Chapter 4. Climate change mitigation

Finland should be commended for its ambitious goal to become carbon neutral by 2035 and carbon negative soon after that date. The 2019 Government Programme also aims for Finland to be the “world’s first fossil-free welfare society” (Finnish Government, 2019). The government plans to achieve carbon neutrality by accelerating emissions reduction and strengthening carbon sinks. However, under current and planned measures, Finland will fall short of meeting this target. In response, it is updating major climate strategies.

A well-being lens to climate action could help Finland accelerate climate mitigation while improving the wider well-being agenda (e.g. equity, health, biodiversity). The well-being lens is a process developed by the OECD that allows governments to think innovatively about climate action, prioritising policies that redesign systems (Box 4.1). Acting at the level of the system structure rather than with system parts enables transformational rather than incremental change, which is key to achieve Finland’s target (OECD, 2021a). The recovery from COVID-19 represents an opportunity to reprioritise policies and advance transformational change through system redesign.

This chapter first discusses emission trends and outlines the challenges of meeting the carbon neutrality target. It then details how a well-being lens to climate action can help Finland achieve its target. Subsequently, it dives deep into three selected sectors – transport, electricity and buildings – that jointly account for around 60% of Finland’s greenhouse gas (GHG) emissions (OECD, 2020a). The chapter highlights sectoral strategies to help advance systemic change and deliver on multiple well-being outcomes.

Finland has successfully met internationally agreed targets. It reached its Kyoto Protocol target (20% emissions reduction by 2020 compared with 1990) in 2018. According to preliminary data, Finland is also positioned to meet the 2020 target of reducing emissions in the effort sharing sector, i.e. emissions outside the European Union (EU) Emissions Trading System (ETS) and coming mainly from transport, buildings and agriculture (MoE, 2021). Finland’s target in the effort sharing sector was 16% reduction by 2020 compared with 2005, higher than that of the EU average (-10%). According to the 2019 National Energy and Climate Plan, existing and planned measures combined with the use of flexibility mechanisms will also allow Finland to meet its current 2030 target of cutting non-ETS emissions by 39% from 2005.

Finland’s GHG emissions declined by 24% between 2005 and 2019. Emissions decreased in all sectors but agriculture. The energy industry and manufacturing sectors showed the largest declines due to a shift from fossil fuels and peat to low-carbon energy carriers (electricity, biofuels). The decline was driven by the sluggish economic performance following the global financial crisis, as well as supportive policies (e.g. carbon pricing through carbon taxes and the EU ETS, and renewable support and mandates). Overall, emissions included in the EU ETS (mainly power plants and energy-intensive industry) declined much more than the emissions in the effort sharing sector in 2010-19 (by 44% compared to 12% in the non-ETS sectors). However, the decrease of both groups of emissions slowed down with the more sustained economic growth of the second half of the 2010s, until the COVID-19 pandemic hit the world economy in 2020. According to preliminary data, GHG emissions in 2020 decreased by 9% compared with 2019. This reflects a warmer winter, a further shift from fossil fuels in power generation and reduction in transport activity due to the COVID-19 pandemic (MoE, 2021).

In 2019, the EU ETS covered 45% of Finland’s GHG emissions, calling for focusing mitigation efforts in the non-trading sectors. In 2019, the energy industry, transport and manufacturing accounted for the largest shares of emissions, followed by agriculture and residential (Figure 4.1).

As in most OECD countries, carbon dioxide (CO2) emissions account for the largest share of GHG emissions (81%). These are followed by nitrous oxide (N2O, 9%), methane (CH4, 8%) and others (2%) (OECD, 2020a). CO2, N2O and CH4 emissions have decreased by 25%, 24% and 42%, respectively, compared with 1990. CH4 emissions declined thanks to improvements in the waste sector and reduced animal husbandry, which were also responsible for the decline in N2O emissions. N2O emissions also decreased thanks to deployment of abatement technology in nitric acid production and less use of nitrogen fertiliser in agriculture.

