Executive Summary

The report contains two parts. Part 1 summarizes the most significant developments in the use of economic instruments in the environmental policies in the Nordic countries. It provides an overview of new instruments or major changes to existing instruments from 2018 to 2021 a detailed country-by-country description of these developments and a cross-country comparison and assessment. Part 1 also provides “raw data” for further analysis by policymakers and other stakeholders, and presents other findings, including policy priorities and good practices. Part 2 provides an overview overview of policies and instruments the Nordic countries have used to promote clean technologies.

The Nordic countries use a vast variety of economic instruments as part of their environmental policies. The differences in use can be attributable to country and sector characteristics, as well as national preferences. The Nordic countries have a continued focus on climate considerations, as opposed to other environmental issues, in their use of economic instruments. There have been some changes in terms of new or discontinued instruments in the examined period. The most common changes relate to adjustments in tax rates. The biggest changes are seen in the transport sector and in the field of energy and air pollution. Noteworthy changes are differentiated tax rates based on CO₂ emissions, implementation of the Worldwide Harmonized Light Vehicles Test Procedure (WLTP) when calculating CO₂ emissions or other changes in the calculation of CO₂ emissions, and the implementation of new, or the extension of, support programmes and subsidy schemes for environmentally friendly investments.

The Nordic countries have constructed specific environmental and energy policies to promote clean technologies. Most commonly utilising a mix of environmental taxes and subsidies. Nevertheless, each country has chosen different technological paths depending on national and sector characteristics, as well as national preferences. 

Every three to four years, the Nordic Working Group for Environment and Economy (NME, formerly known as MEG) of the Nordic Council of Ministers publishes an overview of the use of economic instruments in environmental policies of the Nordic countries. This report is part of the series. The report is structured as the previous report in the series.

The first part includes an assessment of changes to the use of economic instrument in the period 2018–2021. Economic instruments are defined broadly and include taxes, charges and subsidies which provides an economic incentive to change behaviour. The assessment in Part 1 compares the use of economic instruments across sectors and countries. The changes in the use of economic instrument in the environmental policies are seen in light of issues that have been on the international agenda. Following the overview section, Part 1 further includes a detailed assessment of each Nordic country organised by sector. The sector definition aligns with the definition used on the previous reports that is to say the sectors comprise: Energy, greenhouse gases and air pollution, Water, Waste, Transport and Agriculture and natural resources.

Part 2 of this report gives an overview of policies and instruments that the Nordic countries have used to promote clean technologies, as well as an in-dept analysis related to cost-effectiveness, interaction between national climate policies and the EU Emission Trading System, policy instruments needed for implementing a green transition in the industry and finally a discussion on how small countries like the Nordic ones can affect the global environment by promoting clean technology and a shift towards a fossil free production.

In the period 2018 to 2021, the Nordic countries have focused on economic instruments in the transport sector and in the field of energy, greenhouse gases and air pollution.

In the transport sector, a key objective has been to increase the number of zero or low emission vehicles, and hence decrease the use of fossil fuels. The specific economic instruments used differs among the countries, but all countries have implemented some sort of differentiated tax based on CO2 emissions, which in some countries are combined with subsidies for zero or low emission vehicles. Several countries have made changes to the calculation of the carbon dioxide tax, e.g., by implementing the Worldwide Harmonized Light Vehicles Test Procedure (WLTP) when calculating CO2 emissions. Within the energy sector, Denmark, Norway, and Sweden have implemented new energy agreements meant to shape policies in the coming years. In Iceland, the carbon dioxide tax for all fuel types substantially increased in the examined period.

During the period 2018 to 2021 Denmark has made some changes to its environmental policies, and several new political agreements have come into effect.

In 2018, the government presented an energy agreement meant to shape the energy policy between 2020 and 2030. Key elements are initiatives such as suppor­ting renewable energy on market conditions, targeted energy savings, modernising the heat sector, strengthening energy and climate research, and continuous off­shore wind energy. In December 2019, the government reached a new Climate Act, which includes legally binding targets with the aim to reach net zero emissions by 2050. One year later Denmark reached an agreement for the energy and indu­stry sector combined with a climate agreement for waste management. Key elements include initiatives such as the establishment of an energy island in the North Sea, research in clean technologies, green district heating and support to biogas.

The Danish taxation scheme for transportation vehicles were changed in 2021. In Denmark vehicles are subject to both a registration tax and a vehicle tax based on fuel efficiency and in some cases weight, as well as taxes on transportation fuels. With the aim to promote green vehicles with high energy efficiency the registration tax was changed into three steps. For the first EUR 8 741 of the value of the car the tax is set to 25%, between EUR 8 741 to EUR 27 190 the tax is 85%, and above these levels the tax is set to 150%. This implies that electric cars will pay the full registration tax by 2035. Prior to 2021, the taxation scheme included a reduction for fuel efficiency and an increase for fuel inefficiency. This was removed and replaced by a taxation based on CO₂ emissions. A deduction of tax due to safety class (Euro NCAP) and other safety features were also removed.

