1. International policy and central developments in Nordic environmental policy 2018–2021

This chapter presents relevant international policy trends in the period and provides an overview of key developments in Nordic environmental policies. Major changes in each country and in certain sectors are reported and discussed.

The most important international policy developments for the Nordic countries are the EU policies. In addition, the development of Article 6 of the Paris agreement, which regulates international transfer of mitigation outcomes under the Paris Agreement is likely to be of importance in the future. It has focus on the following sectors: energy, industry, transportation, oceans and coast, waste, agriculture and forestry. 

The European Green Deal, presented by the Commission on December 11, 2019, sets the goal of making Europe the first climate-neutral continent by 2050 (European Commission, 2019a). The European Green Deal spans over all sectors in the economy. Since the Green Deal was presented, the EU Commission has presented several legislative proposals targeting different sectors and policy areas.  

The European Climate Law sets a legally binding target of net zero greenhouse gas emissions by 2050. Included in the law is also a new target for 2030 of reducing net greenhouse gas emissions by at least 55% compared to levels in 1990. The main elements of the law were agreed on by the European Council in December 2019. The law entered into force on July 29, 2021.

Based on elements of the Green Deal, in July 2021 the EU Commission adopted a set of legislative proposals, called Fit-for-55, setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030 (as compared to 1990). The package proposed to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport, and land use legislation. It also proposes a new emissions trading system for road transport and heating of buildings (sometimes referred to as ETS BRT) and a carbon border adjustment mechanism (CBAM) (European Council, 2022a). 

The EU Emissions Trading System was established in 2005 and is the largest emissions trading system in the world. It is described as a cornerstone of the EU policy to combat climate change. The EU ETS covers around 1.6 Gt, or 41 per cent, of the greenhouse gas emissions from the EU27 and includes the following sources: carbon dioxide (CO2) from

Emissions in the ETS are capped by a limited number of allowances available for the participating installations. The main method for allocating allowances to the participants is through auctions, thus following the Polluter Pays Principle. But for carbon intensive and trade exposed sectors allowances are allocated free of charge based on benchmarking. The reason is to reduce the costs for the firms and risk of carbon leakage. In 2021, 57% of the allowances were sold through auctions, while 43% were allocated free of charge.

The cap is reduced each year by a linear reduction factor, LRF, currently at 2.2% per year. The limited supply of allowances results in a price on allowances, thus putting a price on GHG emissions. Over the period 2018–2021, the price has been between €8 and €85 per ton CO2e with an average price of €30 (ICAP, 2022).

Although this report only covers the period 2018–2021, it can be noted that in 2022 the price on allowances has been between €58 and €96, with an average value of €82.

The significant price increase was due to a reform that came into force in 2019, limiting the number of available allowances by transferring a part of the allowance surplus into a market stability reserve (Zetterberg and Elkerbout, 2019)

For the revision of the EU ETS, which is negotiated as part of the FF55 package, the Commission proposes to increase the linear reduction factor from 2.2% to 4.3%, which is a significantly faster reduction of the cap. With the previous factor the cap would reach zero in 2058, but with the new factor zero it will be reached in 2040. The Commission further proposes to phase out free allocation over a ten-year period, starting 2026. This is to be linked to the gradual introduction of the CBAM. Moreover, the Commission proses to include shipping in the EU ETS (European Council, 2022a).

Previously, carbon leakage risk has been mitigated through free allocation. However, in the FF55 package the Commission suggests introducing a carbon border adjustment mechanism (CBAM) to mitigate the risk of carbon leakage. This will be aligned with the phase out of free allocation and thereby strengthening the EU ETS. The proposed CBAM would require importers in certain sectors to acquire ‘virtual’ ETS allowances, which mirror the actual ETS price. By doing so, importers face carbon costs similar to the costs that EU producers face. The CBAM will apply to fertilizers, steel, cement, aluminum and electricity, as well as some intermediate goods in these sectors, although not to final goods such as vehicles using these materials. If an exporting country itself applies a carbon price, this will be withdrawn in the calculation of the fee to pay for importing materials into the EU (European Council, 2022a).

The CBAM has not been implemented yet, but there is broad support for a CBAM among the EU institutions. The Commission presented its proposal in the summer of 2021 after the EU Member States reiterated their support in the European Council of December 2020.

As part of the FF55 package, and a part of the revision of the EU ETS directive, the EU Commission proposes a separate new emissions trading system for road transport and buildings, starting in 2026, sometimes referred to as ETS BRT. The obligation to acquire allowances will be put on fuel distributors and importers rather than on individual cars and houses. This system would cover approximately 600 Mt of CO₂-emissions. 100% of the allowances will be auctioned. 