The land use, land-use change and forestry (LULUCF) sector is a net sink in Finland. Forests (trees and soil) absorb a significant proportion of Finland’s CO2 emissions, amounting to on average 20 megatonnes of carbon dioxide equivalent (MtCO2) (38% of 2019 GHG emissions) per year between 2005 and 2019. Yet absorption decreased from 20 MtCO2 to 14 MtCO2 in 2014-18, mainly because of higher harvest levels in the forestry sector. The net sink improved significantly in 2018-20 thanks to lower forest removals (MoE, 2021).

The climate neutrality target is widely supported across the political system. The climate neutrality target will be included in the update of the Climate Change Act, which is expected to pass Parliament in early 2022, along with updated climate targets for the years 2030, 2040 and 2050.

Reaching the climate neutrality target would require annual emission reductions of 5.6% between 2019 and 2035. This represents more than 2.5 times the rate observed between 2005 and 2019. With existing measures, Finland will likely miss the target by 13 MtCO2e (Figure 4.2). However, work on introducing the required additional measures is ongoing. Ministries have developed sector-specific decarbonisation roadmaps in co-operation with relevant stakeholders. At the time of writing, Finland was also updating key cross-sectoral strategies and plans to reflect their enhanced ambition. In September 2021, the government decided on policy measures for these key strategies to close the gap with the carbon neutrality target. The EU climate package, which sets out proposals to reduce EU emissions by at least 55% by 2030, will also help Finland achieve its climate neutrality target by, for example, strengthening emissions trading.

Finland’s carbon neutrality target relies on carbon removal of forests to offset emissions from hard-to-abate sectors, expected to amount to 21 MtCO2e in 2035 (Figure 4.2). Climate change will increase forest productivity in Finland due to higher atmospheric CO2 content, higher temperatures and longer growing seasons, notably in Finland’s northern part. There are trade-offs between forests’ potential as a carbon sink and forest harvesting levels, including for biomass (FCCP, 2019a). Most of the woody biomass comes from forest residues and thus depends on harvest levels.1

Adding up the future demands for woody biomass from the forest industry and sectoral roadmaps, including the energy and chemistry sector (e.g. for the production of liquid biofuels), is estimated to require a harvest level of 140 million cubic metres (Mm3). This is well above the current annual sustainable logging maximum2 of 83 Mm3 (Vadén et al., 2021). In addition to the impact on the carbon sink, there are a number of issues with increased bioenergy as also noted by the European Commission (EC, 2020):

  • Increased wood use may come at the expense of other sustainability objectives, including land-use change (and related emissions), biodiversity, soil health and water quality. This, however, depends on forest practices in use. Most importantly, the effect of increased biomass use depends on the raw material used. Impacts are expected to be lower for using forest residues, which is current practice. Excessive tapping of forest residues, however, can harm soils and biodiversity as local fauna use residues for shelter. Adding nutrients could compensate for lost soil productivity, but this could generate water pollution to which Finnish lakes are particularly sensitive (MoEAE, 2020a). Leaving dead trees to a greater extent in regeneration areas and avoiding fellings in valuable nature areas would mitigate some negative effects (MoEAE, 2019).

  • Imported biomass may have detrimental effects on biodiversity and land-use change with related emissions abroad. Finland’s imports of wood have fluctuated between 10-20 Mm3 during the past 20 years. The Russian Federation (hereafter “Russia”) and the Baltic states are the biggest sources (Luke, 2021). To minimise negative effects, imported biomass and raw materials for biofuel production should be subject to robust sustainability criteria.

  • Burning biomass could increase local air pollution, notably from particulate matter (PM) and nitrogen oxides (NOx) emissions with negative effects on health and biodiversity (AQEG, 2017). While air pollution in Finland is one of the lowest in the world (Chapter 1), the impacts of switching to biomass on local air pollution should be carefully assessed and quantified. This analysis should identify potential trade-offs or synergies between mitigation and public health.

