Based on the studies of policy impact assessments and the workshop discussion with researchers, we have several recommendations for consideration to government agencies and researchers studying policy impacts for improved environmental policymaking with a focus on the effectiveness of green transition.
Continue/expand the use of green charges
Green charges typically follow the polluter pays principle. We encourage using green charges, at least when other policies such as bans are not in place, or when negative externalities are not covered by overarching EU policies, such as the EU ETS.
Set taxes and incentives close to the externality
Negative externalities arise from emissions of pollutants and habitat destruction, not from the consumption of goods and services themselves. Therefore, we recommend identifying the negative externalities in consumption and production value chains and target policies as close to the negative externalities as possible. This is the first-best policy design. While second-best, consumption-based taxes (such as the aviation tax and the electricity tax) reduce consumption and thereby the negative externalities, the same positive effects can be reached with a more precise tax. The first-best solutions also allow producers to either increase the price of the goods and services (reducing demand) or invest in new technology or production lines with less negative externalities. To the degree possible, exemptions should be avoided, and taxes equalised across sectors and sources of pollutions, to provide consistency and fairness.
Encourage studies assessing policy impact
Ex-ante studies can provide a good foundation for policy designs which give the best chance of reaching the intended impacts and goals of policies. Ex-post studies can assess whether or not goals were achieved. We recommend a heightened focus on studies assessing the impacts of policies and variations in policy designs. A redirection of scientific funding would be needed, or direct procurements of policy evaluations from relevant agencies. Comparisons between policy designs across the Nordics also provide a fruitful basis for assessing the impact of varying policy designs.
Prioritise evidence-based policy and policy-based evidence
If proper control groups are accessible, difference-in-difference or regression discontinuity approaches often provide good evidence. If not, we encourage policy experimentation with control and treatment groups that allow comparisons between treated groups and counterfactuals. Governmental agencies are often reluctant towards implementation of policy experiments, based on expectations of negative reactance. However, public acceptance for such experimentation is often higher than expected. When policy experimentation is not possible, other methods such as synthetic controls should be used to assess causal effects of policies, rather than simply comparing before-and-after measurements, which run the risk of being confounded by a range of other factors. Furthermore, we recommend a focus not only on evidence-based policy, but also policy-based evidence. The evidence that we produce must be tailored towards how it will be used. Too often, small-scale experiments are used, where adaptations can be made for local circumstances. When scaling up solutions, additional considerations must be made, and the designs may need to change depending on resource availability etc. For a discussion on how ideas and policy designs may fail at scale, as well as solutions to mitigate these issues, see List (2022). We encourage ex-ante assessments to tailor experimental designs as much as possible to circumstances necessary for a large-scale implementation.
Be aware of potential unintended consequences
Policies may induce unintended consequences such as extrinsic motivations crowding out intrinsic motivation or mental accounting, when people may feel more at ease with causing negative externalities if they pay for them through taxes. They may also lead to substitution effects and other perverse incentives which undermine sustainability objectives. These considerations must be made when designing policy instruments, and properly studied in separate circumstances.
Combine charges with a comprehensive policy mix
Charges may not lead to their full potential in isolation. Public acceptance may be low unless combined with redistributive policies in a wider policy framework. Tax and redistribution combinations provide promising solutions for effective policies that receive public acceptance. A careful consideration of policy mixes may eliminate the threat of perverse incentives or backlashes (e.g., "Gilet Jaunes" effect). Tax revenues can also be earmarked for investments in green technology, to increase public acceptance and further enhancing the effectiveness for a green transformation.
Harmonise long-term policy goals and industry signals
Without clear signals and stable policies from governments and agencies, industries lack confidence and incentives for long-term investments. Policies changing back and forth with new election cycles create unpredictable investment environments. To the extent possible, we recommend ensuring stable and clear policies to foster industry confidence and induce long-term investments. Address potential tax revenue deficits from green transitions with proactive fiscal planning.
Harmonise policy development across countries
The best possible policies are global implementations. This requires substantial collaborations that are complicated by conflicting goals and targets. The EU has taken important steps in harmonising environmental policies, but there is further potential for strengthening policies and harmonisation across countries. Harmonisation reduces potential leakage effects, and the wider impacts of policy implementations are maximised. While the end goal should be for wider harmonisation, the Nordic countries should increase harmonisation between these neighbouring and relatively similar countries. Agreements in separate regions can act as a first step towards agreements at continental and global scales.
Ensure biomass brought under the energy tax framework
If we are to reduce dangerous greenhouse gas emissions, then burning biomass for fuel cannot be treated as carbon neutral by energy tax frameworks. Biomass fuel should be subject to energy and carbon tax just like any other carbon emitting fuel. Ideally this would be coupled with a refactoring of how biomass emissions are treated in more widely in the System of Environmental Economic Accounts, but proper taxation is nonetheless an important first step that is more easily achieved by individual governments.