8. Similarities between literature and practice

Part 1 indicates that taxes, fees, and other charges are used by the Nordic countries as one of the main economic instruments in environmental policies. Other economic instruments, such as subsidies, grants, and other support programmes are also prevalent. All Nordic countries take part in EUETS, and several have tradable quotas for fish. In this chapter the correspondence between the actual policies implemented in the Nordic countries and presented in Part 1 of this report and the academic literature will be examined. Insights from the interviews conducted with experts specialised on the topic in the Nordic countries will also be added.

The literature is consistent in stating that in order to effectively mitigate climate change a combination of economic instruments and policies are needed (see e.g., Bird, 2017; Greaker, Golombek and Hoel, 2019). This is also prevalent from the interviews and the compilation presented in Part 1 shows that the Nordic countries seem to have taken this to heart, with a vast variety of economic instruments used.

Markets-based strategies are used in the form of e.g., cap-and-trade systems, exemplified with the countries participation in the EU-ETS. Denmark, Iceland, and Sweden use tradable quotas in the fishing sector to reduce problems related to overfishing, as well as to improve economic efficiency. Taxes are used to a large scale in all of the Nordic countries, e.g., in regard to fossil fuels and electricity, transport, waste, and various environmentally harmful substances. Bird (2017) states that taxes on energy and fossil fuels generally remain significantly higher in the Nordic countries, than the rest of Europe. One of the Swedish experts stated in their interview that Sweden has succeeded in introducing a tax regime and a CO₂ tax level that deviates from the international norm, where the interest of industries have been taken into account when designing the tax scheme. Sweden has a relatively high CO₂ tax and have been able to maintain a prosperous economic development, as well as maintaining a competitive industry.

Cullenward and Victor (2020) state that direct subsidies and renewable mandates has been far more impactful than real-world carbon prices. In interviews with Danish experts the subject of carbon dioxide tax and its influence towards promoting clean technologies was highlighted. As previously mentioned in section 7, one of the Danish experts argued that the current tax level in Denmark is not high enough to have a substantial impact towards the promotion of clean technologies. The development of clean technologies is more often driven by the financial sector and their need to look for new types of investments.

We examine the use of subsidies and other forms of support further within the next section.

Macfarlane and Mazzucato (2018) list common funding instruments in regard to environmental policy: provision of loans, grants, guarantees and equity finance, and usual advisory services: strategic planning, capacity building, and training programmes. Part 1 describe Iceland’s support for reforestation, revegetation, afforestation and wetland reclamation, in which public funding is used in various forms, such as grant schemes, collaborative projects and direct financial assistance. Bird (2017) argues that all Nordic countries run wide-ranging clean energy research programmes and support industrial investments in energy-saving and low-carbon technologies. This corresponds to Part 1 of this report, see e.g., Norway’s Carbon Capture Storage project with the purpose of finding suitable places in the North Sea to store carbon dioxide, the Swedish initiative the “Industrial leap” or the Danish Rural Development Programme, which aims to promote the competitiveness of the agricultural sector and enhance the green transition.

Greaker, Golombek and Hoel (2019) argue that a potential benefit for the Nordic countries when subsidising clean technology development is that other states can get access to cheaper abatement options. This may be a more efficient way to support research and development (R&D), as well as achieve technological change. However, there could be a potential conflict between developing technology for which Nordic countries have comparative advantages and developing clean technologies for foreign markets.

Bird (2017) presents some environmentally friendly innovations that are common in the Nordic countries, e.g., innovations including low-energy construction, district heating systems and waste and organic materials used as an energy source. Part 1 shows that Finland uses a feed-in tariff system for which existing power plants fueled with wind, biogas, forest chips or wood-based fuels meeting the prescribed preconditions can be approved. Both Sweden and Denmark subsidise the production of renewable energy through various renewable sources, e.g., biogas, wind, solar, and biomass.

Bird (2017) states that biogas is increasingly being produced from agricultural residues and organic household waste. Waste that cannot be recovered and recycled can today be safely incinerated to generate energy instead of being dumped into landfill sites. This can be found in several of the Nordic countries. Bird further states that the Nordic countries have incentivised the use of renewable energy sources even when it has not been the cheapest option in the short term, e.g., as seen in Part 1 Iceland uses tax incentives to encourage environmental-friendly investments. This motivates businesses to invest in environmental-friendly options even if these have a faster depreciation than other.

Bird (2017) states that the Nordic countries’ advanced cross-border electricity market facilitates the greater use of renewable energy, since fluctuations in production often even out between regions, and can be balanced by flexible hydropower production. Part 1 explains the electricity certificate system between Sweden and Norway. In short, the system is a subsidy scheme with market features where producers of renewable energy receive a certificate for every produced unit of energy (MWh), which can be sold. However, the Swedish government have decided that new facilities may not be eligible for the system after December 2021.

