon solutions, and aid programme for development and coordination of joint ventures by Finnish enterprises aiming to export low-carbon solutions in the sector.
      
4. Low-carbon solutions in communities and transport: targets the transition to fossil-free transport. The reforms include a fossil-free transport roadmap and a tax reform in sustainable transport. The component investments, totalling EUR 40 million, include:
   • EUR 20 million directed towards replacing fossil-fuels through public recharging and refuelling infrastructure to extend existing aid granted by the Energy Authority and targeting enterprises and local authorities.
   • EUR 20 million to support private recharging infrastructure for housing companies and rental housing corporations. Subsidies to build private recharging infrastructure for EVs are granted by the Housing Finance and Development Centre of Finland.
      
5. Environmental sustainability, and nature-based solutions (NbS): includes a reform of nature conservation legislation and strategic promotion of a circular economy. The component investments, totalling EUR 30 million, include:
   • EUR 20 million in gypsum treatment of fields and nutrient recycling, to reduce Baltic Sea phosphorus loading and preserve carbon stocks in the field. The investment concerns industry, agriculture, and businesses in other related fields.
   • EUR 10 million in climate-sustainable actions in the land use sector for climate-sustainable and biodiversity protecting methods for forest management. The Ministry of Agriculture and Forestry accepts funding applications for development and training projects that support climate adaptation and risk management.
      

Pillar 2: focuses public and private services, creating a competitive operating environment for businesses, and strengthening Finland’s position as a data-driven service producer for digital societies (EUR 234 million).
 

Pillar 3: raising the employment rate, long-term growth, shared use of research infrastructures and accelerating recovery and renewal of sectors most affected by the pandemic (EUR 638 million).
 

Pillar 4: improving access and deficit of treatment contributing to reaching health and social service reform targets and making services available to all (EUR 400 million).
 

The remaining pillars (2–4), except for Pillar 3 (employment and labour market component area), are identified as supportive or indirectly supportive of the green transition.

National monitoring of the RRPs progress and implementation is carried out by the ministerial working group, coordination working group, specific agencies and ministries.^{[5]The Government of Finland, 2021.} The ministerial working group controls and monitors the implementation of the Sustainable Growth Programme at the political level.

2.2.3 Denmark

Denmark’s RRP was submitted to the European Commission on 30 April 2021 and was approved on 17 June 2021^{[6]European Commission, 2021. Commission endorses Denmark’s plan.} with a budget of approximately EUR 1.5 billion (DKK 11.5 billion) in grants. Denmark’s RRP has a total of 33 investments and six reforms.^{[7]European Commission, 2021. Denmark’s recovery and resilience plan.} The RRP has several investments and reforms under the topic of climate.^{[8]European Commission, 2021. Denmark’s recovery and resilience plan factsheet.}

Denmark’s RRP places significant emphasis on climate and digitalisation. 59% (EUR 923 million) of Denmark’s RRP supports climate objectives, with 25% allocated to the digital transition.^{[9]European Commission, 2021. Denmark’s recovery and resilience plan.} The focus on climate has been noted as a “key cornerstone” in the RRP’s ability to leverage investments for Denmark’s ambitious goal of lowering its GHG emissions by 70%^{[10]Equivalent to 9.1 Mt, of which the RRP is anticipated to contribute 28 Mt (approximately one third) (The Danish Government Ministry of Finance, 2021).} by 2030.^{[11]The Danish Government Ministry of Finance, 2021.} This funding has been used for the construction industry, which has received several subsidies through contractor deductions (håndværker fradrag). Moreover, the topic of green transition (i.e. energy efficiency, green heating, CCS and road transport) appears in relation to both the short- and long-term perspectives of the Danish government, and as related to the long-term growth of the Danish economy^{[12]European Commission, 2021. Denmark’s recovery and resilience.}. As for digitalisation, while it is not directly related to climate, digitalisation has an essential role to play in the green transition.

There are seven components to the Danish RRP.^{[13]The Danish Government Ministry of Finance, 2021.} The components that are considered green have been bolded and expanded on below.

1. Strengthening the resilience of the health care system (EUR 27 million/DKK 0.2 billion)
2. Green transition of agriculture and environment (EUR 170 million/1.3 billion): this measure entails transitioning to organic agriculture practices and technologies, as well as conducting best practice for the climate, such as rewetting and removing carbon rich soils from production. Also included under this measure is investment in tangible, promising green research solutions and in the clean-up of generational pollution (i.e. in industrial sites and contaminated land).
3. Energy efficiency, green heating and CCS (EUR 270 million/DKK 2.0 billion): the aim of this measure is for economic stimulation and job creation. Energy renovation under this measure takes place under the form of SMEs and at the city level. SMEs (EUR 80 million) may carry out projects, such as public and private building energy renovation and improving energy efficiency in industry and SMEs. At the city level (EUR 65 million), oil burners and gas furnaces are to be replaced by electrical heat pump systems. In addition, there are also plans to expand the reach of district heating grids. CCS has also been identified as a key tool.
4. Green tax reform (EUR 520 million/DKK 3.9 billion): the green tax reform, which includes an investment window for green and digital investments (EUR 407 million), is the RRP’s largest and most notable investment. The reform consists of increased taxation on businesses’ energy consumption in the short term, which will later be replaced by a targeted GHG emission tax (currently under preparation). There is also a temporary increase in tax reductions for companies investing in technology and software for transition to business models with lower GHG emissions. This two-phased approach is enacted to ensure a smooth green transition and avoid compromising jobs and business competitiveness. The RRP is envisioned to fund the first phase of the green tax reform, to enable companies to accelerate their green transition. This is aligned with Denmark’s service and industry GHG emissions, which makes up approximately a fifth of Denmark’s emissions.
5. Sustainable road transport (EUR 210 million/DKK 1.6 billion): this is the second largest measure (EUR 259 million). It entails premiums ending the use of old diesel cars, building new bicycle paths and electric bicycle infrastructure, and supporting car-sharing and the purchase of climate-friendly ferries. There is also EUR 141 million included in financial support for the adjustment of vehicle registration taxes, in favour of EVs, and to support the low electricity tax on charging vehicles. The measure aims to encourage one million green cars by 2030 and reduce 2.1 Mt of carbon emissions. Presently, the transport sector emits one third of Denmark’s GHG emissions.
6. Digitisation (EUR 94 million/DKK 0.7 billion): the green transition is one of the topics anticipated to be covered, in addition to welfare, equality, economic growth and employment.
7. Green R&D (EUR 240 million/DKK 1.8 billion): this measure (EUR 94 million) aims to promote public-private research cooperation for climate-related technological solutions, and incentivise companies to increase financing for green R&D. Examples of technology with promising potential to contribute to the green transformation include CCS and green fuels for transport and industry. The aim of this measure is also to promote digitalisation, in addition to maintaining and creating green jobs.

