1. Introduc­tion

Of the current global challenges, combating climate change is a top policy priority. However, the prioritization of climate change has been challenged by recent events such as Russia's war in Ukraine, policies to tackle the COVID-19 pandemic, and growing inflation worldwide. These events have resulted in significant price increases for fuels and electricity, as well as other commodities. Increasing electricity prices garnered intense media attention in 2022, following substantial price increases from average pre-2021 price levels in most Nordic countries (Figure 1). Figure 1 shows daily prices, with the variation in price even larger on an hourly basis (note: for Iceland, price statistics are only available on a bi-annual basis).  

Figure 1 Daily electricity market (Elspot) prices in €/MWh 2020–2023 on the Nordpool electricity market for the price areas in Denmark (a), Finland (b), Norway (c), and Sweden (d), Source: Nordpool (2023). Bi-annual electricity prices to homes and industry in the Iceland 2020–2022, including all taxes and fees, for 5000–15000 kWh/year, half year average (a). Source: Eurostat (2023)

To address the challenges posed by high energy and transport costs, governments may implement market interventions (in this report called “compensation measures”) to provide support to vulnerable households and companies. Compensation measures have been swiftly implemented to address these events, particularly the substantial increase in energy prices. However, the measures’ compatibility with existing climate and environmental policies is unclear. There is also a question as to whether such measures, typically introduced to dampen the impact of energy price increases on households and industries, could have been designed more efficiently and with a better distribution profile.

These questions are not simple to answer, due largely to the complexity and multi-facetted nature of the real-world system in which the compensation measures were implemented. For example, deviations from established standards, such as the EU Renewable Energy Directive, have raised concerns about potential impacts on existing climate goals. Furthermore, the impact of the sharp increase in electricity costs on the green transition is an important example. Since such large changes have occurred, both intentionally and unintentionally, it is crucial to thoroughly evaluate the consequences of the rapidly implemented compensation measures and changes in markets, alongside already existing environmental regulations. The need for such an evaluation is further stressed as the long-term climate change and environmental goals themselves impose a change to the system. However, early evaluations of the effect of the implemented measures - such as the one presented in this report - are challenged by the natural lack of comprehensive data and relevant research to build on.

The main objective of the work leading to this report was to evaluate a selection of compensation measures introduced to address energy and transport price increases in the Nordic countries between 2021–2023, with a focus on the distributional effects and coherence with existing climate change and environmental policies. The analysis focuses primarily on households, and secondarily on industry. 

The main distributional effects considered include aspects such as risk of poverty, differences between geographic areas (such as urban and rural areas), and difference between socioeconomic groups. It also considers whether some industries are more likely to benefit from these measures. The main climate and environmental policy impact considered is the effect of the compensation measures on greenhouse gas emissions.  

In addition, the report discusses alternative approaches that could have better ensured equitable distribution, while maintaining positive and long-term climate change impacts. The extent to which these alternative approaches have been evaluated, and whether the Nordic countries have worked to coordinate their compensation strategies and explored potential negative impacts (particularly on their common electricity market) is also addressed.

The recent energy crisis in Europe has resulted in the implementation of a number of policy measures to shield households and firms from increases in energy prices. For some countries, these measures have been costly, while for others, the costs have been moderate. Figure 2 below summarises the size of the support (in billion Euro and percentage of GDP), based on Bruegel.org which has compiled this information.

Figure 2 Governments earmarked and allocated funding to shield households and firms from the energy crisis (Sep 2021–Jan 2023), for European countries including the Nordic countries (excluding Iceland where no measures were implemented). Total amount in bn euro (blue dots) and as per cent of GDP (yellow bars) per country. Source: Bruegel (2023). Last updated 26. June 2023

As can be seen from Figure 2, relatively speaking (as percentage of GDP), the Nordic countries are in the lower end, although the amounts spent are still substantial, especially if considered per household, and may therefore have non-negligible distributional and climate/environmental impacts.