Swedish Agency of Growth Policy Analysis (2018) has together with Frishammar and Söderholm analysed the state's role in connection with sustainable capital-intensive investments. They argue that in order to achieve good ‘green industry policies’ a country needs to implement a combination of technology-supporting, market-driving, and system-wide policy instruments. Technology-supporting instruments aim to address systemic weaknesses in the access to information, knowledge and resources that risk leading to underinvestment in R&D and innovation, and/or lack of cooperation or institutional inertia. Market-driving instruments aim to influence weaknesses in the will or ability of potential customers/users to demand new technologies or innovations, e.g., through technology-specific support for new technology (such as feed-in tariffs, e.g., Swedish electricity certificate system for renewable electricity). Frishammar and Söderholm argue that technology-specific support for new technologies (such as feed-in tariffs for solar and wind power) tends to be more innovation- and technology-driving than, for example, quota obligations.

Examples of technology-supporting instruments used in the Nordic countries include the Swedish support programme the Industry Leap (‘Industriklivet’). As a subsidy scheme for climate investments aimed towards the industry sector, it includes financing of research, feasibility studies and investments relating to other greenhouse gas emissions. One of the Swedish experts interviewed stated that this programme has been very important for the development of clean technologies including CCS technology. Other examples are found in Denmark’s energy and industry sector, where key elements include initiatives such as the establishment of the world’s first energy island in the North Sea, research in clean technologies such as Carbon Capture and Storage (CCS) and large capacity wind turbines, green district heating and support to biogas. Like previously stated, Norway and Sweden have subsidised a Carbon Capture Storage project.

Examples of market-driving instruments is subsidies or tax cuts for zero or low emissions vehicles. As mentioned in Part 1, generous tax incentives have contributed to a large number of electrical cars in Norway. Statistics Norway (2022c) reported that two thirds of all new cars sold in Norway were electric in 2021. Most of the Nordic countries use market-driving economic instruments in order to incentivise purchases of zero or low emissions cars to some extent, e.g., through reduced VAT which is used in Iceland. Part 1 shows that the Nordic countries use deposit-refund systems and producer responsibility in order to steer the market towards environmental friendlier actions. Producer responsibility means that producers have the responsibility to collect and dispose of product, as well as to inform consumers on how and where to dispose the products.

Two specific types of market-driving instruments mentioned are tender procedures, where the quantity to be produced from a given technology is determined first, e.g., wind power in Denmark, and public procurement of new ‘green’ technology. The later implies that public institutions are encouraged or instructed to include environmental impact as a variable when they perform a public procurement process (Swedish Agency of Growth Policy Analysis, 2018). For example, in Finland the government decided with the act on public contracts to encourage contracting authorities to take environmental considerations into account, and the Finnish government argue it is a highly suitable procurement criterion alongside price and other alternatives (Ministry of Economic Affairs and Employment, 2022e).

Although there are examples of international, as well as Nordic, cooperation (see e.g., Bird, 2017; Greaker, Golombek and Hoel, 2019) Greaker, Golombek and Hoel (2019) arguing that Nordic climate policies still have too much of a country focus. Several of the interviewed experts stated that the cooperation between the Nordic governments has slowed down over the years. One of the Swedish experts stated that it was easier and more convenient to reach out to other Nordic governmental experts in the past. Additionally, several of the experts interviewed argued that the Nordic countries should promote international acceptance across the broader society, and that governments need to present effective policy instrument to promote clean technologies and securing commitment towards a sustainable development.

Greaker, Golombek and Hoel (2019) highlight a few obstacles for the Nordic countries. They argue that the emission standards set by the Nordic countries may spur domestic research and development (R&D), but standards that are higher than other countries will, as long as trade barriers are moderate, also trigger more R&D in other countries. Consequently, the domestic green industry does not get a first-mover advantage by this policy. On the other hand, the policy may lead to more intense competition between abatement technology suppliers, thereby improving welfare. They argue that a subsidisation towards domestic firms’ R&D, should always accompany the efforts to create a larger home market for clean technologies. Secondly, the aim of reducing emissions from domestic transport set by Nordic countries may be dependent on imports of first-generation biofuels from developing countries. Imports of biofuels could induce emissions from land use change in the exporting countries that off-set all, or more than, the emission reductions in the importing countries. In Finland, Sweden and Norway, there are plans for building biofuels factories based on forestry residues. Greaker, Golombek and Hoel (2019) argue that Nordic governments should ensure that the chosen bio-refining processes contribute to technological development for advanced biofuels, and that the chosen processes are relevant for other kinds of cellulosic feedstock. A third example involves the use of absolute targets as a form of instrument to promote clean technologies, which the authors above argue risks promoting technologies that are dead ends. Lastly, Greaker, Golombek and Hoel (2019) argue that ignoring interactions between domestic and foreign climate polices could undo benefits of well-meaning climate policies.

