Chapter 3. Towards green growth

Finland has a strong reputation as a “clean country” and leader in environmental policy. Sustainable development is high on Finland’s political agenda. The country should be commended for its commitments to become carbon neutral by 2035 and to pioneer the world’s first circular economy. However, Finland is not fully on track to meet all its ambitious goals. While emission of greenhouse gases (GHGs) and air pollutants have declined considerably, pressures such as waste generation, material consumption, intensity of forest use and nutrient losses to water bodies have continued to rise (Chapter 1).

To achieve its ambitious goals, Finland can tap into abundant renewable natural resources, a sound environmental policy framework, its experience with using economic instruments, its industrial strengths and strong innovative capacity. Nevertheless, targeted policy measures are needed to provide adequate incentives and boost investment and innovation for the green transition and to steer the economic recovery from the COVID-19 crisis towards low-carbon and circular patterns. Public policies also play a role to smooth the impacts of this transition on vulnerable communities. The challenge for the next decade will be to get the right policies in place, to secure sufficient resources, and ensure continued and broad public consensus.

Finland has a long tradition of promoting sustainable development both in domestic policies and in international development co-operation. It topped the Sustainable Development Goal (SDG) Index ranking in 2021, out of 165 countries (Sachs et al., 2021). Its score indicates that nearly 86% of the SDG goals and related targets have been met. In particular, Finland has achieved the goals related to water and clean energy. However, challenges remain to meet the goals on climate, responsible consumption and production, and terrestrial and marine biodiversity (Figure 3.1). This is consistent with Finland’s own assessment presented in its second Voluntary National Review of the SDGs of 2020 (Prime Minister’s Office, 2020).

Finland has a solid policy framework to achieve the SDGs. It established novel institutional mechanisms to support and monitor national implementation of the SDGs and engage civil society. In 2014, the Finnish National Commission on Sustainable Development (Chapter 2) adopted a long-term vision titled “The Finland we want by 2050 – the society’s commitment so sustainable development”. In 2016, the strategy was updated to align itself with the 2030 Agenda and its 17 SDGs.1 Rather than a strategy, the document sets a whole-of-government and whole-of-society commitment to sustainable development. It provides a long-term sustainable development policy framework for the government, business community and society. The document outlines policy principles and eight objectives in line with the SDGs.2

The Prime Minister’s Office is in charge of co-ordinating the national sustainable development policy. All line ministries are part of the Sustainable Development Co-ordination Network. They are required to report to Parliament annually on their policies and measures to achieve the SDGs. The Expert Panel on Sustainable Development provides independent scientific advice. A monitoring system tracks progress towards the SDGs based on a specific indicator set. A citizens’ panel is organised every year to complement the progress tracking with qualitative information and views of civil society.3 A state of sustainable development report is published every four years (the latest was released in 2020). In addition, the National Audit Office has integrated the SDGs into its audit programme.

An innovative multi-stakeholder system is used to engage civil society in achieving the SDGs. All actors can announce their own “operational commitments” via a dedicated web portal, thereby participating in the implementation of Finland’s vision. Each operational commitment is linked to one of eight national objectives, as well as to the SDGs. As of September 2021, companies, educational institutions, political parties, cities and other actors had made some 2 600 commitments.

Finland could build on its framework for sustainability assessment to move towards green budgeting. A sustainability assessment has been integrated into the annual policy cycle (i.e. planning, budgeting and reporting). Since 2018, the government budget proposals include a sustainable development chapter. This provides a qualitative assessment of the budget contribution to the SDGs and identifies the state expenditure and revenue relevant to the carbon-neutrality goal. However, it only reviews budgetary programmes identified as contributing to green objectives. This is a relatively light approach to green budgeting. In other OECD countries, the budget process appraises the environmental impacts of budgetary and fiscal policies and of their coherences towards delivery of national and international commitments (OECD, 2021a).

Finland’s sustainable budgeting has not yet had any significant impact on resource allocation or improved policy coherence (Metsä and Varis, 18 December 2020). An analysis of the Finnish state budget showed that items counterproductive to carbon neutrality and resource circularity were allocated nearly twice the amount of resources as those in line with the SDGs (EEA, 2020). Nonetheless, the sustainability budget assessment has contributed to improving transparency of budget proposals and visibility of sustainable development issues across the government (Prime Minister’s Office, 2020).

Finland would benefit from a transparent system to track how expenditure contributes (positively and negatively) to meeting environmental goals. In addition, it could benefit from systematic assessment (ex ante and ex post) of the environmental and social impact of policy packages and resource allocations. To this end, it needs to build adequate capacity in administration and enhance co-ordination across government branches.

Finland’s policy approach to the SDGs – the PATH2030 project – concluded that sustainable development has become a widely accepted goal in Finnish society. However, it also noted that more is needed to truly anchor the SDGs in central decision-making processes (Lähteenoja et al., 2019). Conflict of interest between different stakeholders and an insufficient use of indicators and scientific knowledge in decision making have been a barrier to progress (EEA, 2020). In addition to widening sustainable budgeting, the evaluation recommended to strengthen scientific analysis and monitoring in support of decision making. This would help create consensus around policies and reconcile trade-offs.

As recommended by the PATH2030 assessment, the National Commission on Sustainable Development started working on a 2030 Agenda roadmap in 2021 that will define how Finland will promote achievement of the SDGs nationally, in the European Union (EU) and globally. Since 2017, Finland has developed shorter-term implementation plans for the 2030 Agenda that cover respective government terms. In early 2021, the government released a sustainability roadmap to translate the Government Programme’s goal of a “socially, economically and ecologically sustainable society” into specific objectives.

Finland should further integrate sustainable development into development co-operation (Lähteenoja et al., 2019). The level of official development assistance (ODA) fell considerably between 2014 and 2018 as part of fiscal consolidation efforts. The ODA budget cuts affected support to climate change and other environment-related activities. ODA rebounded in 2019 and continued to grow in 2020. It was 0.47% of gross national income (GNI) in 2020. However, this is still well below the level preceding the cuts (0.59% in 2014) and the commitment to achieve a 0.7% ODA/GNI ratio by 2030. In 2019, Finland committed 25% of its total bilateral allocable aid in support of the environment and the Rio Conventions. This is ten percentage points below the average of countries that are members of the OECD Development Assistance Committee (OECD, 2021b).

A swift and well-targeted policy response helped limit the health and economic effects of the COVID-19 pandemic. Finnish gross domestic product (GDP) shrank by 2.8% in 2020, less than on average in the Euro Area (-6.8%). The economy is projected to return to pre-pandemic levels at the end of 2021. Furthermore, as containment measures recede and vaccination continues, the economy is expected to grow by 2.7% in 2022. Unemployment is projected to return to pre-pandemic rates by the end of 2022 (OECD, 2021c).

Fiscal support was sizeable. Discretionary fiscal measures (additional spending and forgone revenue) amounted to about EUR 9 billion in 2020 and EUR 6 billion in 2021 (or 3.8% and 2.4% of GDP, respectively). Most of this support aimed at coping with the pandemic and preparing for economic recovery (MoF, 2021a). The budget deficit and the debt deteriorated mainly because of the crisis response (Chapter 1). Once the recovery is firmly established and the pandemic has subsided, fiscal prudence will be required to stabilise the debt-to-GDP ratio, which is projected to exceed 90% in 2022 (OECD, 2021c).

Finland’s response to the pandemic has a strong environmental and social sustainability component. A working group on sustainable recovery was set up in April 2020 to help identify measures to promote economic recovery, reduce GHG emissions and reverse the decline in biodiversity. The working group also mapped out longer-term actions to accelerate the transition to a carbon-neutral circular economy in line with the European Green Deal. According to the group, Finland’s first fiscal support package (adopted in June 2020 as part of a larger supplementary budget proposal) included EUR 1.5 billion worth of measures that fulfil sustainable recovery criteria (MoE, 2020).