Since the compensation measures have very recently been implemented (and many of them also revised over the last two years

It may be such revisions can be used as basis for evaluation at a laters stage, though this has not been possible in this project.

) it is methodologically challenging to evaluate their effects. In principle, the effects of the compensation measures are the difference between the effects in the period from introduction of the measure, and the effects in a hypothetical (reference) trajectory without the measure in place. To get a “clean” estimate of these effects, one would need either an experimental (or quasi experimental) situation where e.g., one geographical area has experienced a measure, and another (similar in all other aspects) at one point in time has not. Alternatively, that the same area for some time has experienced a measure and later (and/or before) has not. Under such circumstances it is possible to identify, by use of econometric techniques, the causal effect of the measure on the distributional profile (equity) and on climate policy outcomes. If there are no such experimental conditions, the alternative is macro-economic modelling of the effects through the economy. In such cases, one can study both hypothetical and actual policy measures, but with relatively high uncertainty. We limit ourselves to a few observations from international studies that have attempted to assess the impact of energy prices and compensation measures across several countries

There are also a number of individual country studies that we do not review here, such as e.g. Department for Business, Energy & Industrial Strategy (2021),  (both UK) and Kalkuhl et al. (2022) (Germany)

before we proceed to look more specifically at the measures implemented in the Nordic countries. Some of the lessons from the international literature are also relevant in the Nordic context.

The impacts of energy prices and of resulting compensation measures depend on several factors, e.g., for households their share of energy costs compared to other expenditures. They will also depend on the design of the compensation measures. A global study of 116 countries found that the energy price crisis increased energy costs by 63–113 percent on average, resulting in increased household expenditures of 2.7–4.8 percent, and around 78–141 million people potentially pushed into extreme poverty (Guan et al., 2023). In Europe, Steckel et al. (2022) found that the impact of the energy price crisis on households is highly heterogenous. For example, they found that it affects low- and middle-income households more than high-income households, relative to their total expenditures (i.e. regressive impact). Furthermore, results show that the poorest 40 percent of households with high energy costs are particularly affected, and that ca. 11 million inhabitants (2.6 percent of all households) would require at least 50 percent of their current expenditures to compensate for increasing energy prices, while ca. 48 million inhabitants (11.5 percent of all households) would need 25 percent of current expenditures in compensation. A large and more recent assessment based on a microsimulation model of Europe confirms the large, regressive impact of the energy crisis on households in Europe (IEEP, 2023). Menyhert (2022) found that the adverse social effects of inflation are significantly larger in many Central and Eastern European Member States,

This is because low-income households and vulnerable groups (such as large households, rural population, children or elderly persons) in these parts of Europe face particularly high risks of financial distress and social exclusion.

and that energy price increases not only potentially increase inequality within countries but also between EU15 and non-EU15 countries.

The bulk of the resources used for energy price compensation in Figure 2, have been general price-suppressing schemes for everybody, dampening the effect of energy prices.

Bruegel, (2023). https://www.bruegel.org/dataset/national-policies-shield-consumers-rising-energy-prices

This is expensive and if not designed in a progressive way, would do little to alleviate the unequal burden of the high energy prices. In addition, such schemes reduce incentives for saving on energy and investing in energy saving measures and, hence, delay the necessary green transition. Therefore, an unequivocal conclusion from the studies referenced above, and other studies (e.g. Ari et al., 2022 and European Scientific Advisory Board on Climate Change, 2023), is to design such schemes so that they target those who need it the most, while generally maintaining price signals for everybody to reduce energy use.

The report is organised as follows. Chapter 2 explains the overall approach to our assessment of Nordic compensation measures. Chapter 3 provides an overview of the policy measures that have been implemented in the Nordic countries, details in Appendix. Chapters 4–7 assess a selection of measures in each of the Nordic countries. Chapter 8 synthesises the results and lessons from the Nordic countries, to derive some knowledge about how such (future) measures could be better designed to achieve more desirable societal and environmental outcomes.