Other noteworthy changes to Danish policies between 2018 and 2021 are the abolishment of the national tax on mineral phosphorus in animal feed. This change was made to strengthen the international competitiveness of the agricultural sector. Revenue of the energy taxes on fossil fuels decreased by 12% from EUR 4.5 million EUR 3.8 million, and the support to renewable energy decreased by 25%, mainly due to a decrease in subsidies for offshore wind energy.

Between 2018 and 2021 most of the economic instruments in environmental policy has remade unchanged. Some changes to tax levels have been made. The biggest changes include a change in the calculation of the tax for light and heavy fuel oil, natural and liquid gas, and hard coal as well as the taxable fuels. This was made in 2019 and implies that the calculation of carbon dioxide emissions considers emissions from the entire life cycle more clearly than before. The value of a tonne of carbon dioxide used in the calculation of the carbon dioxide tax on heating fuels was simultaneously reduced in order to not tighten this taxation.

Taxes on motor vehicles were also revised in the examined period. Finnish motor vehicles are charged with a one-time registration tax and an annual tax consisting of a basic tax, a driving power tax, or a combination of these. The registration tax is based on retail value and is differentiated based on the CO₂ emissions declared by the car manufacturer according to the Worldwide Harmonized Light Vehicles Test Procedure WLTP. The maximum tax rate has been unchanged in the examined period, but the minimum was reduced to 2.7% in 2019. The change is meant to incentives the purchase of energy-efficient cars, such as electrical or other low emission cars. The annual tax has also remained the same for most vehicles. Since 2020 the basic tax is based on CO₂ emissions declared by the WLTP, and for vehicles with emissions in the lower range the tax was reduced. Before than the NED test cycle was used. The driving tax, levied on vehicles powered by anything other than petrol, were decreased from 4.9 eurocents per day 2017 to 1.5 eurocents in 2020 for electric vehicles.

During 2018 to 2021 the Finnish government implemented a few new support schemes. To improve energy efficiency and decrease the usage of oil and coal the government decided to grant subsidies for renovation projects meant to improve the energy efficiency of residential buildings, for projects meant to replace oil as an energy source in detached houses, and investment support for projects meant to replace coal as an energy source. To accelerate the climate work of municipalities and regions, funding is given to local, regional and national projects supporting the climate work of municipalities. Other noteworthy implementations are a new financial support scheme implemented in 2020 for afforestation of organic soil and wetlands, a temporary subsidy scheme for the purchase of electric cars, and a one-time competitive tendering on the production subsidy for renewable energy.

During the period of 2018 to 2020 some new economic instruments were introduced. Tax levels of previous instruments were mostly unchanged. However, the carbon dioxide tax for all fuel types substantially increased in the period 2018 to 2021. On average this tax was 80% higher in this period compared to 2014 to 2017. A noteworthy implementation of environmental taxes is the introduction of a tax on fluorinated greenhouse gases in 2020. This was made in order to incentivise climate-friendly cooling agents and tax rates are differentiated based on the gases global warming potential. Another is the implementation of a taxation scheme meant to encourage climate-friendly investments. This allows for increased and faster depreciation of new investments that fulfil certain environment and climate related requirements. In addition to this, tax deductions for financing certain environmentally and climate-friendly activities are used since 2021.

Icelandic vehicles are subject to an excise duty based on the registered carbon dioxide emission. In 2018, the calculation of the CO₂ emissions was adjusted with the introduction of new standards using the New European Driving Cycle (NEDC) and the Worldwide Harmonized Light Vehicles Test Procedure (WLTP). Before this the rate ranged from 0% of the vehicle's value for vehicles emitting less than 80 grams of CO₂ per kilometre to 65% for vehicles emitting 250 grams or more per kilometre. The semi-annual vehicle tax was also changed so that the calculation is based on the NEDC and WLTP standards. For vehicles weighing more than 3 500 kg, the fee is still based on the vehicle's weight, and since 2020, this also applies to electric vehicles and hydrogen vehicles. In 2019 VAT discounts were introduced for the purchase of electric and hydrogen motorcycles, mopeds, electric bicycles, electric scooters, and regular bicycles in addition to the already existing VAT discounts offered for the purchase of electric vehicles, hydrogen vehicles and plug-in hybrid vehicles. Since 2020, 100% of the VAT related to the purchase of electric vehicle charging stations for use on residential property have been refunded, as well as a 100% refund of VAT on labour costs related to the installation to owners and builders of residential buildings.

In 2021, the goal of achieving carbon neutrality by 2040 was enshrined in law with amendments to the Climate Act No 70/2012. That same year the government announced its intention to complete the clean energy transition in Iceland no later than 2040, making Iceland the first country to become fossil-fuel independent.

For the period 2018 to 2021 has implemented a few changes to their environmental policies. Most previously instated policies have remained fairly the same, with some adjustments to e.g., tax levels.