Between the onset of the crisis and mid-2021, Finland allocated 58% of recovery spending (or about EUR 2.2 billion) to “green measures”, which is high by international comparison (O’Callaghan, Murdock and Yao, 2020). As in many other OECD countries, Finland’s support has a strong focus on climate mitigation and largely targets the transport and energy sectors, which are main sources of GHG emissions and are candidate for quick roll-outs (OECD, 2021d). Measures included grants to municipalities for sustainable infrastructure projects (e.g. cycling and green areas); large-scale investment in public transport (including in railway and inter-city rail connections); funding for clean energy infrastructure, energy efficiency and charging station for electric vehicles (EVs); investment in national parks and forest biodiversity; and support to research and innovation.4 However, like many countries, Finland has provided support to rescue its national air carrier, as well as other hard-hit industries. These may be considered to generate negative environmental effects (OECD, 2021d).

In mid-2021, the government started implementing the Sustainable Growth Programme 2021-26. A dedicated inter-ministerial working group oversaw development of the programme. It is also in charge of monitoring its implementation, although indicators are not yet defined. The programme aims to use public funding to leverage private investment and open up new markets and business opportunities. It is funded by the Next Generation EU funds (EUR 2.9 billion in 2021-23). It encompasses the Recovery and Resilience Plan (RRP) funded by the Recovery and Resilience Facility (RRF) (EUR 2.1 billion in 2021-23 or 1% of Finland GDP).5 The RRF is estimated to boost growth by 0.3 percentage points in both 2021 and 2022 (OECD, 2021c).

The programme builds on four pillars: green transition, digital economy, employment and skills, and access to health and social services. The green transition pillar is allocated over half of the RFF, which is well above the 37% EU benchmark. About a quarter of the programme funding will be for digitalisation (e.g. to facilitate remote working). The programme also includes approximately EUR 700 million in funding for research, development and innovation activities.

Measures for digitalisation and research and development can also contribute to the green transition (MoF, 2021b). Most green measures target the energy, buildings and transport sectors, which is in line with Finland’s strategy to achieve carbon neutrality (Chapter 4).6 The RRP is expected to reduce annual GHG emissions by 6% by 2026 (MoF, 2021c). However, the RRP pays relatively little attention to biodiversity and the bioeconomy (Green Recovery Tracker, 2021).7

The scope of the RRP may be too broad and not commensurate to available resources, which may hamper its effectiveness. This calls for a better prioritisation of allocations to support an effective transformation of the economy and society. To be eligible for RRP funding, most projects need to be climate-friendly and/or meet the “do no significant harm” principle. However, it is not clear how this assessment will work in practice. The actual contribution of the Sustainable Growth Programme to the green transition goal will depend on the design and timely implementation of relevant measures. This illustrates the importance of further scrutiny during the planning, review and implementation of recovery measures. Much will also depend on the balance of resource allocation in the government budgets till 2026.

Economy-wide expenditure for environmental protection is relatively low in Finland, partly due to the modest level of public spending. National (public and private) environmental protection expenditure averaged about 1.7% of GDP in 2014-18 in Finland. This was below the EU average of 2% and the level observed in Sweden and Denmark. Environmental protection investment declined slightly during the same period. It was 1.2% of total investment of the economy (gross fixed capital formation) in 2018, compared to 2% in the European Union as a whole (Eurostat, 2021a).

The business sector is the main driver of environmental expenditure in Finland, more so than in most other EU countries. Specialist producers of environmental services and other corporations contributed nearly 70% to economy-wide environmental expenditure in 2018 (the EU average was 56%).8 The government sector (including the general government and non-profit institutions serving households) contributes comparatively little: 10% of environmental protection expenditure in 2018, or less than half than the EU average. Expenditure in the business sector grew by some 20% in 2014-18 and more than compensated for the decline in government exependiture. Household expenditure – mainly payments for waste and wastewater services – also grew. It was 21% of total environmental protection expenditure in 2018, on par with the EU average (Eurostat, 2021a).

Almost all environmental protection investment is carried out at business level, nearly evenly split between specialist producers of environmental services and other corporations. The government sector contributed just 3% to total environmental protection investment in 2018, well below the EU average of 21%. Only 0.2% of public investment targets environmental protection, the lowest such share in the European Union (Eurostat, 2021a). The strong role of the business sector is linked to the governance of the waste and water sectors. Finland largely relies on private operators to provide waste and water services (Chapter 1).

The share of environmental protection investment in total investment of corporations is high. In 2018, businesses dedicated 2.2% of their investment to prevent and/or limit the negative environmental effects of the main production activity. This was one of the ten highest shares among the European countries of the OECD in 2018 (Figure 3.2). In 2018, air pollution control and climate mitigation accounted for a third of business environmental protection investment. Wastewater management made up for 27% of environmental protection investment, followed by protection of water and soil quality (23%) and waste management (13%) (Eurostat, 2021a).

Finland has made progress in facilitating investment related to climate change, energy transition and sustainable transport. However, additional investment will be needed for the climate neutrality and circular transition (EC, 2020a). Some Finnish industrial actors have estimated that achieving climate objectives would double investment needs in their industry (MEAE, 2020). Focusing investment promotion policy on the low-carbon energy transition and sustainable transport, along with human capital and innovation, would strengthen Finland’s long-term growth potential (EC, 2020a).

Investment will not only be required in clean energy and transport technologies but also in the circular economy and bioeconomy. The shift to carbon neutrality will affect businesses’ input and retail markets (e.g. increasing the demand for electricity and alternative raw materials such as biomass, and rising end user prices). This strengthens the case for greater materials efficiency, as well as recycling and reuse of certain products and materials (Material Economics, 2019). Overcoming barriers to circular economy solutions is therefore critical to meeting the carbon neutrality objectives. Investment in the sector needs to focus on waste prevention, separate collection and sorting, as well as on recycling infrastructure (Chapter 1).

The General Government Fiscal Plan 2022-25 allocates 3.1% of budget expenditure to measures targeting the carbon-neutrality goal in 2022 (excluding the RFF). However, this share is planned to decline to 2.3% in 2023 and 2.1% in 2025. The measures include, among others, support for renewable energy generation, transport network development and maintenance, clean technology development, acquisition of nature reserves and sustainable agriculture (MoF, 2021d). Public financial support should target investment that would not occur otherwise, with a view to enhancing cost-effectiveness of public spending and leveraging private investment.

The General Government Fiscal Plan 2022-25 also outlines a number of tax measures that are aligned with the carbon-neutrality goal. These include the gradual removal of some energy tax expenditure and changes in the electricity tax rates for some activities. However, the net effect of a change in peat taxation as from 2022 could be an increase in emissions in the short term (Section 3.6.1).

Finland has experienced rapid growth of renewable energy in the past decade (Chapter 1). In the power sector, a feed-in premium scheme has applied to renewable electricity projects using wind, biogas and biomass (forest chips and wood fuels) since 2011.9 In 2018, a technology-neutral tender-based premium scheme replaced the feed-in premium mechanism.10 Both schemes attracted lots of new onshore wind projects (Chapter 4). In 2018, Finland saw its first wind power investment made without any subsidies (IEA, 2018). A favourable taxation regime has stimulated the use of biomass for power and heat production (Section 3.5.2); mandatory blending quotas have encouraged the use of biofuels for transport (Chapter 4).

As Chapter 4 discusses, Finland could further improve the energy performance of its building stock. The long-term renovation strategy aims at decarbonising the building stock through a mix of renovation, phase-out of fossil fuel use and demolition of underused buildings (Chapter 4). A subsidy programme is in place to encourage building renovations. For 2020-22, a budget of EUR 100 million is available to support residential renovation projects that will improve energy efficiency significantly above mandatory standards. Other policies to encourage energy efficiency in buildings include a voluntary agreement with the property sector, energy performance certificates, consumer energy advice, eco-design and energy labelling, as well as a tax credit for abandoning oil heating.