Denmark’s RRP also details control and audit measures, including those specifically for the RRP’s administration, to ensure compliance with EU regulation 2021/241 on anti-fraud and corruption, and in particular Article 22 on protecting the financial interests of the EU.^{[14]For more details on monitoring, see Denmark’s RRP Section 3.6: Control and audit.}

2.2.4 Norway

Norway’s recovery plan acknowledges the pillars of health, economy and climate change, and strives to find the synergies between these three key areas in its post-COVID-19 recovery.^{[15]Key source for this section, unless otherwise stipulated, is the webinar, the Nordic path to a green recovery (section on Norway).}

The main economic sectors of focus in the Norwegian green recovery are the development of new technologies for emissions reductions from industry, petroleum and transport sectors. In particular, the construction industry (e.g. green steel and cement plant) has been cited by local stakeholders as a key target for state financing. An example of this is the full-scale CCS “Longship” project (Langskip) announced in 2020 to capture and store approximately 400,000 tCO₂e per year from one of Norway’s largest cement plants.^{[16]IEA, 2022.} The main climate instrument in the ‘Norwegian Climate Plan for 2030’ is increased taxation,^{[17]It should be flagged that there is mention of tax reductions in other taxes for industries affected by this GHG tax.} both for emissions for industries within (e.g. petroleum and aviation) and beyond the EU Emission Trading System (ETS). The idea is that taxes will gradually increase up to EUR 200 per tCO₂e in 2030 (currently around EUR 59 per tCO₂e). This tax increase is planned to be offset by reducing other taxes for groups that are affected by GHG taxation. Guarantees are also emphasised, notably for the shipping sector.

Norway’s COVID-19 green recovery package is divided into three phases:

1. Strengthening of existing support scheme (Enova) for low emission technology development. This includes developments for industry, transport, buildings and infrastructure. There are two main state enterprises, Enova and Innovation Norway, supporting R&D, contributing a combined total of approximately EUR 360 million.^{[18]Platform 2020 Redesign 2020,}   Enova is an important tool for spurring a green transformation in Norway. Enova funds late-stage technology development and early-stage market introduction of low and zero emission technologies. Enova reports that the extra two billion granted under the COVID-package had a mobilising effect, providing confirmation and assurance for firms that R&D is a focal point for the government in Norway’s green transition.
2. Establishing a ‘green platform’ to ‘fast track’ green technology development and solutions deployment. This phase of the recovery plan aims to support late-stage technologies to enter the market, with the aim that technologies will eventually be market-competitive without state support. Both Enova and Innovation Norway are part of the Green Platform joint initiative, which also includes the Research Council and Siva, for financing large-scale innovation projects from research to market introduction. Examples of innovative technologies pioneered include technology for a hydrogen-powered economy, offshore wind, and CCS.
3. Strengthening of specific programmes (i.e. research funding; circular economy; green shipping; municipal green projects), with the vision of transforming existing markets. This is primarily achieved through grants. Additional sectors include the creation of green jobs (i.e. employment and capacity-building opportunities related to the green transition e.g. renewable energy innovation or CCS) and green spaces. Outdoor recreation measures during the COVID-19 period was allocated EUR 2.5 million in addition to the existing EUR 24.6 million. Increased funding of adaptation measures was also granted. It will be mandatory for municipalities and the government to purchase zero emission passenger cars and light vans from 2022, and then ferries, high speed vessels and city buses from 2025. Public procurement has already been used with great success; for example, more than 70 electric vessels are now found in Norwegian fjords.

​There will also be public procurement for developing home markets for green technologies. In the transport sector, reduced taxation will also be used to support zero emission vehicles (EVs), while increased funding (EUR 42 million) via guarantees will be used to support green shipping initiatives. For shipping, this involves the electrification of cargo ships,^{[19]DNV, n.d.} battery storage and hydrogen power. Biofuels, and advanced biofuels, are also being discussed. Government loan and guarantee schemes also exist to provide liquidity support for Norwegian enterprises^{[20]KPMG, 2020.}.

Beyond supporting green initiatives, recovery financing also supports some non-green sectors, where a tax relief package for the petroleum sector was granted. In addition, temporary relief of duties on foreign-registered vehicles, air passenger tax returns/temporary exemptions for airlines and CO₂ duty on natural gas and liquefied petroleum gas (LPG).^{[21]The Norwegian Tax Administration, 2022.}  

Nevertheless, several local stakeholders suggested that there has not yet been a direct link between green aspects, recovery and relief instruments in Norway. Considering the above, it seems that widespread knowledge of the green recovery measures implemented in Norway was limited.

2.2.5 Iceland

In March 2020, Iceland announced its first stimulus package of EUR 1.5 billion in response to the COVID-19 crisis, emphasising employment, businesses, welfare system and strengthened economic demand.^{[1]Government of Iceland, 2020a.} As part of the first package, a special investment initiative includes green measures such as energy transition and green solutions.^{[2]Government of Iceland, 2020b.} A second stimulus package of EUR 394 million, announced in April 2020, highlighted support for small enterprises, innovation, and vulnerable groups.^{[3]Government of Iceland, 2020c.} Green measures in the second package include a new food fund to support sustainability and innovation in food manufacturing and boosting growth in horticultural farming.^{[4]Government of Iceland, 2020c.}

The ‘Climate Action Plan’^{[5]Ministry for the Environment and Natural Resources, 2020a.} is Iceland’s main instrument for the achievement of the Paris Agreement goals and for reaching the 40% emission reduction targets by 2030 (from 1990 emission levels), as the common goal agreed between Iceland, Norway and the EU.^{[6]Decision of the EEA joint committee no. 269/2019 of 25. October 2019.} It also lays the foundation for Iceland to achieve carbon neutrality by 2040. With the measures of the updated plan, Iceland expects a total emission decrease of 40%–46%.^{[7]Ministry for the Environment and Natural Resources, 2020a.} According to the 2019 ‘Policies and Measures’ report, Iceland projected that, with existing measures,^{[8]Based on the first edition of the ’Climate Action Plan’ and excluding LULUCF sector.} Iceland’s emissions would peak in 2021 and decrease until 2035.^{[9]During this reporting process, it was unknown whether this prediction was reached.,[10]Iceland’s Report on Policies and Measures and Projections, 2019.}

The Plan, first published in September 2018^{[11]Ministry for the Environment and Natural Resources, 2018.} and updated in October 2020,^{[12]Ministry for the Environment and Natural Resources, 2020c.} enables a minimum of EUR 331.2 million (ISK 46 billion) in government spending on climate activities between 2020–2024. Of this, EUR 65.5 million (ISK 9.1 billion) of funds are earmarked for climate activities by the Ministry of Environment and Natural Resources, EUR 102.9 million (ISK 14.3 billion) for tax subsidies by the Ministry of Finance and Economic Affairs, and EUR 165.3 million (ISK 23 billion) by the Ministry of Transport and Local Government for walking and cycling paths, and subsidies for buses and grants for the Borgarlína transport system.