There have however been quite a few changes for the Norwegian transport sector. In 2018 the annual excise tax on motor vehicles was replaced with a traffic insurance tax, and in 2021 the previous exemption of this tax for electrical cars were scrapped. Electrical cars are however still subject to a lower tax rate. In 2020 the road use tax, which purpose is to take external costs connected with e.g., accidents, congestion, road wear and local emissions into account was extended to include natural gas. There has also been increases in the CO₂ component within the taxation of motor vehicles, and since 2020 it is based on the WLTP standards. Further, in 2021 the Norwegian government announced that the flat CO₂ tax rate will increase by 5% each year until 2025, across all economic sectors not covered by the EU ETS scheme. The air passenger tax first introduced in 2016 was temporary terminated in 2019. However, it was introduced again in 2022.

A new climate strategy for the period 2021 to 2030 was implemented in 2021. The objective is to reduce non-quota emissions with 45% before 2030 in both the transport sector and the agriculture sector.

Other noteworthy changes made in the examined period are the subsidisation of a Carbon Capture Storage project which purpose is to find suitable places in the North Sea to store carbon dioxide, and the introduction of a tax on the fishing fleet with the purpose of financing control and supervision in the fishery industry.

In the examined period, 2018 to 2021, Sweden has made some changes to existing instruments and implemented a few new instruments. Tax rates have been altered, e.g., the excise tax on electricity consumption, which has been increased each year. Most of the changes to pre-existing taxes are percentage-wise small.

In January 2018 a new climate policy framework entered into force. The framework establishes that Sweden’s climate policy must be based on targets and specifies how the implementation will be carried out. The long-term target is to have zero net greenhouse gas emissions by 2045 at the latest.

The Swedish government implemented two other noteworthy changes in 2018. Both an emission reduction obligation scheme and a bonus-malus system targeted at new cars was implemented. The emission reduction obligation scheme implies that low-blended biofuels are subject to carbon and energy taxes that correspond to the rates of their fossil equivalents. The implementation corresponded with changes in the tax rules for petrol and diesel. The carbon tax rates were adjusted downwards to account for the share of low-blended biofuel per litre full blend, and the energy tax was lowered. High-blended and pure biofuels are not covered by the scheme and are still exempted from both the carbon tax and the energy tax. The implementation of a bonus-malus system implies that vehicles powered by diesel or petrol are subject to a higher annual tax during the first three years, and the previous tax exemption associated with low CO2-emissions was removed. A bonus is given to zero or low emission vehicles. The maximum bonus of EUR 6 803, or 25% of the retail value, will in practice only be given to zero emission vehicles. For other vehicles, such as plug-in hybrids, the bonus decreases for every gram of carbon dioxide per kilometre the car emits.

Another noteworthy change in the examined period is the reduction of tax cuts for fuels used for heat production in combined heat and power plants and in other heating plants (CHPs) made in 2019. Since then, CHPs within the EU ETS are subject to 91% of the carbon tax and 100% of the energy tax, which is an increase of 80 and 70 percentage points respectively. Lastly, the electricity certificate system, a subsidy scheme for renewable energy, was decided to be terminated by 2035, and no new electricity generation facilities are eligible for the system at the end of 2021, and the subsidy scheme for climate investments in the industry sector was extended. The extension made in 2020 implies that the scheme now includes e.g., financing research and feasibility studies.

The second part of the report presents an in-dept analysis of economic instruments the Nordic countries have implemented to promote clean technologies. The analysis is presented across six different chapters. The study illustrates that almost all the Nordic countries are utilising a mix of both environmental taxes and subsides to promote clean technologies. However, each country has chosen various technological paths depending on national interests and circumstances.

The desk research indicates 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. 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. 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.

The conducted analysis that covers which policy instruments are needed for implementing a green transition in the industry shows that that pricing is not enough to drive deep decarbonisation in industry. Other types of policy instruments are needed. A three-domain framework covering different domains of behavioral processes is further highlighted within this sub-chapter.

The analysis of how cost-effective the Nordic countries taxation system for clean technologies are indicates that most countries have a low coverage level. Suggestions to increase cost-effectiveness are discussed in this chapter, and it involves proposals to increase the number of, and level of taxes to better follow the marginal cost of the emissions. Suggestions what the Nordic countries can do on a national level is also discussed.

The interaction between national climate policies and the EU Emissions Trading System was examined in the in-dept analysis. The study indicates that overlapping policies are common both at EU and member state levels. The importance for the EU ETS to manage imbalances in supply and demand that may occur due to overlapping policies is also highlighted. Suggestions to implement price floors in the EU ETS are further discussed.

Seen from a global context, the Nordic countries are relatively small thus their ability to affect the global environment is largely related to the power of leading by example. The value of leadership, what may motivate nations to be frontrunners when it comes to affect the global environment by promoting clean technologies and shifting to a fossil free production is discussed. The importance of establishing joint forces in terms of developing and improving new clean technology supply chains across the Nordic region is elaborated.