Finland set the goal to at least halve GHG emissions from transport by 2030 from the 2005 level (Chapter 4). To this aim, it has subsidised the purchase of EVs (Section 3.5) and the development of public charging stations (Chapter 4). The government estimates that achieving the 2030 target of 25 000 charging stations will require about EUR 415 million in investment by 2030 (MEAE, 2019).

As highlighted in Chapter 4, there is a need to reorient spending towards rail, sustainable modes of transport and active mobility to reduce car dependency. There is also room to improve cost-effectiveness of public transport service provision, especially in rural areas. Finland’s public spending on maintenance and investment in transport infrastructure has been heavily skewed towards road transport (Figure 4.5). In a welcome move, the national transport plan 2021-32 attempts to direct investment in new transport infrastructure towards rail. It includes the development of three high-speed railroad lines, with investment costs of over EUR 8.5 billion in the 2020s. In addition, as part of the government response to COVID-19, Finland allocated the highest funds per capita to cycling infrastructure across all European countries (Chapter 4).

The 2019 Government Programme states that “Taxation should take better account of development that is socially, economically and ecologically sustainable” (Finnish Government, 2019). Finland makes extensive use of taxation, user fees and charges that can help achieve environmental goals. However, as recognised by the government, the ambition of becoming a carbon-neutral circular economy calls for reassessing the tax structure.

The government announced a “tax reform for sustainable development”. This will involve changes in energy, transport and mining taxation; promotion of the circular economy by tax means; and study of an innovative consumption tax based on emissions. The proposed tax reform is in line with, and in some respects goes beyond, several recommendations from the 2009 OECD Environmental Performance Review about reviewing taxes and subsidies and increasing the cost-effectiveness of economic instruments (OECD, 2009). The government committed to draw a roadmap on sustainable taxation to support the climate neutrality goal, while maintaining stable tax revenue. As of September 2021, work in this area has focused on energy and transport taxation.

Finland’s level of taxation is among the highest in the OECD, with total tax revenues amounting to 42% of GDP compared with an OECD average of 34%. This reflects a more extensive welfare system and higher-quality public services than in most other countries. Finland has been moving towards a more growth-friendly tax system in recent years, with cuts in corporate income tax rates, reduced income taxation for lower- and middle-income households, and increasing shares of revenue from environmentally related taxes.

The tax burden on labour, however, remains among the highest in the OECD. Reducing subsidies and tax expenditures and further increasing taxes that do not impose large economic distortions (including environmentally related taxes) could help ease the tax burden on labour, while contributing to achievement of environmental goals (OECD, 2020). Acting in this area would also help achieve fiscal consolidation. This has become more pressing because of the increase in public debt to finance the management of, and recovery from, the COVID-19 pandemic (Section 3.3).

In 2019, environmentally related taxes accounted for 6.6% of total tax revenue and 2.8% of GDP. This places Finland far above the OECD average (Figure 3.3). Energy taxes raise roughly two-thirds of total environmentally related tax revenue. Transport-related taxes account for the remaining third; this is a high share compared with most other OECD countries. As in many other countries, environmental taxation on pollution or resource use is negligible in terms of revenue.

Between 2010 and 2019, environmentally related tax revenue increased by 13% in real terms, although it declined slightly relative to GDP (Figure 3.3). The increase of nominal rates of energy taxes offset the effect of a decrease in taxable energy consumption and the shift to cleaner fuels, which are taxed less. At current legislation, revenue from energy taxes as a share of GDP is projected to further decline (by 0.6 percentage points by 2030) with electrification and a massive switch to biofuels (MoF et al., 2021). Nominal rates should be regularly adjusted to maintain the tax incentive function and compensate for the decline in the tax base. Establishing a formal mechanism of adjustment (e.g. through an index) would help reduce social and political resistance to otherwise ad hoc tax increases (MoF et al., 2021).

Households pay the highest share of environmentally related taxes. In 2019, households contributed to 33% of energy tax revenue, 76% of vehicle tax revenue, and 42% of pollution and resource taxes (Figure 3.4). Household energy tax bills are nearly twice as high as those paid by other sectors, reflecting tax concessions granted to industry and agriculture. As in other countries, environmental taxation is higher on households and lower on sectors that are more exposed to international competitiveness issues.

Energy poverty is not an acute problem in Finland, with only 1.7% of Finns reporting being unable to keep their homes warm enough (compared with 7.3% in the European Union) (EPOV, 2020). Finland has no dedicated national initiatives addressing energy poverty. However, it provides basic income support for low-income households to cover necessary daily expenses (including heating and electricity costs). There are no social or reduced tariffs for low-income households.

Energy taxes in Finland are levied within the framework of the 2003 EU Energy Taxation Directive, which sets the structure and minimum rates of the taxation of energy products in EU member states. In 2011, Finland revised its energy taxation to further reflect environmental aspects. Since then, energy taxation has been based on three components:

  • An energy tax component, which is based on the calorific value (energy content) of the fuel.

  • A carbon tax component, which is based on average lifecycle carbon dioxide (CO2) emissions of the fuel.

  • A strategic stockpile fee component, which is a (small) fixed component used to cover expenses from compliance with international stockpiling obligations.

The energy tax is the largest component in terms of tax revenue. It is levied on both fossil fuels and liquid biofuels with the objective to increase energy efficiency. The tax rates vary across energy uses, with considerably higher rates applying to road fuels than to fuels used for heating or in agriculture.

As in many countries, diesel used for road transport faces a lower energy tax than petrol, despite diesel’s higher local air pollution effects; diesel vehicles generally emit more particulate matter and nitrogen oxides per litre used.11 A higher circulation tax on diesel vehicles aim to compensate for lower rates on diesel fuels (Section 3.5.3). Lower rates also apply to peat; fuels used for commercial shipping and aviation are exempt (as in all EU member countries). Meanwhile, energy-intensive companies and agricultural businesses receive an energy tax refund (which will be phased out; Section 3.6.1). Biogas and biomass fuels are exempt (OECD, 2019).

When Finland introduced the carbon tax in 1990, it became the first country to explicitly tax CO2 emissions. The carbon tax component is based on lifecycle CO2 emissions, a feature unique in the world. The tax applies to both fossil fuels and liquid biofuels at a nominal rate of EUR 77 per tonne of CO2 for transport fuels and EUR 53 for heating fuels. As these nominal tax rates factor in the lifecycle emissions of the fuel, they should be increased by about 20% to be comparable to a tax on CO2 calculated on the basis of emissions from combustion alone (MoF et al., 2021). This increase would make them among the highest standard explicit CO2 tax rates among OECD countries.

The carbon tax applies relatively uniformly across all sectors, including to entities covered under the EU Emissions Trading System (ETS). Peat, however, is exempt from the CO2 tax component (in addition to benefitting from a lower energy tax component). Biofuels are classified in three categories: i) biofuels that fail to meet sustainability criteria are subject to the same carbon tax as fossil fuels; ii) sustainable first-generation biofuels are subject to 50% of the carbon tax on equivalent fossil fuels; and iii) sustainable second-generation biofuels are exempt. For example, the carbon tax rate on biogasoline sold in Finland is half the standard rate and it is zero for biodiesel. Gaseous and solid biofuels enjoy a zero carbon tax as well (OECD, 2019).