The Plan introduces 48 actions and is valid until 2030. It consists of three components, the Effort Sharing Regulation (ESR), the EU Emissions Trading System (EU ETS) and the land use, land-use change and forestry (LULUCF) sector. The ‘Climate Action Plan’ emphasises rapid clean energy transition in transport, and increased efforts of the LULUCF sector, with the following actions^{[13]Ministry for the Environment and Natural Resources, 2020c.}:

Actions under the ESR:

• Land transport: the key actions include EUR 68 million (ISK 10 billion) in infrastructure for active mobility, in particular, bicycle paths between 2020–2034; and EUR 2.2 million (ISK 325 million) annually to be directed towards incentives for temporary tax subsidies for bicycles, electric scooters, and electric bicycles between 2020–2023. A further EUR 310 million (ISK 45 billion) addresses the development of the Borgarlína transport system, trunk roads, bicycle, and footpaths between 2020–2033, and EUR 82 million (ISK 12 billion) to subsidise buses in metropolitan and rural areas between 2018–2024. Grants include EUR 1.6 million (ISK 227 million) in charging stations, EUR 0.7 million (ISK 100 million) in energy transition in companies with car fleet and EUR 0.4 million (ISK 60 million) to install charging stations at housing establishments. The grants are administered by the Energy Fund.^{[14]According to the plan, an additional EUR 2.1 million (ISK 300 million) towards the implementation of energy exchange projects is foreseen due to the economic impact of COVID-19.}
• Ships and ports: the key actions address energy transition of the fishery sector, electrification of ports, including grants for electrical connection of fleet and electrification of tourism operators, and a ban on the use of heavy fuel oil.
• Energy production and small industry: the main actions address carbon capture from geothermal power plants, the electrification of fishmeal production plants, climate impact of the construction industry and domestic renewable fuels.
• F-gases and chemical use: actions include a stepwise reduction of importation of fluorinated gases (F-gases) up until 2036 through regulation as well as taxation of F-gases.
• Agriculture: key actions include an estimated EUR 0.1 million (ISK 20 million) annually towards a climate-friendly agriculture project between 2020–2024 and EUR 0.2 million (ISK 30 million) annually in carbon-neutral beef production. EUR 1.4 million (ISK 200 million) annually addresses increased domestic vegetable production.
• Waste management: key actions address landfill tax to reduce landfill waste, a ban on the landfilling of organic waste by law, as well as EUR 0.5 million (ISK 68 million) over a five-year period towards the reduction of food waste through various short- and long-term projects.
• Transition incentives: actions consist of a carbon tax to reduce the use of fossil fuels, establishing a climate fund to support climate education and innovation, regulation for environmental data reporting and examining the feasibility of issuing government green bonds.

Actions under the EU ETS concern the aviation and heavy industry and target 43% emission reductions by 2030 compared with 2005. These include carbon capture from heavy industry, updated regulation under the ETS, and participation in the international system for reducing aviation emissions.

Actions under the LULUCF focus on the land use sector, with projected sequestration and emission reductions of 515%. The key actions include EUR 6.7 million (ISK 980 million) in enhanced action in forestry, EUR 0.5 million (ISK 76 million) in enhanced action in land reclamation, EUR 2.6 million (ISK 380 million) in recovery of wetlands, and EUR 2.1 million (ISK 300 million) in improved mapping of grazing land and land use through a special 10-year project.

Iceland will report progress on the fulfilment of commitments associated with the Effort Sharing Regulation and the LULUCF biennially, in accordance with the EEA Joint Committee adopted decision No 269/2019.^{[15]Ministry of Environment and Natural Resources, 2020b.}

​The ‘Green Plan’ of Reykjavik sets out green activities for the Icelandic capital up until 2030, supporting the city in recovering from the economic shock imposed by the COVID-19 pandemic and reaching its carbon neutrality target by 2040. The vision of the ‘Green Plan’ is rooted in carbon neutrality, green growth and leaving no-one behind.^{[16]The leave no one behind principle is one of the universal values of the UN Agenda 2030.,[17]The Green Plan, 2020.}Of the total investments of EUR 1.19 billion (ISK 175 billion) over the first three years, the ‘Green Plan’ commits EUR 650 million (ISK 95 billion) in largely green investments, EUR 550 million (ISK 80 billion) in green infrastructure and housing by the city’s companies and EUR 340 million (ISK 50 billion) towards green transport until 2030. The plan includes the following green investments:

1. The ‘Growing City’ component^{[18]City of Reykjavik website on the Green Plan. The growing city. Accessed on 10.1.2022.} introduces several actions to enhance competitiveness, green growth and green job creation. The green investments include:
   • EUR 17 million (ISK 24.5 billion) directed towards green residential development in 2021, including green district development of Ártúnshöfði and Elliðaárvogur, as well as new development areas in Vogabyggð.
   • EUR 580 million (ISK 85.1 billion) directed towards eco-friendly, diverse transportation between 2021–2030, including EUR 230 million (ISK 34.3 billion) in express carriage system, the City line and EUR 59 million (ISK 8.7 billion) in pedestrian and cycling trails.
   • EUR 55 million (ISK 8 billion) directed towards green knowledge cores around various industries for future employment opportunities and entrepreneurial areas for businesses.
2. The ‘Green City’ component^{[19]City of Reykjavik website on the Green Plan. The growing city. Accessed on 10.1.2022.} focuses on several actions that aim at reducing GHG emissions, enhancing green areas and carbon sequestration, climate adaptation and public health through outdoor activities and food. Green investments include:
   • EUR 200 million (ISK 29.8 billion) towards environmental action in green transport, circular economy development and eco-friendly structures. This includes EUR 59 million (ISK 8.7 billion) in biodiversity, including Reykjavik Climate Forests, EUR 22 million (ISK 3.2 billion) in waste recycling and waste reduction and EUR 85 million (ISK 12.4 billion) in energy transition, with a focus on reducing transport emissions and infrastructure.
   • EUR 87 million (ISK 12.7 billion) in developing green areas, such as EUR 16 million (ISK 2.4 billion) in city parks, EUR 8.9 million (ISK 1.3 billion) in a recreational areas and EUR 11 million (ISK 1.6 billion) in neighbourhood parks and coastal areas.
3. The third component, ‘City for the people’,^{[20]City of Reykjavik website on the Green Plan. The city for the people. Accessed on 10.1.2022} ensures that the green transformation is fair and based on participation.^{[21]The Green Plan, 2020.}

Projects supporting the city’s environmental and resource policies are subject to green bond financing through the Green Bond Framework.^{[22]The Green Plan, 2020.}

2.3 Analysis of the Nordic recovery plans

Table 5 summarises the topics covered in the Nordics’ COVID-19 recovery plans.

^{[1]Green and portion of total recovery spending for Iceland is based on an interview with Iceland’s Ministry of Finance and Economic Affairs on 24 March 2022.}

Table 5: Summary of the Nordics’ COVID-19 recovery plans (Source: South Pole, 2022)

Table 6: Sector addressed in the Nordics’ COVID-19 recovery plans (Source: South Pole, 2022)

According to the GRO database, Denmark (EUR 7.1 billion; USD 7.5 billion) has the highest green COVID-19-related spending in the Nordics, followed by Norway (EUR 3.6 billion; USD 3.8 billion). While Denmark allocates the highest proportion of recovery spending to green spending (62.7%), this is closely followed by Finland (58.4%) and Norway (55.0%). Sweden has both the lowest amount of green recovery spending (EUR 1.1 billion; USD 1.1 billion) and percentage of green spending in total recovery spending (42.9%). The reasons behind the differences in spending were not examined in detail but could be attributed to potential variation in what is considered ‘green’ or the GRO’s evaluation criteria.

As seen, the Nordic recovery plans align with the surplus of research identifying renewable/clean energy and infrastructure (including grid modernisation).^{[1]Hepburn et al., 2020.} In particular, energy efficiency infrastructure investment received a disproportionately high allocation of financing, notably in Denmark and Norway. The transport sector and building energy efficiency (i.e. efficient insulation, heating and domestic energy storage) were also key topics acknowledged in the green transition. Agriculture and industry were also key sector focuses, with agriculture mentioned in Finland’s, Denmark’s, and Iceland’s recovery plans.

Other smaller, cross-sectoral topics of focus include green market creation (including employment), green spaces/natural capital investment (e.g. via climate-smart agriculture and habitat restoration), and clean R&D (including CCS technology).