During interviews with experts from the Nordic countries a few common threads could be identified when it comes to challenges in designing and implementing different economic instruments.

Both Sweden and Denmark mentioned policies/instruments where there is an unclear relationship between the environmental problem and the incentives, their examples being related to the tax on plastic bags in Sweden and the tax on aviation tickets in Denmark. The correlation between the environmental problem and the incentives is weak, and governments tend to overestimate that imposing a new environmental policy and related economic instrument would have a positive impact without sufficient systematic economic analysis. This relates to Greaker, Golombek and Hoel (2019) who state that it is hard to say how easily consumers will adapt to e.g., flying less. Further, they argue that no country can currently predict exactly what it will cost to become a ‘low-emissions society’. It is difficult to predict future cost reductions for renewable power, batteries and hydrogen-based solutions, and it is difficult to say how easily consumers will adapt.

Aviation taxes are used in several Nordic countries to mitigate the environmental impact. There are several types of aviation taxes such as ticket taxes, Value added tax, taxation on aircraft fuel, environmental taxes and taxes for air cargo. In 2019, a study by the Directorate-General for Mobility and Transport at the European Commission modelled the effect of the change in the taxation regime, in terms of various impacts, such as potential CO₂ emission reductions from the aviation sector across member states, including some of the Nordic countries. The different impact tax scenarios illustrated that in Sweden an abolition of the ticket tax could increase the CO₂ emissions with 4% from 2.5 to 2.7 Mton. An introduction of an aviation ticket tax in Finland, could decrease the CO₂ emissions with -4% from 2.1 to 2.0 Mton. A similar pattern can be seen for Denmark, were introducing a ticket tax could decrease the CO₂ emissions with 4% from 2.7 to 2.6 Mton.

Moreover, introducing a fuel excise duty could decrease the CO₂ emissions from the aviation sector at a higher rate, ranging between -8% in Sweden, -9% in Denmark to -12% in Finland compared to current situation according to the modelled results (European Commission, 2019b). The aviation tax can be seen a model for more climate protection to combat climate change and the goals set by the Paris Agreement. The Nordic governments could create policy programmes that aims to decrease the costs for low carbon projects that provides incentives to promote emission free aviation such as electric and hydrogen planes.

Fossil Free Sweden presented a road map in 2018 for transforming the aviation industry to 2030. The road map highlighted one of the largest obstacles for introducing fossil-free fuel into in the aviation sector is related to the lack of market forces to push the development. Governmental support for commercialising the product processes of bio-jet fuels is needed in both Sweden, and the other Nordic countries in order to create sustainable aviation sector (Fossilfritt Sverige, 2018).

Internal contradictions or bureaucracy may create problems in the green transition. One of the Danish experts interviewed mentioned that despite the country’s ambitious goals on expanding offshore renewable energy sources, the permitting process has created an obstacle. The permitting process may take up to six years. Furthermore, the expert highlighted that the shift from conventional towards organic farming is a sensitive topic in Denmark. The agricultural sector receives large subsidies from the EU, thus there are strong lobbying behind each initiative. Committing to a shift to organic farming requires large investments, which conventional farmers have small possibilities to make, due to low price elasticity for their products. As they struggle to preserve their agricultural production in the long run, it is difficult to fully commit towards the shift needed.

Several experts stated that lobbying organisations with strong opposition towards the implementation of new environmental taxes have raised issues in several Nordic countries, such as Denmark, Finland and Iceland. Many of these groups have a large influence and can negotiate to be exempt from new taxes. This also become a problem when removing a subsidy, as organisations that have benefitted from the subsidy may use their lobbying power to impact the policy outcome. The industries across the Nordic region have been given tax rebates and exemptions to protect its competitiveness on the international market. Overall, it can reduce the effectiveness of the economic instruments.

A wide acceptance of the profound consequences of climate change within the society is needed in order to make a positive policy change. Several of the experts interviewed highlighted that one of the challenges in the Nordic countries is obtaining an acceptance regarding the consequences of climate change across social groups and regions.

This chapter makes it clear that there are many similarities between theory and practice. Market-based strategies, such as environmental taxes, seems to be most common in the Nordic countries. Direct subsidies and other forms of support, such as research programmes are also common. All Nordic countries use a vast variety of policies, just like highlighted as important by scholars. However, it is also prevalent that, although there are similarities, scholars do not always agree with the instruments used. Further, there are risks associated with some of the instruments used. This is also somewhat corroborated by the interviewed experts. The reviewed literature emphasizes that more international cooperation is needed, and the experts interviewed highlight that cooperation between the Nordic countries has decreased over time. The interviews also highlighted that there are other challenges the countries are subject to, such as lobbying organisations who disagree with the implementation of new environmental taxes. Conclusively, there are a wide range of examples of similarities between what instruments or policies theory suggest and what the Nordic countries use, but there are also risks associated with the chosen instruments.