The Effort Sharing Regulation (ESR), as adopted in 2018, sets national targets for emission reductions from road transport, fuel use for heating buildings, agriculture, small industrial installations, and waste management. These sectors – which (so far) are not included in the EU Emissions Trading System (EU ETS) - currently generate about 60% of the EU’s greenhouse gas emissions. To meet the EU's overall emission reduction target by 2030, the Commission proposed, through FF55, to reduce emissions by at least 40%, compared to 2005 levels, under the ESR. This is an increase of 11 percentage points compared to the existing target of a 29% emission reduction. Based on EU’s overall target, specific targets are set for the individual Member States.

The Regulation on Land Use, Land Use Change and Forestry sets an overall EU target for carbon removals by natural sinks, equivalent to 310 Mt of CO2 emissions per year by the Year 2030. National targets will require Member States to care for and expand their carbon sinks to meet this target. In the FF55, the EU Commission proposes that by 2035, the EU should aim to reach climate neutrality in land use and forestry sectors. The purpose was to break out agriculture from member states emission reduction targets, with the aim to establish a new combined agricultural, forestry and other land use sector.  

The FF55 proposes an increased target aiming for 40% energy production from renewable sources by 2030. All Member States will contribute to this goal. Specific targets are proposed for renewable energy use in transport, heating and cooling, buildings, and industry. To meet both climate and environmental goals, the sustainability criteria to use bioenergy are strengthened. Member States must design support schemes for bioenergy in a way that respects the cascading principle of uses, for woody biomass, meaning that the same wood fiber is used several times before destruction.

The Energy Efficiency Directive will be revised to set a more ambitious binding annual target to reduce energy use at EU-level. It will guide how national contributions are established and almost double the annual energy saving obligation for Member States. The public sector will be required to renovate 3% of its buildings each year.

A combination of measures is required to tackle rising emissions in road transport, to complement emissions trading. More ambitious CO₂ emissions standards for cars and vans are proposed to accelerate the transition to zero-emission mobility, by requiring average emissions levels of new cars to decrease by 55% from 2030 and 100% from 2035, compared to 2021 levels. As a result, all new cars registered as of 2035 will be zero-emission. To ensure that drivers are able to charge or fuel their vehicles at a reliable network across Europe, the revised Alternative Fuels Infrastructure Regulation will require Member States to expand charging capacity in line with zero-emission car sales, and to install charging and fueling points at regular intervals on major highways: every 60 kilometers for electric charging and every 150 kilometers for hydrogen refueling.

The Alternative Fuels Infrastructure Regulation requires that aircrafts and ships have access to clean electricity supply in major ports and airports. The ReFuelEU Aviation Initiative will oblige fuel suppliers to blend increasing levels of sustainable aviation fuels in jet fuel taken on-board at EU airports, including synthetic low carbon fuels, known as e-fuels. Similarly, the FuelEU Maritime Initiative will stimulate the uptake of sustainable maritime fuels and zero-emission technologies by setting a maximum limit on the greenhouse gas content of energy used by ships calling at European ports.

A revision of the Energy Taxation Directive proposes to align the taxation of energy products with EU energy and climate policies, promoting clean technologies and removing outdated exemptions and reduced rates that currently encourage the use of fossil fuels. The new rules aim at reducing the harmful effects of energy tax competition, helping secure revenues for Member States from green taxes, which are less detrimental to growth than taxes on labour. From January 2023, energy taxation should be based on the energy content of the energy products and electricity, and their environmental performance (EU Commission, 2021. Proposal for a Council Directive restructuring the Union framework for the taxation of energy products and electricity (recast) COM/2021/563 final).

A new Social Climate Fund is proposed to provide dedicated funding to Member States to help citizens finance investments in energy efficiency, new heating and cooling systems, and cleaner mobility. The Social Climate Fund would be financed by the EU budget, using an amount equivalent to 25% of the expected revenues of emissions trading for building and road transport fuels. It is estimated to provide €72 billion of funding to Member States, for the period 2025–2032, based on a targeted amendment to the multiannual financial framework. With a proposal to draw on matching Member State funding, the Fund would mobilise €144.4 billion for a socially fair transition.

One of the key pillars in the European Green Deal is the new resolution on EU Biodiversity strategy that was launched during 2021 and later on adopted by the EU Commission in June 2022. This Biodiversity strategy contains specific commitments and actions to be implemented by 2030, at the latest. It involves enlarging existing Natura 2000 areas and measures to restore degraded ecosystems (EU Commission, 2022c).