Since 2012, the CO2 tax for transport fuels has been based on lifecycle emissions. This approach harmonised the tax bases for fossil fuels and biofuels to avoid fiscal state aid problems and made it unnecessary to establish additional tax reductions and exemptions for biofuels (MoF et al., 2021).12 Finnish tax treatment of liquid biofuels is unique in the European Union. The lower tax levels on biofuels result from the energy and carbon tax methods, as well as sustainability criteria, and not from explicit tax discounts. In January 2019, the lifecycle methodology was extended to fuels for heating and machinery. To limit the additional tax burden due to this change, the carbon tax rate on these fuels decreased to EUR 53 per tonne of carbon dioxide equivalent (CO2eq).

Finland does not tax fuels used to generate electricity in accordance with the EU Energy Taxation Directive. The EU ETS generally covers the electricity sector. However, the energy tax and the strategic stockpile fee apply to electricity consumption, irrespective of the source to generate the electricity. Two electricity tax rates apply: a lower (class II) rate for industry, agriculture, mining and data centres, and a higher (class I) rate for other users (households, service sector, etc.). Since 2015, electricity produced from small-scale plants benefits from a tax exemption. Table 3.1 presents the energy tax rates applied in 2021.

Until 2018, fuels used in combined heat and power (CHP) plants, which are covered by the EU ETS, benefited from a 50% carbon tax exemption. In January 2019, this carbon tax discount was turned into a full exemption from the energy tax to increase the relative tax burden on high-carbon fuels, notably coal (MoF et al., 2021). In 2021, Finland reduced the energy tax discount for CHP based on fossil fuels. Nonetheless, CHP continues to enjoy a favourable tax treatment compared to heat production plants. At the same time, the mix of energy and carbon taxation and ETS allowance prices discourages the use of fossil fuels in CHP plants, while providing incentives for biomass combustion (Chapter 4).

Average effective tax rates on CO2 emissions from energy use (including from burning biomass) are among the ten highest in the OECD. As such, they provide relatively strong incentives for energy savings and GHG emission reductions across the economy (Figure 3.5). These rates consider both the energy and carbon tax components and various tax reductions and exemptions. Recent increases in the tax rates for transport and heating fuels have further strengthened the effective carbon tax in both the road and non-road sectors.

Finland’s effective carbon tax rates on road CO2 emissions increased between 2015 and 2018 (as they have in most countries). However, unlike the trends in most European countries of the OECD, the effective tax on non-road CO2 emissions in Finland declined in 2015-18 (Figure 3.5). This can be attributed to a considerable increase in the use of (untaxed) biomass combined with less use of highly taxed coal (OECD, 2019). Finland could better assess the potential net effect of taxing solid biofuels on GHG emissions and revenue. It could consider the option of extending the energy and carbon tax structure (based on lifecycle GHG emissions) to solid biofuels.

In addition to the energy tax, some energy uses are subject to carbon pricing through the EU ETS. The EU ETS covered about 45% of Finland’s total GHG emissions in 2019, a share that declined over time with the shift to renewables (preliminary data indicate that 41% of emissions were under the EU ETS in 2020) (Chapter 1). The OECD estimates that – accounting for both energy and carbon taxes and the EU ETS – Finland priced nearly all CO2 emissions from energy use in 2018. However, less than half were priced above EUR 60 per tonne of CO2 – the mid-point estimate of carbon costs today (Figure 3.6). These numbers disregard the CO2 emissions from the combustion of solid and liquid biofuels (which are taxed less). If these emissions are included, Finland priced 62% of CO2 emissions, with merely 24% of emissions priced above EUR 60 per tonne of CO2 (OECD, 2021e). Emissions priced at EUR 60 per tonne of CO2 or above were primarily emitted by road transport and, to a lesser extent, industry. By contrast, nearly three-quarters of emissions from residential and commercial energy use are unpriced, reflecting the prevalence of biomass for heating in this sector.

The government announced an overhaul of energy taxation to help achieve a carbon-neutral economy by 2035 and to benefit renewable energy (Finnish Government, 2019). It started with raising tax rates on transport fuels in 2020. A working group was established to inform the energy tax reform process. The government started to implement other changes to energy taxation in 2021.

Most notably, changes to energy taxation include the phase-out of the industrial energy tax rebate system by 2025 (Section 3.6.1). At the same time, the electricity tax for class II users (industry, mining, greenhouses and data centres) was lowered to the EU minimum rate (from 0.69 to 0.05 cents per kWh) in 2021. The two measures, which aim to support decarbonisation through electrification, are expected to be budget-neutral. With the same purpose, data centres, heat pumps and electric boilers generating heat for district heating networks will be transferred to the lower electricity tax category as from 2022.13 Moreover, the government increased the energy tax on heating fuels and reduced the tax discounts on paraffinic diesel and fossil fuels used in CHP. It also nearly doubled the energy tax rate on peat.

There is scope to continue moving towards a more stringent carbon pricing policy. As recommended by Parry and Wingender (2021), Finland should consider a progressive increase of the effective carbon price to reach a target level by 2030 (e.g. EUR 125 per tonne of CO2). It could set a trajectory of future effective carbon prices for each fuel in each sector, with a view to progressively reach an economy-wide price by 2030. This could be done by introducing annual surcharges on fuels. Such surcharge would be equivalent to the difference between the yearly target price and the prevailing effective carbon price resulting from the combination of the carbon tax, energy taxes and the ETS allowance price. This would be similar to the carbon price floor mechanisms in place in the Netherlands and the United Kingdom (OECD, forthcoming). A target carbon price of EUR 125 is estimated to have relatively modest impacts on revenue, welfare and energy prices (Parry and Wingender, 2021). Still, it should be part of a comprehensive fiscal reform that reduces labour income taxes and addresses potential adverse impacts on households and competitiveness.

Finland’s vehicle taxation encompasses two taxes: a one-off registration tax (the car tax) and an annual vehicle circulation tax. The car tax is calculated as a percentage of the vehicle’s retail price, with the tax rate varying according to the vehicle’s CO2 emissions (since 2008). The rate rises from 0% for zero-emission vehicles in one-gramme increments to 360 grammes of CO2 per kilometre (gCO₂/km), where a tax rate of 50% applies.14 This is a relatively high maximum registration tax rate compared to most other European countries. Vans used for goods transport and distribution benefit from a reduced tax rate; lorries, buses and tractors are not subject to the tax. Until October 2021, EVs were subject to a 2% tax rate. Since then, EVs have been exempted from the car tax. At the same time, the annual vehicle circulation tax on EVs has been raised, with a view to shift the tax burden on EVs away from the point of sale and encourage purchase of such vehicles.

The annual vehicle circulation tax has two components: i) a base tax that applies to all cars and vans; and ii) a motive power tax that applies to passenger cars, vans and heavy goods vehicles that are powered by other than petrol engines (i.e. diesel, electric and gas-powered cars). The base tax depends on the vehicle’s CO2 emissions intensity and ranges from EUR 53 to EUR 654 per year. The motive power tax intends primarily to rebalance the effect of lower fuel taxes on diesel fuel, natural gas and electricity compared to petrol. For diesel cars, the motive power tax is set at EUR 0.055 for each 100 kg of gross weight for every day the car is registered, while hybrid and electric cars pay lower rates.

A purchase subsidy of EUR 2 000 for EVs of up to EUR 50 000 (not including plug-in hybrid models) was in place between 2018 and 2021. The subsidy is expected to be extended to 2022. In addition, a scrapping bonus of the same amount was granted for the purchase of a new low-emission passenger motor vehicle in 2020-21. A scrapping bonus of up to EUR 1 000 can also be used to purchase a new electric bicycle or a season ticket for public transport. This could provide incentives to use sustainable modes of transport (Chapter 4).

In recent years, the share of internal combustion engine car sales started declining, while that of hybrid and electric cars began to rise visibly. In 2020, hybrid and electric cars jointly accounted for 38% of car sales, compared to 13% for diesel cars and 47% for petrol cars (Figure 3.7). In mid-2021, first registrations of electric cars outnumbered those of diesel cars for the first time. This suggests the combination of vehicle tax design and EV purchase subsidy has contributed to incentivising the purchase of lower-emission cars.