Given the limited supply of sustainable woody biomass, Finland should consider concentrating biomass in hard-to-abate sectors as announced in the Government Programme (Finnish Government, 2019). These sectors include aviation, maritime and heavy freight. Meanwhile, it should opt for other energy sources for sectors where alternatives to biomass are readily available (e.g. heat, cars).

Biomass could also be prioritised for development of technologies that would remove CO2 from the atmosphere, including bioenergy carbon capture and storage (BECCS).3 BECCS could be important for becoming carbon negative, increasing the chance of limiting global warming to “well below 2°C”, preferably to 1.5°C as agreed in the Paris Agreement. Yet BECCS would require captured CO2 to be transported abroad due to lack of suitable geological formations (IEA, 2018).

A well-being lens to climate action, including systemic redesign, can help Finland reach its carbon neutrality target. Transitioning towards economic and societal systems with lower energy and material demand is key to reducing the emissions gap. In addition, it can help reduce trade-offs from using biomass (Figure 4.3). Refocusing climate action through a well-being lens can also support Finland to ensure that lower demand and net-zero emissions systems are also higher well-being systems. Figure 4.3 shows three dynamics:

  • Dynamic 1 on the right hand side of Figure 4.3 depicts the trade-off between biomass use and the absorption potential of forests, both of which depend on harvest level (as explained in Section 4.2.2).

  • Dynamic 2 shows the most common policy approaches to climate mitigation in Finland and in other OECD countries. Decarbonising system parts (e.g. through non-combustion technologies in energy production) directly reduces the emissions intensity of economic activities. Improving the energy efficiency of system parts (e.g. through deep retrofits of buildings) reduces energy demand. Thus, it also reduces energy-related GHG emissions for a given emissions intensity.

  • Dynamic 3 shows systemic redesign (Figure 4.3) which is underexplored in Finland. Lowering energy demand through systemic redesign implies enhancing cross-sector synergies. For example, low-energy neighbourhoods with district heating can benefit from multiple heat sources, including renewable sources, electric heat pumps and waste heat from other sectors. It is also about reducing energy consumption and emissions by shifting from systems’ dynamics that are at the source of high levels of both, and that also yield poor results in terms of wider well-being. For example, Finland could move from car-dependent transport and urban systems towards transport systems that are sustainable by design. This would lower overall mobility by increasing proximity or shifting trips to more sustainable modes of transport while improving accessibility and lowering emissions (OECD, 2021c). To achieve such a shift, strategies need to prioritise reversing the dynamics (e.g. from sprawl to proximity) behind car dependency (Section Transport System). Systemic redesign is, thus, a high leverage point that can lead to deep emission reductions compared to climate strategies focusing on system parts (OECD, 2021a). Systemic redesign could also make policies focusing on system parts more effective (e.g. by reducing rebound effects or enhancing the effectiveness and acceptability of policy instruments such as carbon pricing) (OECD, 2021a).

As in most OECD countries, Finland’s climate policy plans to date have mainly focused on decarbonising system parts (e.g. vehicles). This is also reflected in more recent plans or plans under development. The 2017 Medium-term Climate Change Policy Plan (KAISU), for example, expects more than two-thirds of estimated emissions reductions in the transport sector to derive from changes in system parts. This includes increasing the carbon efficiency of vehicles and increasing the biofuel share in fuels (MoE, 2017a). More recently, 17 of 20 measures of Finland’s roadmap to fossil-free transport (published in 2021) focus on decarbonising system parts whereas only 3 would trigger systemic change (MoTC, 2021a).

Finland is, however, planning to make more use of systemic redesign. Finland announced that “(s)olving the sustainability crisis will require prompt, systemic changes in society” (Finnish Government, 2019). In a welcome step, Finland’s roadmap to fossil-free transport emphasises that in urban areas “a determined shift away from the current car-centric system must be made toward a sustainable mobility system” (MoTC, 2021a). The roadmap also aims for halting the increase of vehicle kilometres in the 2020s. Redesigning the transport system helps reduce traffic volumes by balancing the key dynamics that lead to increased traffic (Section 4.4).