As for fiscal measures, climate-related taxes and carbon taxes are effective areas for green recovery. However, it is also noted that energy taxes, especially excise duties, act as an implicit carbon price, and may be more significant than explicit carbon pricing.^{[2]Global Subsidies Initiative, 2020.} These climate finance instruments will be further explored in the following sections.

3 Financing the green recovery and mobilising private finance

3.1 Climate finance before and during the pandemic

Before the pandemic, climate finance was on the rise, according to CPI’s Global Landscape of Climate Finance (Figure 12):

Figure 12: CPI’s Global Landscape of Climate Finance (Source: Climate Policy Initiative, “Global Landscape of Climate Finance 2021”)^{[1]CPI, 2020.}

The renewable energy sector receives the most tracked finance from private sources, with investment in low-carbon transport also increasingly emerging as an attractive investment area.^{[1]CPI, 2019.} While this is a substantial amount of finance, these figures are significantly lower than the EUR 1.5–3.6 trillion required from the supply-side energy system annually (to increase to EUR 3.2 trillion) until the mid-century to align with limiting global temperatures to an increase of 1.5°C.^{[2]de Coninck et al., 2019.}

The pandemic has further jeopardised the mobilisation of sufficient investments to enable low carbon transitions. The uncertain future post-COVID-19 pandemic forces regulators, governments and financial decision-makers to carefully consider how to maintain the capacity of the financial system, foster innovation and protect the assets of savers, pensioners, local public institutions and businesses, enable a larger share of private saving to be channelled towards low-carbon options, and create a business environment where more investments are channelled towards green investments.^{[3]Green Climate Fund, 2021.} The impact of the COVID-19 pandemic has also increased pressures upon national budgets, and public finance flows not connected to health, economic stability and recovery will also be under pressure. While CPI has not yet tracked the impact of COVID-19 on climate finance flows, we can expect a levelling off, particularly on the public side.

3.2 Overview of climate finance instruments that could be used to support a green recovery

The typical climate finance instruments used by the public sector are soft loans (~15%^{[1]The exact proportion of market-rate loans coming from the public sector is not available.}) and grants (11%) according to CPI.

In terms of efficiency in mobilising private finance for a green recovery, governments are advised to focus more on innovative instruments beyond loans and grants, including results-based finance, equity and guarantees that de-risk and mobilise climate investments at scale. The goal should be to mobilise as much “low-cost” private financing as possible (i.e. mainly debt) to enable a low-cost green recovery. According to the OECD, the EU’s green transition from 2030 to 2035 would need to be financed by bank loans (50%), private capital (30% – includes equity and debt-like instruments) and bonds (20%) – mainly low-cost debt instruments.^{[2]Swedish Bankers’ Association, 2020.} In addition, green public procurement policies can also have a strong impact in stimulating a market for greener solutions. Sweden created a procurement agency in 2015 to support and monitor procurements across the country.^{[3]LeadIt, 2021.}

Governments must be cautious of the implications of deregulation on the green transition in times of crisis (e.g. COVID-19 pandemic). Deregulation may be a negative climate finance trend; indeed, economic/financial stimuli may have a role to play in creating negative environmental impacts in cases where environmental standards and/or criteria are lowered for other socio-economic priorities. The EU Taxonomy, through its ‘Do No Significant Harm’ (DNSH) principle, has attempted to address this, which could help to avoid such deregulation in any future crises. Similarly, governments should also be aware of the implications of some climate finance mechanisms, such as carbon taxation. For instance, increasing energy prices, driven by the current conflict between Ukraine and Russia, coupled with carbon taxes and increasing costs of living, may have significant negative effects on low-income households, particularly in terms of heating and transport mobility (e.g. via increasing costs of petrol and diesel). Governments could consider optional structures to ease the financial burden on the most vulnerable households. This social dimension of the green transition is being addressed by the EU Green Deal, which has a substantial section on a ‘Just Transition’.^{[4]EC, 2021.}

Section 3.3 analyses the key climate finance instruments currently used in the Nordics for the post-COVID-19 recovery, based on the available databases tracking climate finance.

It is acknowledged that COVID-19 recovery finance involves both green and non-green financing, though the ideal strategy would systematically benefit both the green transition agenda and economic recovery. This analysis will cover only green recovery financing within the Nordic countries (examples of how the Nordics have contributed to the green transition of other countries can be seen in Box 2). In addition, based on the themes discussed earlier in this section, particular attention will be paid to use of innovative finance examples, for the purpose of accelerating and de-risking the green transition.

Box 2: Green development finance from the Nordic countries

The Nordics have played a significant role in mobilising climate finance beyond its countries, through funds and various other climate finance instruments. As examples, we discuss here one Nordic and one national development finance institution.
 

Nordic Development Fund (NDF)^{[1]NDF, 2020.}

NDF is a Nordic development finance institution (DFI). In 2020, the Nordics increased investment in the NDF to support a green post-COVID-19 recovery, in line with the NDF vision of ‘build back better and green’ (BBBG). Through the BBBG programme, the NDF has provided support in Asia and Africa through a grant of EUR 6 million to the Community Resilience Partnership Program and a grant of EUR 7.5 million to the African Water Facility towards their post-COVID-19 recovery efforts. The Community Resilience Partnership Program works towards strengthening the climate resilience of poor and vulnerable populations by preparing and financing investments in climate adaptation in Asia. The African Water Facility similarly supports the preparation of investment-ready projects for water supply, sanitation, and integrated water resource management.
 

Danish Investment Fund for Developing Countries (IFU)^{[2]IFU, 2020.}

The IFU is a Danish DFI. Similar to other Nordic DFIs (e.g. Finnfund; Swedfund; Norfund), IFU has been active in climate finance. During the COVID-19 pandemic, IFU has been supporting companies in their recovery by assisting in the monitoring and management of impacts. In 2020, the IFU made COVID-19 related investments of EUR 43.4 million (DKK 323 million). EUR 480 million (DKK 3.6 million) of this was granted to nine project companies in different sectors. The IFU has also created the Sustainability Facility COVID-19 Grant, which allows companies to apply for a grant to cover part of their COVID-19 related expenses. This would include, for example, costs for buying protective equipment, training employees and assisting healthcare workers and patients in preventing the spread of COVID-19. The intention of supporting such expenses is to allow companies to maintain operations in a safe and secure manner, thereby increasing job stability for the employees and, to some extent, sustaining economic growth.
 

Potential additional climate investment initiatives for Nordic DFIs to support a green recovery

From the above, the Nordics are well-positioned in supporting a green post-COVID recovery in developing and emerging economies. However, the good work of the Nordics can be further strengthened through establishing a Nordic Climate Investment Fund(s), the further development of green bonds, and reflecting on the early lessons learned and the applicability of climate-related finance sector regulation in Nordic countries, and in reference to the recommendations provided by the Financial Stability Board.^{[3]NCM, 2017.} Such a Nordic Climate Investment Fund can accelerate climate finance mobilisation by institutional investors and promote overall investment alignment with the investment criteria of ‘well below 2-degrees’. More broadly, the Nordic countries can provide continued emphasis on mainstreaming climate efforts for effective climate finance mobilisation and action, as well as global climate finance tracking and transparency. Aligning on these pillars and utilising their ‘joint voice’ will ensure that sufficient effort and finance is targeted at adaptation and the most vulnerable.