As a result, the average CO2 intensity of newly registered cars declined steadily over the past decade. It reached 115 gCO₂/km in 2019 (Figure 3.7) – still some 20% above the EU fleet-wide target for 2021. The car tax design was found to have had a positive, albeit small, impact on the CO2 emissions intensity of newly registered cars (Harju et al., 2018). At the same time, the CO2 intensity of new diesel cars has been rising in recent years. This is largely due to the growing share of the sport utility vehicle segment and camper vans (Chapter 4).

Similar to other countries, the reform that linked vehicle taxes to CO2 emissions in 2008 led to a spike in the purchase of diesel cars. Since then, the share of diesel cars in new registrations has been declining steadily (Figure 3.7). However, diesel cars dominate the used car segment. Sales of used (imported) diesel cars continued to grow to reach 60% of all used car sales in 2016. This share dropped to 46% in 2019. Overall, the share of diesel cars in the fleet continued to rise to 28% of total cars in use in 2019, and has started to decline slightly since. In addition, the passenger car fleet is old. The average age of cars was 12.5 years in 2020, above the EU average of 11.5 years and well above the average age of cars in other Nordic countries (FICAS, 2021). Old diesel vehicles are a major driver of air pollution.

The higher motive power tax on diesel vehicles has only partially offset the incentives to purchase diesel cars linked to lower taxes on the fuel and the CO2-based vehicle taxation. The motive power tax does not reflect the marginal cost of fuel use, including environmental costs. Higher amounts of fuel used by any given vehicle will imply higher emissions for that vehicle. The generally higher efficiency of diesel vehicles results in lower fuel costs for a given distance driven, a benefit that is entirely captured by the owner (Harding, 2014). In addition, the motive power tax for diesel vehicles has not been raised since 2012 and the average energy tax on diesel fuel in 2021 was lower than in 2012.15

A higher energy tax on diesel would better reflect the social costs of driving a diesel car.16 Ideally, fuel and vehicle taxes should be complemented by distance-based charges dependent on vehicle emission parameters and the place of driving to best address air pollutant emissions; road charges based on place and time of driving could complete the mix to tackle congestion where needed (van Dender, 2019).

In its 2019 programme, the government announced its intention to revise the vehicle tax regime in line with the GHG emissions reduction goals for the transport sector, the expected shift towards automation and the spread of mobility as a service. The intention is to develop a tax policy that both supports climate objectives and secures the fiscal base of transport taxation in the long term. Revenues from environmentally related taxes are expected to decline over the next decade. The largest revenue losses will result from declining transport fuel tax revenue due to electrification and use of biofuels, which are taxed less (MoF et al., 2021). OECD analysis suggests the best way to achieve the dual goal of reducing GHG emissions and supporting fiscal revenue is a gradual shift from energy-based taxation of road transport towards a comprehensive system of road use charges. The charges would be differentiated according to where and when the driving takes place and the type of vehicle used (van Dender, 2019).

Finland does not charge for road use, whether based on distance travelled, time on the road or congestion levels. Finland is one of only three European countries not to have a road pricing scheme in place for heavy goods vehicles. However, the motive power tax is proportional to the time a vehicle is registered. Hence, it could be broadly likened to a time-based charge (vignette).

In 2021, a government-appointed working group investigated possible changes to transport taxation to achieve GHG emission reduction targets. The working group concluded that fuel taxation remains the most cost-effective way to curb CO2-emissions from transport. It considered that strengthening vehicle taxation is a better revenue-raising solution than introducing a nationwide road pricing scheme, which would imply considerable administrative and technical costs. At the same time, the working group acknowledged that lower costs of driving (once the fleet is electric) may encourage higher vehicle use. This, in turn, may require localised and targeted policy interventions such as congestion charges in regions suffering from high traffic volumes (MoF, 2021e).

Helsinki region – the only region with congestion problems – has been considering congestion pricing. Road pricing would help address congestion, increase use of public transport and reduce environmental impacts of road transport in the region (HSL, 2016). Road charges could be put in place in the Helsinki region within the existing administrative structure. However, the legislation does not permit municipalities to implement such systems.

The government announced its intention to introduce legislation enabling congestion charging in city regions (Finnish Government, 2019). Implementation of congestion pricing would require an assessment of how revenue could be used to improve the effectiveness and social acceptability of the scheme. One possibility, for example, would be investing in public transport and active mobility.

As mentioned in Section 3.5.2, fuels used for commercial aviation are not taxed. Finland does not impose a passenger aviation tax. A citizens’ initiative on this issue (aimed at mitigating CO2 emissions) gathered more than 50 000 signatures, which means Parliament must consider the introduction of a flight tax.

The benefit of using a company-owned car is taxed based on the principle that private use of such cars should be treated like wage income (i.e. taxed at full value). The taxable benefit is based on two components: the vehicle price (with the tax rate decreasing as the vehicle ages) and distance travelled for personal use.17 Although the true value of the in-kind benefit of company cars could be underestimated, this tax model can be considered good practice. The Finland policy still provides incentives for employees to be paid in the form of a company car (e.g. rather than in cash). However, such incentives are lower in Finland than in many other OECD countries.

Parking space provided by the employer, on the other hand, is not taxed. This risks increasing the demand for on-the-job parking and hence the use of cars for commuting. This is especially the case in urban areas where parking space is scarce and may conflict with other uses, such as in the city of Helsinki.

In January 2021, Finland reduced the taxable value of the in-kind benefit for company-owned zero-emission electric vehicles by EUR 170 per month. According to the working group on the reform of transport taxation, this tax exemption is a costly way to reduce emissions. Costs (in terms of forgone income tax revenue) are estimated at EUR 500-1 000 per tonne of CO2 over ten years (MoF, 2021e). Nonetheless, the General Government Fiscal Plan 2022-25 extends this benefit to non-electric low-emission company cars (hybrid and gas-powered), which can lead to increased CO2 emissions from company cars. Finland also exempted the benefit of charging electric cars at the workplace as of January 2021. Both measures remain in place until 2025.

Employees travelling to work benefit from a tax deduction to compensate for commuting expenses. These deductions are up to the amount of the lowest cost of commuting, regardless of the means of transport used. When public transport is available, the deduction is based on the cost of a long-term public transport ticket. However, for many employees the calculation is based on the cost of car commuting because public transport is not available.18 This commuting allowance scheme aims to avoid distorting choices between means of transport for commuting. However, it still provides a hidden subsidy to live farther from work and public transport services and, in turn, to commute by car. If the employer pays for (or reimburses) commuting costs, they are tax exempt if public transport is used (up to EUR 3 400 per year). However, they are fully taxable if other forms of commuting are used (e.g. private car use). The fringe benefit of a bicycle provided by the employer is tax-free up to EUR 1 200 per year.

Taxes on pollution and natural resource extraction and use account for merely 1% of environmentally related tax revenue (compared with 5% in OECD Europe). Finland levies a number of taxes and charges on material use, waste generation and natural resource use (see below). A noise charge applies to night-time departures of turbo jet aircrafts in the Helsinki-Vantaa airport. The revenue of fishing and hunting licence fees is used to finance fish population and game management. However, no levies apply to water abstraction, water pollution, air emissions, fertilisers or pesticides.

Since 1996, a landfill tax has aimed to reduce the amount of waste sent to landfills. In line with the recommendation of the 2009 OECD Environmental Performance Review, the tax now also applies to private landfills. In 2016, the tax rate was increased from EUR 55 to EUR 70 per tonne. Waste categories with no technical treatment or feasible use alternative to disposal at landfills are exempt (e.g. mineral and inorganic chemical process waste). The tax has contributed to reducing landfilling. However, it had only limited effects on recycling rates as much of the previously landfilled waste was diverted to incineration plants for energy recovery (Chapter 1).