Finland has advanced towards a whole-of-government approach, including by increasing cross-sector co-ordination and planning. The country needs to bring all sector-specific decarbonisation roadmaps together in a coherent way to achieve the carbon neutrality target effectively. Cross-sector co-ordination helps ensure that emission reductions in one sector do not lead to emission increases in other sectors. The government established the Ministerial Working Group on Climate and Energy Policy, which includes representatives from several ministries. It is identifying additional measures needed to achieve the climate neutrality target. The working group provides an excellent opportunity to revisit policies, prioritising those expected to deliver deep emission cuts through systemic change.

Climate aspects are increasingly integrated in decision-making processes related to energy, transport, agriculture, forestry and land-use planning. More precisely, every law requires a climate impact assessment. Climate change is also considered in the development of sustainability pathways, which were updated by the National Commission on Sustainable Development in 2016 (Chapter 3). The Commission, the Climate Policy Roundtable and other bodies, also help facilitate dialogue and co-ordination between the government, stakeholders and citizens.4

At the time of the writing, Finland was updating cross-sector mitigation strategies and the Climate Change Act to reflect the carbon neutrality target (Table 4.1). The 2015 Climate Change Act is the central piece of climate legislation. It lays out major national climate policy planning, including KAISU until 2030 (MoE, 2017a), the Long-term Low-emissions Development Strategy (LT-LEDS) until 2050 (MoEAE, 2020a) and an adaptation plan (Chapter 1).

The policy plans are complementary. KAISU lays out measures for the effort sharing sector, specifying and complementing the measures of Finland’s 2016 National Energy and Climate Strategy (NECS). NECS outlines actions in the emissions trading, effort sharing and land-use sectors to achieve Finland’s previous medium-term and long-term targets (MoEAE, 2017a). Both KAISU and NECS were subject to a long-established public consultation process, involving the national parliament, regional and local authorities, social partners, civil society and the general public (EC, 2020). In addition to KAISU and NECS, Finland was also updating the climate change plan for the land-use sector in 2021 (MoE, 2021).

Revisiting Finland’s LT-LEDS could be an important step to guide action towards systemic redesign. Finland submitted its LT-LEDS to the European Union5 in 2019 and to the United Nations Framework Convention on Climate Change (UNFCCC) in 2020. The strategy lays out two techno-economic scenarios (“Savings” and “Continuous Growth”) that would meet the carbon neutrality target by 2035 and reduce GHG emissions by around 90% by 2050 (MoEAE, 2020a). Both scenarios, however, show only modest reductions in energy use, amounting to 10-15% between 2020 and 2050 (MoEAE, 2020a).

Exploring a low energy (and low material) demand scenario could be an alternative and beneficial narrative (OECD, 2021a). Such a scenario would draw on the well-being lens. Low-energy demand pathways tend to show most synergies and the lowest number of trade-offs with other well-being dimensions and Sustainable Development Goals (SDGs) (Buckle et al., 2020).

Developing a low-energy demand scenario could also better inform about the scope for synergies between climate mitigation and other social, economic or environmental goals across sectors. Quantifying the social, economic and environmental effects could support this narrative and ensure buy-in from multiple stakeholders. Finland could also review the LT-LEDS to include indicative and flexible sectoral reduction targets to provide more clarity and accountability on sectoral abatement (Aguilar Jaber et al., 2020). Finland’s Climate Change Panel could play a more important role in guiding this effort (Box 4.2).

The surface transport sector is the most challenging sector for decarbonisation largely owing to the highly dispersed population and above-average mileage per capita. The transport sector accounted for 20% of Finland’s GHG emissions and 38% of the effort sharing sectors in 2019 (OECD, 2020a). Most (94%) transport emissions originate from the road sector. Transport emissions were increasing until 2007, but decreased by 16% in 2007-19 (OECD, 2020a). GHG emissions from transport declined in the first half of the 2010s. They have since fluctuated around 2015/16 levels, before declining by 8% in 2020 due to the COVID-19 pandemic (MoE, 2021).