3.3 Key financial instruments within Nordic green recovery initiatives

Globally, climate action-related measures include corporate bailouts with green strings attached, green R&D subsidies (e.g. tax reductions for green products), grants and loans for green investments (including guarantees, although through limited use), and regulatory changes. Financing trends in the Nordics are in line with this global trend. In Sweden, bailouts were used (e.g. for airlines), as well as loan guarantees. Loan guarantees were used through the Swedish Green Risk Guarantee Program (kreditgarantier för gröna investeringar), though it is of note that the Program is not a formal part of Sweden’s COVID-19 recovery package. The Swedish Green Risk Guarantee Program^{[1]Swedish National Debt Office, n.d.; Swedish Infrastructure Department, 2021.}, operating until 2024, provides loans of at least EUR 50 million (SEK 500 million) to industrial investments that significantly contribute to at least one environmental goal or the climate policy framework. Investment must contribute to overall positive environmental results and long-term environmental effects, and be part of a plan drawn up by the company to achieve environmental and climate sustainability. So far there have been 11 applications for the programme, with one project (transforming a fossil fuel refinery to a biofuel one) approved. Similarly, guarantee and COVID-19-recovery loan schemes have been used in Denmark through the Restart Fund (genstartsfond).^{[2]Vækstfonden, 2021.}

The Nordic Region has an advantage in the green transition and in attaining a higher level of green stimulus, in that its countries already had a high level of environmental ambition nationally (i.e. environmental standards, policies and implementation capacity) prior to the COVID-19 pandemic. According to the OECD Green Recovery Database, the most common financial instruments used in OECD countries are grants and loans, and most of the green measures focus on financing the energy and transport sectors. Similarly, the GRO report also highlights green policy priority areas: the energy sector, low-emission transport, building upgrades, energy efficiency measures, natural capital development, and green R&D investments.^{[3]UNEP, 2021.} This is aligned with expert opinion, which also identified that policy focus areas include the energy, transport, industrial and agricultural sectors.

For the Nordics, South Pole and Gaia consulted external databases tracking the different financial instruments in the recovery plans, as well as RRPs and the like, to understand the climate finance instruments referenced in the plans. Table 7 shows the climate finance instruments used across the Nordic countries, evaluated according to the GRO database and RRF plans (or equivalent), and organised under equity, debt, fiscal/regulatory instruments and liquidity.

^{[1]Including carbon tax; tax relief. [2]For example, subsidies to businesses; health; tax deferrals. [3]Reallocation of funding from one sector of the economy to another within the governmental budget. [4]Based on Iceland's ’Climate Action Plan’ and an interview on 21 February 2022.}

Table 7: Climate finance instruments utilised by Nordic countries to support a green recovery (Source: South Pole, based on input from the GRO database, 2022; ADB database, 2022)

Tax reforms, credit creation and liquidity support were the most important instruments used for the recovery (see Figure 13). These are described below in more detail.

Figure 13: Key financial instruments used in the COVID-19 recovery packages (Source: South Pole, 2022)

Tax reform: received a low level of investment (significantly below EUR 50 million) and was least prominent in Finland. There was limited use of, and budget for, taxation for green COVID-19 recovery. One of the few examples was its use in self-produced clean energy in Sweden. However, tax reform was widely used for businesses of all sizes (with the exception of Norway), in the form of tax relief (e.g. up to EUR 4.5 billion for deferred VAT payments for large companies in Denmark)^{[1]All except for Sweden, according to the GRO (information on Iceland unavailable).} and other taxes, and extension of labour market tax contribution deadlines (EUR 10.3 billion in Denmark). This was especially the case in Denmark and Norway; however, in Norway, this was sometimes used for non-green sectors, such as temporary CO₂ tax exemptions on natural gas and LPG.

Credit creation: while used (e.g. through loan guarantees), credit creation received a low level of investment (significantly below EUR 50 million) the countries’ COVID-19 recovery plans (i.e. with the exclusion of the Swedish Loan Guarantee Programme). Credit creation was often not used for explicitly green industries; in most cases, it is not stipulated what industry this is used for. The closest ‘green’ industry that this finance instrument has been used for is the case of Finland’s agricultural guarantees (EUR 0.4 million), although it is noted that there are no green conditions associated with this. Occasionally, credit creation has also been used for non-green industries (e.g. shipping and aviation in Norway), albeit with limited financial support (less than EUR 1 billion EUR). Guarantees are used across a range of business sizes, including SMEs (except for Sweden). Norway has the highest allocation of loan guarantees for SMEs (EUR 4.5 billion), followed by Denmark (EUR 2.3 billion). Denmark also has a State Guarantee Scheme with a EUR 5.5 billion budget. Other forms of credit creation used include financial sector lending/funding (Sweden only; EUR 99.5 billion) with interest rate adjustments starting at 0%, the purchase of municipal and corporate bonds, (EUR 9.4 billion in loan guarantees), loan scheme for reinsurance of credit insurance (Norway only; EUR 1.9 billion), start-up loan support (Denmark only; EUR 0.3 billion) and employment funds (Finland only, less than EUR 938 million).

Liquidity support: this instrument received the most financial allocation across all the Nordic countries. For all countries, this financial mechanism is promised to leverage over EUR 500 million and is applicable to a diversity of stakeholders of varying sizes (i.e. private, public – including states, regions and localities, and rural-based individuals/groups). While this measure was mostly used in recovery, there was a limited focus on green transitions, and instead on non-green/neutral topics. The green transition topics referenced were public transport maintenance/support (Sweden, Finland, Denmark, Norway). However, sectors of focus relate to those previously acknowledged as essential to the green transition, namely the transport sector. Some examples of financing of related sectors, but with no green conditions, included support for agricultural forest owners (Sweden), agricultural guarantees/support for crop damage (Finland; Norway), and industry subsidies (Norway). Of the Nordic countries analysed, Norway used the most liquidity for green transition, while Denmark’s use of liquidity was mostly for non-green/neutral topics.

It is essential to accelerate the uptake of best practices and the replication of successful measures and recovery instruments that support climate finance at scale.

3.4 Cooperation on green transition finance approaches for Nordic governments

Many Nordic private sector actors (i.e. financial and corporate) believe that they have set more ambitious climate and green transition targets than the public sector. In many cases, these changes in sustainability mandates have been driven by their key stakeholders (e.g. consumers and investors) more so than public sector recovery policies and measures.

Table 8 summarises some of the key barriers and solutions highlighted by Nordic stakeholders during interviews and focus group discussions. Addressing these barriers and solutions should be included in guidelines for developing effective mechanisms for post-COVID-19 financial recovery.

Table 8: Barriers and solutions to a green post-COVID-19 recovery highlighted by Nordic stakeholders from the private and public sectors (Source: South Pole, 2022)

Several measures aligned with the solutions highlighted in Table 8 are being introduced and/or prepared in the Nordics. A particular feature of the Nordic Region and long-term collaboration is also the existence of joint financing institutions. The Nordic Investment Bank (NIB), which also covers the Baltic states and its owners, as well as the Nordic Environment Finance Corporation (NEFCO) have strong sustainability and green growth mandates. During the COVID-emergency, NIB and NEFCO reacted by adjusting and expanding their finance for measures that accelerate a green recovery. NEFCO has facilitated Green Recovery Financing for Nordic SMEs by providing loans ranging from EUR 100,000 to EUR 500,000 to investments and business activities in support of international growth outside the Nordic countries. NIB has been an international forerunner on the green bond market (e.g. in 2020 NIB disbursed close to EUR 5 billion, with some EUR 1.5 billion given as Response Loans)^{[1]NIB, 2020.}. Another example is the Finnish Climate Fund, a state-owned special-assignment company launched in 2020, which has been able to provide critical de-risking for multiple transformative new technology demonstration projects and industrial scale-up investments throughout the COVID-19 emergency (see Box 3).^{[2]The Finnish Climate Fund. (n.d.).}

Box 3: The Finnish Climate Fund – addressing market barriers to demonstrate and scale-up low carbon solutions

The Finnish Climate Fund, launched in December 2020, is a state-owned special-assignment company. The fund focuses on combating climate change, boosting low-carbon industry and promoting digitalisation.