Another pillar of the European Green Deal is the adaptation of a new circular economy action plan, which was launched in March 2020. The following year, the European Commission adopted several packages with regard to new legislations for sustainable batteries, waste shipments, circular textiles as well as launched a Global Alliance on Circular Economy and Resource Efficiency. The objectives of the circular economy action plan are to make Europe cleaner and more competitive, thus taking the lead on global efforts on circular economy (European Commission, 2022d).

Following the initiatives from the biodiversity strategy, in October 2021 the EU Commission launched a consultation on a new action plan with the aim to conserve fisheries resources and protect marine ecosystems. This is based upon the European Union's Marine Strategy Framework Directive which was adopted in June 2008. This directive was amended in 2017 to better link ecosystem components. In June 2020, the Commission adopted a report on the first implementation cycle of the Marine Strategy Framework Directive (European Commission, 2022e).

Article 6 of the Paris Agreement (UNFCCC, 2015) allows for countries to voluntarily cooperate to reach their respective mitigation targets set out in their Nationally Determined Contributions (NDCs). Within Article 6, Article 6.2 creates the basis for trading in “mitigation outcomes” (GHG emission reductions or removals) across countries under frameworks that can be established bilaterally. Article 6.4 is expected to be similar to the Clean Development Mechanism of the Kyoto Protocol. It establishes a mechanism for trading mitigation outcomes between countries under the supervision of a body (“Supervisory Body”) designated by the Conference of Parties – the decision-making body of the UN Framework Convention on Climate Change (UNFCCC). Article 6.8 recognizes non-market approaches to promote mitigation and adaptation. It introduces cooperation through finance, technology transfer, and capacity building, where no trading of emission reductions is involved. Under Article 6, mitigation outcomes that have been authorized for transfer by the selling country’s government may be sold to another country, but only one country may count the mitigation outcome toward its NDC. It is critical to avoid double counting in order to avoid overestimating the reduction of global emissions. The agreement on Article 6 established an accounting mechanism known as “corresponding adjustment,” to ensure that double counting does not occur. Corresponding adjustment requirements may also extend beyond compliance markets to the voluntary carbon markets, where demand is driven by the private sector’s voluntary commitments to reduce emissions.

Initial rules as to how the Article 6 market mechanisms would function were agreed at the 26th session of the Conference of the Parties to the UNFCCC (COP26) in November 2021. These rules established a procedural framework for the functioning of the market, set out eligibility requirements for credit issuance, included an agreement as to the composition of the Article 6.4 Supervisory Body, and resolved several of the most contentious issues regarding the functioning of the Article 6 market mechanisms, including double counting of mitigation outcomes between nations. Other issues that were resolved related to the legacy of the Clean Development Mechanism ("CDM") and the level of credit transaction proceeds to be contributed to a Global Adaptation Fund. Although significant progress was made at COP26, negotiations on details concerning the functioning of article 6 continue.

According to a study from 2019, a well-functioning trade in mitigation outcomes under Article 6 of the Paris Agreement, could save the world’s countries $ 250 billion per year (IETA, 2019). When costs for reaching national targets are reduced, countries can afford to reduce emissions even further, thus increasing ambition. According to the study, Article 6 could bring about further emission reductions of around five billion tonnes of carbon dioxide per year on a global scale.

The tax revenue per capita from environmentally related taxes has been decreasing in Denmark, Finland, Norway, and Sweden since 2016 and in Iceland from 2017, see figure 1.

Data for 2021 were not available at the time of completing this report.  

In 2020, Denmark generated the highest revenue followed by Finland and Norway, while Iceland generated the lowest total revenue per capita.

The share of environmental tax revenue, out of total revenue, peaked for Denmark, Finland and Norway during 2016. Iceland’s share peaked in 2017 and Sweden’s in 2013. Between 2018 and 2020 all Nordic countries shares decreased, except Denmark which increased by 2% in 2018. However, in 2019 Denmark experienced a sharp decrease of -14%. In 2020, Denmark’s and Finland’s shares converted towards each other and are now close to the OECD average of 6,2%. Sweden has in 2020, the lowest share which accounts for 4,9%, see figure 2.

Figure 1: Total environmental taxes per capita, 2015, USD, PPP, 2013–2020
Source: OECD, 2022a.

Figure 2: Share of environmental tax revenue of total tax revenue, 2013–2020
Source: OECD, 2022a.