Summary for policy makers

The long-term Nordic policy objective of combating climate change has been challenged in recent years by disturbances to the economic system. The effects of the COVID-19 pandemic and Russia’s military invasion of Ukraine on trade flows and income distributions contributed to large price increases for electricity, heat, and transport fuels between 2021–2023. The Nordic governments tackled these price increases by introducing numerous measures to economically compensate households and businesses. However, it is unclear if and how these measures affected the Nordic social, climate and environmental policy priorities.

To clarify these issues, this report evaluates selected compensation measures, with a focus on their effect on income distribution, climate, and the environment. The report also presents alternative and likely more appropriate compensation measures that could have been taken. The scope of this project includes the Nordic countries and measures implemented from 2021–2023. The focus is on measures aimed at households and, to a minor extent, businesses. The main constraint of the analysis is data availability and the limited research available on impacts, which is a result of project implementation at the same time that several of the measures were in place. Therefore, the results presented in this report rely on theoretical reasoning and a few Nordic and international studies, but relatively limited empirical evidence.

The main results and conclusions are:

The design of the compensation measures varied among the Nordic countries.
All countries acted relatively quickly, but this speed resulted in implementation problems. There have also been occurrences of targeting errors, as well the creation of undesirable incentives.
Most of the implemented measures did not redistribute funds to low-income households. Rather, high energy consumption often implied high support, which implies that more support was given to high-income households.
Measures that include redistribution would be possible to implement in Nordic countries, which all have well developed social security systems. This is exemplified through one Danish measure, which supplied a one-off payment to disadvantaged households.
Most of the implemented measures distorted the price signal for electricity scarcity provided by the market, thus diminishing the opportunity for the market to effectively allocate resources and reduce energy consumption and emissions.

Most measures missed the opportunity to establish a direct win-win relationship between climate change policies and the desire to alleviate the price shocks. One Danish and one Norwegian measure did, however, give direct support for investments in green technology, with corresponding direct long-term effects on greenhouse gas emissions.
To reduce the risk of conflict between climate change policy and price shock alleviation, it is important that compensatory measures are generally understood to be temporary measures. Otherwise, businesses and households may come to expect such support in the case of future price increases, with the result that incentives for investment in energy saving measures are dampened.
Other policy designs for compensation measures are available. Measures that include flat rates or regressive transfers of funds, and include the decoupling of measures from current consumption, are outlined in the literature to be more effective than most of the measures that were implemented. A few of the implemented measures have some of these features, so learning from them may be beneficial.