Its mission is to create societal impact instead of maximising profit, which provides much needed leverage for addressing key financing barriers and mobilising private finance. To date, the Finnish Climate Fund has already been able to provide critical de-risking for multiple transformative new technology demonstration projects and industrial scale-up investments, typically in the range of EUR 10 million to EUR 50 million. The fund's primary instruments are capital loans, but it may also use other equity instruments. The fund is tackling a critical gap in the financing ecosystem in Finland and is actively collecting and sharing lessons learned with other Nordic and international partners.

The Finnish Climate Fund’s annual funding volume is approximately EUR 80 million, consisting of 10–15 investment decisions with ticket sizes typically between EUR 2 million to EUR 20 million. The fund operates in a minority role (maximum 50% of total funding) and the amount of public funding in the total investment must be under 70%.

Taking a longer-term approach is crucial to ensuring that the green transition vision goes beyond COVID-19 to support green technological innovations that will have a long-term impact on the economy. Moreover, public sector recognition of the appetite and readiness of the private sector should encourage the public sector to more actively support improvements to the green transition’s economic case and profitability, factors which the public sector is uniquely positioned to influence (e.g. penalising businesses that do not reduce their GHG emissions; mandatory requirements for banks to embed green criteria into their loans). The public sector also has a unique view of the ‘bigger picture’, which provides an understanding of the interlinkages between investments needed to solve the bottlenecks and challenges identified. This can also be used to identify focus areas for green transition, as has already been done, and plan the roadmap of the steps needed for countries to move towards the green transition.

3.5 Successful foreign programmes that could inspire financing green transitions in the Nordics

Although the Nordics are frontrunners in climate finance, other initiatives across Europe have demonstrated their capacity to mobilise private capital for the green economic recovery. This section outlines examples from Europe that are currently supporting Nordic initiatives and/or have had significant success in the region. A summary of these initiatives is provided in Figure 14 below.

Figure 14: International case studies leveraging private capital to support the green transition (Source: South Pole, 2022)

3.5.1 European Innovation Council (EIC) green growth start-ups

The EIC Accelerator^{[1]EU, 2021} is a venture capital investor and the leading funding source for Nordic green start-ups. Private funding is increasingly used to scale-up projects, with venture capital investment into green start-ups doubling since 2019, and 12 times higher than in 2016. With this, the EIC can be a useful source of funding for green start-ups, which are heavily dependent on public funding at the early stage, making 46% of seed-stage funding.

Eligibility criteria: start-ups focusing on ‘green’ products/services.

How it works: the EIC Accelerator provides substantial financial support with: 1) grant funding (non-dilutive) of up to EUR 2.5 million for innovation development costs; 2) investments (direct equity investments) of up to EUR 15 million managed by the EIC Fund for scale-up and other relevant costs. In addition, EIC selected companies receive coaching, mentoring, access to investors and corporates, and many other opportunities as part of the EIC community.

How it could be replicated in the Nordics: this instrument is available to Danish, Finnish and Swedish SMEs already. However, an expansion of the instrument or similar instrument could be set up to support green-growth focused SMEs in Norway and Iceland.

3.5.2 Swiss Technology Fund

The Swiss Technology Fund^{[2]Technology Fund, n.d.} offers loan guarantees to Swiss companies to reduce GHG emissions. The total fund size does not exceed around EUR 337 million (CHF 350 million) to ensure proper finance flows to involved enterprises.

Eligibility criteria: the fund targets SMEs creating innovative technologies (developed to the market-readiness stage), working on reducing GHG emissions, energy efficiency and renewable energy, and other climate-related topics such as NbS. SMEs must have generated a revenue of at least EUR 96,242 (CHF 100,000), be based in Switzerland and be creditworthy.

How it works: companies receive a loan guarantee of a maximum of EUR 2.9 million (CHF 3 million). The guarantee has a 10-year duration, within which loans must be repaid and a minimum of 20% is to be repaid in the first half of the loan’s duration. The guarantee is designed as a ‘joint guarantee’, in that every project must contribute at least 40% of the amount using other funds. Box 4 details further information on the fund.

How it could be replicated in the Nordics: developing a region-wide loan guarantee mechanism supporting climate-focused SMEs could mobilise significant capital from commercial financial institutions. A dedicated feasibility study would be required to identify the challenges faced by local SMEs to mobilise capital and at what cost, as well as the appetite of local commercial financial institutions.

Box 4: Swiss Technology Fund – How it works

One of the key challenges of climate finance and COVID-19-recovery is the optimisation of public funding used to mobilise private capital. There is significant potential for governments to better involve the private sector in recovery plans. This can be in the form of blended finance or de-risking private capital investments.

An example of the latter are loan guarantees for SMEs i.e. guarantees provided by the state to enable the SMEs to have access to commercial financing (e.g. Swiss Technology Fund). This instrument is particularly interesting as it requires disbursement of public funds only in the case of default, and has the potential to mobilise private capital at scale. These instruments have the potential to support the short-term need for COVID-19-recovery and be earmarked for companies whose activities are aligned with a green economy. The focus of several countries on green credit lines are also deemed relevant for short-term recovery financing.

3.5.3 Paris Green Fund

The Paris Green Fund^{[1]Paris Fonds Vert, n.d.}, officially called the Ecological and Energy Transition for the Climate (TEEC), supports territorial investment for the ecological transition of the City of Paris. The Fund has a total value of EUR 200 million and has the City of Paris as its anchor investor.

Eligibility criteria: SMEs at industrialisation stage focusing on climate-smart buildings, housing, urban mobility, energy efficiency and renewable energy, air quality, waste management, and digital innovations. The Fund also works through minority equity participations on supported SMEs and attracts investors from private sector, parapublic organisations and family offices.

How it works: the fund targets and provides EUR 1 million to EUR 15 million funding over a five-year investment period. The fund leverages private sector capital for local SMEs through the seed funding. To create the fund, the City of Paris underwent a legal derogation (the first of its kind), allowing it to create a private investment fund for companies. With this legal amendment, municipalities are allowed to participate in the capital of a commercial company without needing to address the provision of municipal services or general interest activities.

How it could be replicated in the Nordics: the City of Paris and Fund for Cities Development published guidelines (access on demand) for the replication of the Paris Green Fund concept in other cities in 2018, focusing on the necessary regulatory framework, political support and economic requirements to ensure replicability. The dissemination of these guidelines to cities and communal banks could stimulate the replication of such innovative financing instruments.

3.5.4 La Rochelle Carbon Aggregator

Created by Atlantech, the Aggregator is an innovation network, which is a technical and finance platform to develop small-scale projects for local carbon neutrality.^{[2]Communauté d'Agglomération de La Rochelle, n.d.} The Aggregator looks to leverage private finance from local enterprises by creating a cooperative digital transaction platform for carbon credit issuance and sale at the municipal level.

