Objective
The Nordic Council of Ministries publishes a quadrennial report series on the use of economic instruments in the Nordic countries. The report series serves to document and highlight examples from the use of economic instruments in the five Nordic countries, with the aim to inform and inspire policymakers around the world.
This report is part of a series and comprises of two parts. The objective of the first part, The use of Economic Instruments in Nordic Environmental Policy 2018–2021 is to present an overview of the use of economic instruments in environmental policy in the Nordic countries for the period 2018–2021along with the second part, Overview of policies and economic instruments to promote clean technologies in the Nordic countries.
The report has been prepared by IVL Swedish Environmental Research Institute in Sweden, one external consultant from Iceland as well as Nordic external experts have been interviewed in Norway, Finland, Denmark, Sweden and Iceland. The core project team consisted of Flintull Annica Eriksson (Project leader), Annacarin Karlsson, Lars Zetterberg, Jenny Von Bahr, Johan Rootzén, Kenneth Möllersten, Henrik Kloo (IVL Swedish Environmental Research Institute) and Hrafnhildur Bragadóttir (Independent expert).
The focus area has been the use of economic instruments within the period 2018–2021. Significant changes or alterations to economic instruments after 2021 are also mentioned where relevant. National currencies have been converted to Euro using national exchange rates (yearly average) collected from the European Commission.
Definition of economic instruments
The purpose of applying economic instruments in an environmental policy context is to correct for market failures by internalizing externalities i.e., to incorporate non- monetized environmental cost and benefits into the price of goods, services and activities. As the market prices on using natural resources and environmental assets do not reflect the actual costs to society, these resources become overexploited. Through internalisation of these external costs, economic instruments provide incentives for agents to change behaviour. Several economic instruments can be introduced to correct for market failures e.g., taxes or charges, subsidies, and quotas (tradable permits or emission allowances) (Tietenberg, 1990):
An environmental tax or charge is a payment for using a certain resource or negatively affecting the environment. The unregulated market price does not reflect the cost to society associated with environmental deterioration. The environmental tax aims to correct the market failure by covering the gap between the market price and the social cost to society. An optimal tax should reflect the marginal social costs. An additional function of taxation is to raise revenue for the government, although this should not be the primary goal of an environmental tax. The tax should ideally be placed on the point source responsible for environmental harm. In practice this can be administratively impractical, or technical impossible, and an activity or product can instead be taxed through a proxy. A tax can be an efficient form of regulation because each actor can adjust to the regulation according to his or her own cost function. Environmental taxes do not, however, guarantee a certain level of environmental quality. Environmental taxes are best suited for regional and global environmental problems where it is the total emission or resource use that matters, and not the location of the emission-sources.
Unlike a tax, the allocation of quotas ensures that a predefined pollution level is met. This could be particularly relevant in cases where there is a risk that a change in pollution levels would lead to large damage cost to society; for example, if there is an irreversible tipping point. When quotas are made tradeable, producers who can reduce their pollution at a low cost will have an incentive to sell emission permits, while the producers facing a high cost of abatement will have an incentive to buy emission permits. It ensures abatements are made where the marginal costs are lowest. Hence, the emission reduction is achieved in the most efficient way.
Subsidies are used to support production sectors or activities which would otherwise be underprovided by the market. Subsidies are used to pay for positive externalities, or they are used as an incentive for producers to change to a more environmentally friendly form of production. Subsidies might overcompensate producers and can lead to overproduction. Subsidies also increase public spending and the need for tax revenue. This can lead to distortions in other parts of the economy.
Definition of clean technologies
Part 2 of this report focuses on policies and instruments to promote clean technologies in the Nordic countries. The objective of Part 2 of this report is to present an in-dept analysis of economic instruments the Nordic countries have implemented to promote clean technologies with suggestions and recommendations to policymakers on how they can further develop and strengthen existing measures to promote clean technologies.