Increasing the price of waste incineration could help steer waste streams from incineration towards recycling. The EU ETS exempts incineration of municipal and hazardous waste, but Denmark and Sweden, for example, have opted to include it. Finland should consider doing the same. Denmark also applies an incineration tax based on the energy and CO2 content of the incinerated material to encourage recycling of the most energy-intensive waste, such as plastics. However, a 2021 Finnish study concluded that a weight-based waste incineration tax based on the price of EU ETS emission allowances or equivalent to the energy tax rate would not yield significant increase in recycling and CO2 emission savings. The extra costs of incineration would be passed on to households via waste fees, but the increase would be insufficient to produce any behavioural change in waste sorting (Prime Minister’s Office, 2021).

Any form of pricing incineration should be included in a broader policy package. Such a package should look at the entire waste value chain. It should thus aim to increase waste sorting at source, streamline producer responsibility schemes and promote development of recycling markets (Prime Minister’s Office, 2021).

In this respect, the 2021 changes to the Waste Act (Chapter 1) provide a good basis to advance separate collection and recycling. Green Deal voluntary agreements between the government and industry sectors can contribute to achieving circularity and climate neutrality goals (Chapter 2). Among agreements in place as of 2021 were those aiming to decrease consumption of single-use plastic bags; increase recycling of oil waste; promote reuse and recycling of demolition materials; and recycle plastic packaging at construction sites.19 To be effective and efficient, Green Deal agreements need to engage a sufficiently large number of actors, as well as set clear and ambitious targets and monitoring mechanisms.

Finland also applies other economic instruments for waste management. Deposit-refund systems for beverage packaging have existed for decades. These deposit-refund systems, coupled with a tax (EUR 0.51 per litre) on beverage containers that are not part of the system, have helped increase the recycling and reuse of packaging materials (EC, 2019). A recycling tax is levied on sales of new tyres of EUR 1.85-61.10 per tyre. An oil protection fee of EUR 0.50 per tonne is charged on imported oil and oil transported through Finland. Revenue from the oil protection fee is earmarked to cover the costs of managing oil spills and cleaning up soil and groundwater contaminated by oil.

Finland has been considering other taxation measures to encourage sustainable waste management and the circular economy. The 2018 Plastics Roadmap, for example, announced a feasibility study on taxing single-use plastics. However, government-led analyses on the taxation of plastic products and non-mineral resources (such as sand, gravel, clay) have concluded the environmental benefits of taxation would be either negligible or lower than the costs (MoF, 2012). The 2019 Government Programme announced to “comprehensively investigate the conditions for using taxation policy to promote a circular economy, for example through a broadly based tax on packaging made from non-renewable natural resources, a tax on energy and carbon dioxide emissions from waste incineration, and an increase in the waste tax levied on landfill waste” (Finnish Government, 2019). At the time of writing, the government was planning to reduce the electricity tax on recycling industry as from 2022.

Finland has published annual reports on tax expenditures since 2010. The country is a member of the Friends of Fossil Fuel Subsidy Reform, an informal grouping of non-G20 countries established in 2010. The group works to build consensus on ambitious and transparent fossil-fuel subsidy reform.20

According to the OECD Inventory of Fossil Fuel subsidies, Finland’s expenditure on fossil fuel support equalled 0.55% of GDP and USD 268 per capita in 2019 (OECD, 2021f). Nearly all support measures are tax expenditure items resulting from reduced energy tax rates to lower the cost of energy consumption in industry, transport and agriculture sectors. There is only one small budgetary support measure, which aims at covering the cost for emergency stockpiling of peat (OECD, 2021g). Figure 3.2 reports the main tax expenditures that Finland considers at least partially environmentally harmful.

Finland introduced some tax measures in 2020-21 that help reduce fossil fuel subsidies. This is in line with its climate neutrality goal, as well as recommendations from the 2009 OECD Environmental Performance Review (OECD, 2009). Measures include gradually removing the energy tax rebate for energy-intensive industries, increasing the tax rate on peat, removing the tax discount on paraffinic diesel and reducing the tax discount on fossil fuel used in CHP. The working group on energy tax reform also proposed the gradual removal of tax expenditures for peat, agricultural fuels and mining activities (MoF et al., 2021). However, no plans have been announced for implementation.

While many EU countries apply lower energy tax rates to industry than to households, Finland applies the same standard energy tax rates to business and non-business use of energy. At the same time, it grants an energy tax refund to selected energy-intensive sectors. This is effectively a subsidy for using fossil fuels; peat and natural gas are the most common fuels used in the sectors that benefit from the tax refund. This refund, which was widened in 2012 in response to competitiveness concerns among the Finnish manufacturing sector, will be gradually phased out by 2025.21 At the same time, the electricity tax for industry, mining, greenhouses and data centres will be lowered to the EU minimum rate in 2021 (Section 3.5.2). As a result, the electricity tax expenditure will increase as of 2021 (to about EUR 830 million) (Table 3.2). Nonetheless, the mix of the energy tax refund phase-out and the electricity tax rate reduction is expected to be budget-neutral. This combination of measures aims to support decarbonisation through electrification by shifting the tax burden from electricity use to fossil fuel use.

There are two other major sources of forgone tax revenue. A lower energy tax is charged for diesel used in road transport. Energy tax rebates are also available for light fuel oil used in mobile machinery (i.e. off-road agricultural, construction, gardening and municipal use).

Peat continues to benefit from a separate, favourable energy tax regime. As the only domestic fossil energy source, peat is considered important for energy security, and peat production sustains more than 2 000 full-time jobs in rural areas (Chapter 4). Only peat used in power or heating plants generating more than 5 000 MWh a year is subject to the energy tax. Moreover, the rate for the energy tax is lower on a per-unit-of-energy basis than for coal or natural gas. Peat is also exempt from the stockpiling fee and the carbon tax component of energy taxation. If peat were subject to the same energy tax model applying to other fuels, its tax level would be nearly six times as high.

Finland should phase out the tax expenditure on peat, as well as the energy tax refund for agricultural fuels (Table 3.2), as recommended by the working group on energy tax reform (MoF et al., 2021). The working group suggested to gradually raise the peat tax rate to reach EUR 10 MWh in 2023. This would still be less than a third than the tax rate that would apply to peat based on its energy and carbon content. In particular, peat would remain cheaper than coal, thereby discouraging operators from replacing peat with coal. However, it may become convenient to substitute peat with timber wood, which is untaxed. Taxing the use of timber for large-scale energy production could help ensure that wood is not diverted from being used as raw material for processing (MoF et al., 2021).

In line with the working group’s recommendation, the government raised the energy tax rate on peat in 2021. It has also been considering further changes to peat taxation to support the goal of halving peat use by 2030. These include a carbon price floor for peat as from 2022, under which peat tax would increase if the EU ETS price fell below a certain threshold. The ETS price needs to stays above EUR 20 /tCO2 for Finland to achieve its target on peat. At the same time, to smoothen the transition, peat installations would receive tax-free allowances for the first 10 000 MWh produced from peat (MoF, 2021d). However, the net effect of this measure would be a loss of tax revenue in the short term and more GHG emissions from peat use.

Finland’s agricultural sector receives among the highest producer support payments in Europe. In 2019, agricultural support under the EU Common Agricultural Policy (CAP) reached EUR 1.4 billion. This support accounts for nearly a third of farm gross return, the highest share among EU member states and far higher than the EU average of 13% (Niemi and Väre, 2019). An additional EUR 319 million was paid as national aid,22 which mostly supports farmers in northern areas by sustaining their agricultural production.