Eligibility criteria: small-scale projects focused on energy efficiency and renewable energy, non-motorised transport, NbS and sequestration technologies.

How it works: projects within the municipality’s pipeline of carbon-neutral projects can enter into the aggregator facility. The aggregator facility evaluates their CO₂ savings, and aggregates these savings as carbon credits, to be issued through the Voluntary Carbon Market (VCM). The VCM carbon credits are sold to local enterprises seeking to offset their emissions. Income from credits is then used to help fund local projects.

3.5.5 ‘Pay as you Save’ (PAYS) for clean transport

The PAYS mechanism aims to scale-up and facilitate clean public transport by helping transport companies overcome green transition barriers without imposing additional liabilities (e.g. loans/leases). This is especially helpful for the transport sector, as implementing clean transport faces high upfront costs for transport companies and utilities (40%–50% higher than diesel buses), with limited availability, and counterparty and technology risks. Moreover, this mechanism is also timely, as COVID-19 has constrained local transport enterprises’ budgets as a result of the lower affluence of commuters.

Eligibility criteria: the mechanism is aimed at medium to large bus service providers.

How it works: a utility leverages its access to capital to invest in batteries and charging infrastructure for electric buses to reduce their upfront cost to customers, thereby accelerating electric bus procurement whilst expanding the utility’s revenue base. A bus service provider agrees to pay a fixed charge on monthly electric bills that is less than estimated savings versus diesel, reducing operating expenses from day one without incurring additional balance sheet liabilities. A PAYS tariff allows the utility to recover its costs within the warranty period through a fixed charge on the bus service provider’s regular monthly electricity bill. The tariff is calibrated to ensure the estimated operating cost of an electric bus is less than that of a comparable diesel bus. Once the utility’s costs are fully recovered, the bus service provider owns the battery and charger assets.

How it could be replicated in the Nordics: PAYS require close collaboration between the public sector and private companies providing green public transport services. Such models are not yet widely used, but stimulating this exchange could facilitate significant investments into more sustainable transport.

4 Conclusions and recommendations

4.1 Key findings and conclusions

There is a strong case for COVID-19-recovery to simultaneously address both economic and climate targets, through optimal co-benefits and policy design.^{[1]Hepburn et al., 2020.} The EU, including Denmark, Finland and Sweden, has identified this opportunity and ensures that part of the NGEU recovery instrument is aligned with its sustainable growth strategy. Norway and Iceland, through their proprietary recovery programmes, have also embedded ‘green’ measures/guidelines, following the Nordic ‘Vision 2030’ objectives for a transition to a green, competitive and socially sustainable economy. However, there are strong discrepancies in the proportion of COVID-19-related spending allocated to ‘green spending’, spanning from 0.8% in Sweden to 8% in Denmark according to GRO data.

Across the five analysed countries, the energy (generation, transmission, efficiency) and transport sectors were unanimously prioritised for green-tagged recovery investments, as well as the creation of green market and green spaces. This was followed by the building sector (in Sweden, Finland, Denmark and Iceland), the industrial sector (in Sweden, Finland and Iceland), and the agricultural sector (in Finland, Denmark and Iceland).

The Nordic countries have supported economic recovery through a wide range of financial instruments. Liquidity support for short-term recovery has been consistently used across the five countries analysed, supporting businesses of all sizes, from SMEs to large corporations. Two other instruments have been used by all countries with the exception of Iceland: tax reforms, mainly in the form of tax rebates reducing the financial stress on businesses, and credit creation, in the form of dedicated credit lines with preferential conditions. With the majority of these instruments depending mainly on public funding, the financial burden for recovery has fallen mainly on governments.

However, there are successful case studies, both nationally and/or regionally (e.g. the Finnish Climate Fund) and internationally, which have succeeded in leveraging private sector capital with lower amounts of public funding and have replication potential across the Nordics. Some key international examples mentioned in this study are:

• the European Innovation Council and Paris Green Fund, which raised private capital for green start-ups and SMEs;
• the Swiss Technology Fund, which provides loan guarantees to SMEs that have a positive climate impact to help them gain access to commercial finance at better conditions;
• La Rochelle’s Carbon Aggregator, which leverages private finance from local enterprises through creating a cooperative digital transaction platform for carbon credit issuance and sale at the municipal level; and
• the Pay as you Save mechanism, which aims to scale-up and facilitate clean public transport by helping transport companies overcome high upfront capital expenditure costs.

4.2 Recommendations

There is significant potential for governments to better involve the private sector in recovery plans and scale-up existing climate finance. Moreover, a longer-term approach to ensure that the green transition vision goes beyond COVID-19 will also be a crucial factor in realising long-term impact. Figure 15 summarises key guidelines for a green post-COVID-19-recovery through the optimisation of public funding used to mobilise private capital. This can be in the form of blended finance or de-risking private capital investments.

Figure 15: Recommendations for financing the green recovery (Source: South Pole, 2022)^{[1]While policy and regulatory frameworks are essential to leveraging finance instruments, they are outside direct scope of this report.}

Loan guarantees for green SMEs could be particularly efficient in the Nordic countries. These are guarantees provided by the state to enable green SMEs to have access to commercial financing, particularly for clean technology ventures. The main advantage of this instrument is that it requires disbursement of public funds only in the case of default. It does not interfere with financial markets, and has the potential to mobilise private capital at scale to develop innovative new climate solutions. Supporting early-stage clean technology and solutions with loan guarantees makes economic sense for governments, as it has a doubled dividend by addressing two typical market failures: the negative externality of environmental emissions and the positive externality of knowledge spill-over effects in early-stage technology development. The Swiss Technology Fund (further detailed in Section 3.4), dedicated to technologies that have a positive climate impact, attracted a higher number of applicants during the COVID-19 outbreak and provided invaluable support to SMEs in times of low economic activity.^{[1]South Pole, 2022.} Loan guarantees have the potential to support the short-term need for COVID-19-recovery and be earmarked for companies whose activities are aligned with a green economy. The focus of several countries on green credit lines are also deemed relevant for short-term recovery financing.

Recognising the private sector’s appetite and the overall readiness of the private sector for green transition would also encourage the public sector to actively support improvements to the green transition’s economic case and profitability. In the long-term, fiscal reforms are necessary to embed climate-related criteria in economic growth. These changes have already begun in most of the Nordic countries, but with a short-term focus to relieve the financial sector during the recovery process. In the long term, fiscal reforms are necessary to embed climate-related criteria in economic growth. Some fiscal set-ups have already begun in most Nordic countries, but with a rather short-term focus on relieving the financial sector in the post-COVID-19 recovery process. To ensure long-term impacts, fiscal reforms, such as aligning tax rebates or tax levels to climate performance, should be considered. Carbon taxes can be an additional tool to raise funding for green growth sectors and provide the right incentives to private sector actors. The latest IPCC report reiterates the benefits of setting a price on carbon that is high enough to incentivise a rapid transition in the economy, while avoiding negative impacts on low-income households.^{[2]Climate Change 2022: Mitigation of Climate Change (IPCC, 2022)}

Climate finance should be particularly attentive to supporting green technological innovations and SMEs. Based on expert experience, a roadblock in financing green initiatives is due to lack of project readiness rather than a shortage of investment-ready funds. Thus, supporting green SMEs to become investment ready would help in unlocking further climate innovation. Public sector support for developing green skills and competences, for instance, in encouraging finance experts to develop sustainability skills and green energy technical expertise to develop commercial skills, can also aid the overall accountability to the green transition. Technologies highlighted as important in the green transition, as mentioned across interviews, include CCS, hydrogen and electrification. Governments can also play an important role in the technology transition by providing guidelines, incentives and by pushing other actors towards climate action (e.g. via carbon pricing). Technology, including digitalisation, should also be accessible to ensure equity amongst individuals of different economic backgrounds and be considered for their impact on climate change (i.e. impacts on GHG emissions and physical climate risks).

Climate finance should also be attentive not only to funding green industries, but also helping all industries become greener. This is particularly relevant for the Nordic countries, which already have relatively green profiles yet fit a couple of high-emitting sectors. Governments should direct attention towards challenging sectors, such as shipping, steel, mining, and plastics, and on scope 3 emissions to address impacts of high consumption levels. While loan guarantees have already been positively received by the industry actors in the steel, cement and plastics sectors, there remains a need for investment for greening infrastructure. Moreover, a local private sector stakeholder highlighted that new business models going beyond pure economic growth should be explored and stimulated by the public sector. So far, companies interested in such fundamental transitions lack examples and role models.

It is also important to track whether financial recovery packages reach the targeted stakeholders and have the desired climate impact and standardised measuring mechanisms. There is currently limited information on tracking the finance flows of COVID-19 recovery financing. It is likely that information for green financing would only be available at a later stage, as green financial disbursement may be conditional on green targets being met. Further, measuring and addressing scope 3 emissions is one of the biggest challenges remaining for corporations, as this is highly dependent on supplier information. This complicates consistent comparison between organisations over time and, hence, assessment of impact. In line with this, it is suggested that there be a follow-up report analysing the alignment of whether finance is indeed flowing to the objectives, priority sectors and themes as per each countries’ recovery commitments, once data is available.

Mandatory reporting of GHG emissions and more clarity on meeting climate regulations have been suggested by some interviewees and focus group participants. Government support of reporting mechanisms which enable (standardised) tracking and reporting of supply-chain emissions would be a tangible action to enable the private sector in the green transition and inform consumer choice. Furthermore, national and regional Nordic alignment with established, widely-used regional and international frameworks (i.e. the EU Taxonomy; the TCFD), would also aid in streamlining green transition action in the Nordics. Adhering to these standards could help in the alignment of green transition objectives (e.g. agreeing on definitions of climate neutrality and net zero pathways).

Finally, in parallel to the ambitious commitments of the Nordic countries, joint Nordic collaboration on policy and regulatory coordination, knowledge sharing and capacity building, and regional approaches to financing will be key in accelerating the green transition. Building on the groundwork of the Nordic ‘Vision 2030’ may help to encourage collaboration not only in each of the Nordic Countries (e.g. through national funding agencies), but also across the region (e.g. through NIB; NDF; NEFCO) and extending to other countries that receive Nordic support. Cross-country, as well as sectoral and cross-sectoral cooperation, that does not hinder the innovation drive of a healthy competitive market, has already been positively received across the public, private, and finance sectors, according to the stakeholders interviewed for this report.

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Annex I

NextGenEU – Accessing the EU COVID-19 recovery package

The NGEU has seven programs, as outlined in Table 8. The core programme is the RRF. The aim of the EU RRF is to “mitigate the economic and social impact of the COVID-19 pandemic and make European economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions”.^{[1]European Commission, n.d.} The RRF provides finance through loans and grants, and supports Member States investments and reform initiatives up until 2026.^{[2]European Commission, n.d.}

13% of the approved grant amount is disbursed as pre-financing following the approval of the national RRP,^{[3]EU Regulation 2021/241.} while the disbursement of the remainder of payments under the RRF is performance-based i.e. linked to achievement of the promised measures and targets entailed in the RRP.^{[4]European Commission, 2021.} This caveat for disbursement of the RRF may be useful for ensuring commitments are upheld. Countries can present a request for payment twice a year, upon completion of relevant and agreed milestones and targets. Member States are expected to report progress bi-annually, in the context of the European Semester.^{[5]EU regulation 2021/241.} The assessment of the Member States’ RRPs include the response to country-specific recommendations.^{[6]EU Regulation 2021/241.}

About this publication

Final Report: Financial instruments to support a green economic recovery post-COVID-19

Nata Tavonvunchai (South Pole), Ana Martha Coutiño (South Pole), Aymeric Reymond (South Pole), Mikko Halonen (Gaia), Matleena Moisio (Gaia), Miikka Simanainen (Gaia), Suvi Peltoniemi (Gaia), Marie Gustafsson (South Pole) and Martin Stadelmann (South Pole)

Nord 2022:017
ISBN 978-92-893-7343-2 (PDF)
ISBN 978-92-893-7344-9 (ONLINE)
http://dx.doi.org/10.6027/nord2022-017

© Nordic Council of Ministers 2022

Illustrations: Tobias Scheel Mikkelsen

Published: 24/5/2022
Updated: 10/8/2022

About the report

This report was prepared by South Pole and Gaia Consulting under the Financial instruments to support a green economic recovery post-COVID project, supported by the Nordic Council of Ministers’ Working Group for Climate and Air (NKL). The project provides an overview of the key financial instruments supporting the Nordic green recovery plans, as well as innovative Nordic climate finance mobilisation approaches. While green recovery and transition remain rather broad definitions, the aim of this report is to unveil financial modalities and actors that hold the key to mobilising private finance at scale post-COVID-19. The report thus considers ‘green’ to encompass all activities that have a positive climate mitigation or adaptation impact. Noting pioneering commitments by the Nordic countries to climate neutrality and the joint Nordic ‘Vision 2030’, the report focuses on climate finance mobilisation approaches while also including innovative and promising approaches for mobilising other forms of green finance.

This report is informed through a mix of desk research, consultation of key databases (i.e. the Green Recovery Tracker, the Global Recovery Observatory (GRO), the Organisation for Economic Co-operation and Development (OECD) Green Recovery Database, Energy Policy Tracker, and the Vivid Economics Global Greenness of Stimulus Index [GSI]) and stakeholder interviews. As some of the listed databases are continually updated, the data used is based on data available at the time of writing (31 May 2022), unless otherwise stated.

The project team would like to thank Anna Gran, Amanda Hagerman, and the Nordic Working Group for Climate and Air (NKL) for their contributions to this report. The project team would also like to thank the report’s Steering Group Committee members, Dennis Hamro-Drotz (Nefco) and Emelie Öhlander (Ericsson), and insights received from the stakeholder interviews and focus group discussions conducted during the study.

Disclaimer

This publication was funded by the Nordic Council of Ministers. However, the content does not necessarily reflect the Nordic Council of Ministers’ views, opinions, attitudes or recommendations.

Nordic co-operation

Nordic co-operation is one of the world’s most extensive forms of regional collaboration, involving Denmark, Finland, Iceland, Norway, Sweden, and the Faroe Islands, Greenland and Åland.

Nordic co-operation has firm traditions in politics, economics and culture and plays an important role in European and international forums. The Nordic community strives for a strong Nordic Region in a strong Europe.

Nordic co-operation promotes regional interests and values in a global world. The values shared by the Nordic countries help make the region one of the most innovative and competitive in the world.

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