Nearly three-quarters of Finland’s CAP budget is channelled through the EU Rural Development Programme (RDP). The RDP had a total budget of EUR 8.3 billion for 2014-20, of which EUR 2.3 billion was financed from the EU budget (EC, 2020b). The largest part of RDP funding (44%) supported “areas with natural constraints”. In Finland, these areas largely refer to cold environments with poor soil, where agricultural production is difficult.

Agri-environment-climate measures received the second largest part of the RDP (21%). Farmers receiving such support must limit use of nitrogen and phosphorus in arable farming. Under the RDP, Finland aimed to put 80% of the used agricultural area under water management contracts, 54% under soil management contracts and 18% under biodiversity management contracts (EC, 2020b).

In addition to the RDP, Finland also receives EU agricultural subsidies in the form of income support (i.e. direct payments), amounting to EUR 525 million in 2019. In accordance with EU rules, at least 30% of this support must be allocated to “greening” measures. However, the European Court of Auditors has criticised the low level of requirements of the greening approach. The approach largely reflects standard farming practices and thus has not encouraged substantial changes in agricultural practices (ECA, 2017).

The upcoming CAP reform and Finland’s implementation plan provide an opportunity to improve the effectiveness of greening, as well as of agri-environment-climate measures, in promoting sustainable agricultural practices.23 This should be done alongside a revision of subsidies that negatively affect biodiversity. In 2015, a national review of such subsidies concluded that some harmful subsidies can be reformed at national level. At the same time, it noted the largest subsidies would need to be reformed at European or global level to address concerns of competitiveness or carbon leakage.

Finland’s policy framework is conducive to eco-innovation. Several strategies and programmes aim to develop new know-how, business models, markets and technology. Their ultimate goal is to make the country a leader on innovation for the circular and carbon-neutrality transition. These strategies include those on the bioeconomy and clean technology (cleantech), as well as the National Roadmap to a Circular Economy, among others.

Gross expenditure on research and development (R&D) is high. It is about 2.8% of GDP, above the OECD average (Table of Basic Statistics). The government announced to go further and reach a target of 4% of GDP by 2030, as well as to increase public R&D spending (Finnish Government, 2019). This increase aims to recover from the dramatic drop in R&D expenditure in the aftermath of the global financial crisis and the decline of the Finnish information and communication technology industry.

The government’s pledge to increase public R&D expenditure is welcome. Between 2008 and 2017, government R&D funding declined by 17% in real terms. The cuts in public R&D spending exacerbated the drop in business R&D. While public spending has stabilised at pre-crisis levels, private-sector investment has not recovered yet (EC, 2020a). Public spending should focus on accelerating investment in innovation at business level. The Sustainable Growth Programme 2021-26 includes approximately EUR 700 million in R&D for this purpose (Section 3.3).

Finland is a leader in investing in clean energy technology. More than three-quarters of the energy-related public R&D outlays targeted energy efficiency and renewable sources in 2019, among the highest share among the member countries of the International Energy Agency (Figure 3.8).

However, environment- and energy-related R&D accounts for 5.5% of public R&D budgets, a relatively low share among OECD countries. This reflects the fact that most R&D spending occurs in the business sector (Figure 3.9).

Despite the drop in public and business R&D expenditure, Finland has continued to deliver a high number of patents in environmental technology. Most environment-related patents were for technology to mitigate climate change (e.g. clean energy technologies, low-carbon processing) and general environmental management (e.g. air and water pollution control) (Figure 3.10).

The country is an OECD leader in terms of patents application in environment-related technology. Green patents accounted for about 13% of all patent applications in 2016-18, the ten highest among OECD countries. Finland filed 37 environment-related patents application per capita in the same period (Figure 5 in Assessment and recommendations). Finland has a share of over 1% of the global cleantech market, which is about twice as much as the country’s contribution to global GDP (EC, 2019).

Environmental regulations have been a major driver in shaping the market for low-carbon solutions since the early 2000s. Finland has often pioneered the implementation of EU environmental policies, which has given Finnish companies a first-mover advantage. After the 2009 financial crisis, many businesses started to prioritise investment in low-carbon solutions in response to an increasing customers' demand for cleaner products (Hjelt et al., 2020).

Finnish small and medium-sized enterprises (SMEs) are more innovative than on average in the European Union. About 70% of the cleantech companies operating in Finland are either micro-organisations or SMEs, and have fewer than 250 employees (EC, 2019). However, there is a gap in innovation investment and capacity between them and large companies (EC, 2020).

As in most countries, there is a need to improve collaboration between the basic research institutions and the business sector, particularly SMEs, to bring innovative cleaner technology and products to the commercialisation stage (OECD, 2018). Most public support to private R&D is directed to SMEs. However, this could better target investment in environmental and low-carbon technology, which can pose a higher financial burden. According to Finnish companies, the insufficient financial support for pilot and industry-scale demonstration projects is a barrier to the climate neutrality transition (MoE, 2020).

Finland has taken steps to remove this barrier. In 2018, the institutions promoting innovation, exports and investment were merged into Business Finland, a one-stop shop that implements innovation support programmes. The agency aims to facilitate collaboration among businesses, research and public organisations. It has launched several programmes to promote investment and innovation in the bioeconomy, circular economy and cleantech sectors. It has provided considerable R&D funding for investment in low-carbon solutions. Energy-related projects accounted for one-third of Business Finland’s total innovation funding in 2006-19 (Hjelt et al., 2020). The newly established Finnish Climate Fund (a state-owned company) provides funding for industry-scale demonstration projects of climate and digital technology solutions.24 In addition, the independent innovation fund Sitra has focus areas on circular economy and carbon-neutral industry.

In addition to applying green public procurement (Chapter 2), Finland is the most advanced EU country in implementing public procurement for innovation (PPI). In 2020, the government launched an action plan to reach 10% of PPI in all public procurement by 2023. This aims to stimulate demand for innovative goods and services, including in the environment field, thereby encouraging industries to produce them commercially on a large scale. As public procurement represents 15% of Finland’s GDP, the public sectors can use its large purchasing power to act as an early adopter of innovative goods and services. Finland would benefit from assessing effectiveness of the PPI policy in fostering low-carbon and other environment-related solutions.

The environmental industry contributes significantly to the Finnish economy. Finland’s environmental goods and services (EGS) sector grew faster than the rest of the economy in 2012-19, in terms of both value added and employment.25 It also grew more than on average in the European Union (Figure 3.11). EGS contributed nearly 8% to the Finnish GDP and about 10% to exports in 2019, more than in all other EU countries. More than 160 000 people (full-time equivalents) were employed in the EGS sector in 2019 (Statistics Finland, 2020; Eurostat, 2021b).

Resource management activities dominate the EGS sector. These are activities to preserve and maintain the stock of natural resources, including energy, minerals, and forest and water resources. They accounted for nearly 85% of the EGS turnover in 2019. The energy sector (renewables and energy savings) accounted for more than 60% of resource management turnover, reflecting Finland’s policy emphasis on the low-carbon energy transition (Figure 3.10). The energy sector is also the single largest source of EGS-related jobs.

Environmental protection activities accounted for the remaining 15% of the EGS turnover, a relatively minor share compared to most EU countries (Statistics Finland, 2020; Eurostat, 2021b). These are activities to prevent and reduce pollution and environmental degradation (mainly wastewater treatment, waste management, and air and climate protection).

Finland’s businesses are particularly active in providing environmental goods and services. The proportion of SMEs offering green products or services is one of the highest in the European Union. One-fifth of SMEs generate more than half of turnover by selling green products or services (EC, 2019).

According to the national impact assessment of the 2035 carbon-neutrality goal, the accelerated deployment of new technologies will lead to growth in exports and manufacturing based on domestic resources, with positive impacts on economic performance and employment. For example, under certain conditions,26 the value of machinery and equipment production would increase by a factor of 2.5, compared to the business-as-usual scenario. Irrespective of the scenario, the impact assessment suggests there are no trade-offs between achieving climate neutrality by 2035 and citizens’ well-being, public finances and the provision of welfare services (MEAE, 2020). In addition, the circular economy could generate an estimated value added of EUR 2 to 3 billion by 2030 (EC, 2019).

The transition to a carbon-neutral and circular economy will bring significant opportunities to create jobs. It is essential to prepare the labour force for this transition to be successful. Finland has an effective system to identify the skills required to address future labour market needs. Circular economy is included in education curricula at all levels.

However, skills shortages are a barrier to innovation and to the uptake of digital and clean technology (OECD, 2020). On-the-job training and lifelong learning opportunities are particularly important for young workers to acquire the right skills, as well as for older workers to maintain their employability throughout their working lives. Finland needs to continue investing in up-skilling and re-skilling its labour force to support deployment of clean technologies and target learning schemes towards the overall greening of the economy (EC, 2020a).

New green jobs are expected mainly in sectors with traditionally limited female representation, such as forestry and cleantech. Education and training schemes need to be adjusted to mitigate existing gender inequalities and encourage women to participate more in science, technology and engineering studies (EC, 2020a).

The transition to a low-carbon economy is expected to entail some job losses in some sectors, areas and communities. The most immediate impact arises from the commitment to halve peat use by 2030. Peat is a domestic energy source and dominates in the interior regions. As of 2020, the peat sector employs between 2 000-2 500 full-time equivalent workers. This number is expected to decrease to 500 by 2025 (Chapter 4).

While job opportunities can emerge in green sectors, the challenge is to ensure these new jobs are created in the same regions facing the risk of job losses. This would help avoid a relocation of workers with potentially negative consequences on family life and communities (OECD, 2021h). An inter-ministerial working group was tasked with proposing ways to help the transition out of peat. Proposed measures include a programme to support entrepreneurship in the bioeconomy and nature management. In addition, some jobs may be created in the bioenergy sector to replace peat for energy production (Chapter 4). Finland plans to use the EU Just Transition Fund (about EUR 750 million in 2021-27) to finance investment in training and infrastructure to strengthen the local economy and support the local workforce.

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Notes

← 1. Finland’s first sustainable development strategy dates to 2006.

← 2. The eight objectives defined in the 2050 commitment are: equal prospects for well-being; a participatory society for citizens; sustainable employment; sustainable society and local communities; a carbon-neutral society; a resource-wise economy; lifestyles respectful of the carrying capacity of nature; and decision-making respectful of nature (https://kestavakehitys.fi/en/commitment2050).

← 3. There have been three citizens’ panels, in 2019, 2020 and 2021. About 500 citizens participated in each panel on a voluntary basis. They replied to an online questionnaire on the state of sustainable development and the results of the survey were made public at closing events.

← 4. The package also increased capitalisation of the National Climate Fund by EUR 300 million.

← 5. In addition to the RFF, Finland will receive funding from other programmes under the Next Generation EU funds, such as those under the Just Transition Mechanism and the European Agricultural Fund for Rural Development.

← 6. For example, the RRP provides funding for phasing out oil heating in single-family houses and for building charging infrastructure for electric cars. GHG emission reductions are also expected from investment in the reuse and recycling of industrial sidestreams.

← 7. The European Commission describes a bioeconomy as involving “the production of renewable biological resources and the conversion of these resources and waste streams into value added products, such as food, feed, bio-based products and bioenergy”.

← 8. Specialist producers are corporations that offer environmental protection services (e.g. waste or wastewater management) on the market. Other corporations (or ancillary producers) are businesses that do not sell environmental services on the market. Rather, they undertake environmental protection activities in-house and for own use to limit the negative environmental effects of their main production activity.

← 9. Under the scheme, electricity producers received a premium on top of the wholesale electricity price for a period of 12 years.

← 10. Under this scheme, winners of the tenders will receive a premium when the average three-month market price of electricity is lower than EUR 30/MWh. If the market price exceeds EUR 30/MWh, a portion of the tariff will be awarded on a sliding scale; no aid is paid if the market price is higher than the sum of the reference price and the approved premium.

← 11. Emissions of local air pollutants, with the exception of sulphur dioxide, depend on the combustion technology and are not based on the amount of the pollutant in the fuel. Emissions of these pollutants for a given fuel quantity will differ considerably between different vehicle types. Combustion of diesel fuel typically emits higher levels of nitrogen oxides, particulate matter and volatile organic compounds, although the amount of these pollutants is gradually being reduced as diesel technology improves (Harding, 2014).

← 12. The state aid rules prevent simultaneous use of tax reductions to promote biofuels and biofuel distribution obligations, which have been in force in Finland since 2008.

← 13. Data centres outside the district heating network that meet the criteria for energy efficiency and energy utilisation and building-specific heat pumps of industrial size are also entitled to a reduced electricity tax. The electricity tax reduction also applies to recirculating water pumps in geothermal heating plants. It also planned to transfer recycling industry to the lower electricity tax category from 2022.

← 14. The car tax is levied on passenger cars, vans, motorcycles, tricycles and quadra-cycles, and buses. The tax schedule is based on a modality introduced in 2012, but tax rates have changed several times since (Harju et al., 2018).

← 15. The nominal rate of the energy tax for transport fuels has been raised several times since 2012. However, the average tax level for diesel has not changed significantly in nominal terms, mainly due to the increasing share of biodiesel (which enjoys a lower energy tax). Taking into account the change in the general price level, the average tax level for diesel in recent years has been lower than in 2012 (MoF et al., 2021).

← 16. Most local air pollutant emissions depend on diesel combustion technology and on the composition of the whole vehicle fleet, including older and higher-emitting vehicles, as well as vehicle maintenance and driver behaviour (Harding, 2014).

← 17. It is assumed that a company car has an annual mileage of 25 000 km, of which roughly two-thirds are for private trips. If the calculation is not based on the estimated mileage of private use per year, the benefit is calculated on a per kilometre basis. This ranges from EUR 0.07 to 0.20/km (depending on the age of the vehicle and whether the employer or employee pays for fuel). The employee needs to substantiate the values based on kilometres by keeping records (Finnish Tax Administration, 2020).

← 18. If no public transport is available, a per-kilometre deduction can be made, where the per-kilometre rate is intended to estimate the actual cost of commuting. Employees biking to work can deduct EUR 85 per year.

← 19. Green Deal agreements on CO2 emissions from waste incineration and on reducing single-use food packaging were under negotiation at the time of writing.

← 20. The group brings together Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, Switzerland and Uruguay.

← 21. Energy-intensive companies that pay more than 1% of their annual value added in fuel and electricity tax are entitled to a tax refund of 85% of the amount paid above that threshold.

← 22. When Finland joined the European Union, it negotiated the right to provide additional subsidies to agriculture to those available through the EU Common Agricultural Policy.

← 23. Due to negotiations between the European Parliament and the Council of the European Union, the provisional start date of the proposed CAP reform has been postponed to 1 January 2023. A transitional regulation has been agreed for 2021 and 2022.

← 24. In December 2020, the State Business Development Company VAKE was transformed into the Finnish Climate Fund.

← 25. Environmental goods and services are those produced for the purpose of environmental protection (i.e. preventing, reducing and eliminating pollution and any other degradation of the environment), as well as resource management (i.e. preserving and maintaining the stock of natural resources and hence safeguarding against depletion).

← 26. The example refers to the “Continuous Growth Scenario” described in Finland’s Long-term Low Greenhouse Gas Emission Development Strategy. Under the scenario, emission reductions will be achieved by accelerated deployment of new technologies, including robust electrification, digitalisation and industrial renewal (but excluding carbon capture and storage technologies, or CCS). In the alternative “Savings Scenario”, emission reductions will be achieved through the circular and sharing economies, energy efficiency, bioeconomy and CCS.

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