The decrease in transport emissions occurred despite rising vehicle kilometres of passenger cars. The reduced emissions were thanks to a growing share of biofuels in road transport and improvements in vehicle fuel efficiency (MoE, 2017b). This shift has been encouraged primarily by biofuel mandates, as well as by vehicle and fuel taxation (Chapter 3), and more recently by supportive polices to electric vehicles (EVs). Yet, despite the progress, Finland’s per capita transport emissions and per capita car travel are among the highest in OECD countries. This is mainly due to long travel distances resulting from low population density, notably in rural parts of Finland.

Finland’s target is to reduce transport-related GHG emissions by at least half by 2030 from the 2005 level. Existing and planned measures of the KAISU policy package fall short of meeting the 2030 target by 1.5 MtCO2e, calling for a refinement of policies (MoE, 2020a). Finland’s roadmap on fossil-free transport, published in May 2021, would close this gap. However, large uncertainties remain on estimating the potential for emissions reductions.

Applying a well-being lens to climate action in the transport sector can help Finland reduce transport-related emissions by shifting territories from car dependency. The scope for this is greater in urban and suburban areas where 55% of the Finnish population live. However, the recommendations included in this section can also be useful to rethink rural areas.

Through a well-being lens, the focus of transport policy is on the sustainable delivery of accessibility rather than on mobility of use. In other words, the policy focuses on ease of accessing services, jobs and opportunities. It focuses less on mobility per se (i.e. the physical movement of people and vehicles).6

Shifting the focus of transport policy acknowledges the need to achieve a better balance between mobility and proximity. Such a balance promotes systems where the bulk of trips are made through the most sustainable modes. Conversely, less sustainable modes are chosen for less frequent trips (OECD, 2021c). Car travel is channelled towards the trips in which its value would exceed its costs (ITF, 2021).

As discussed in OECD (2021b), induced demand, sprawl and the erosion of sustainable modes are three key dynamics at the source of car-dependent systems.7 To reverse these dynamics, Finland needs a stronger focus on accessibility and prioritisation of policies that can trigger systemic change. This would allow Finland to deliver a transport system that yields less mobility, energy consumption and material use, while allowing to enhance well-being. Reverting the dynamics that lead to car dependency would help reduce emissions, for example. At the same time, it would increase safety, health outcomes (beyond air quality improvements), improving use of public space and, thus, quality of life.

Advancing this systemic change requires rebalancing the policy mix. Finland needs to move from policies that deliver incremental change (those that optimise system parts) towards those that deliver transformational change (by redesigning the system’s structure).

Making systemic change central to climate action is key for delivering deep emission cuts and well-being. Policies focused on improving parts in the system (i.e. improving vehicle technologies) will still be needed. However, climate action through system redesign would ensure that policies reinforce rather than undermine each other.

As in most OECD and EU countries, car use is the primary mode of land transport in Finland. Finland’s modal share of car use is slightly higher than the EU average (as well as the average of other Nordic countries). The car ownership rate is 20% higher than the EU average, indicating high levels of car dependency (Figure 4.4). Car ownership has expanded more quickly than the EU average since 2005. Car dependency is a major driver of transport-related energy demand and emissions. As such, it is associated with significant social costs, including health costs from air pollution, accidents and congestion. While car traffic on city street networks decreased slightly between 2016 and 2018, car traffic increased on outer city roads (MoE, 2020a).

Modal shares of sustainable transport modes (active modes, public transport and shared mobility) are low. Finland did not meet its National Strategy for Walking and Cycling 2020 target (set in 2011). This strategy sought to increase journeys completed by walking and cycling by 20% compared with 2005 (equivalent to 300 million additional trips). It is also unlikely to meet the 2030 target of a 30% increase (MoE, 2017a). Yet shares of walking and cycling are high in urban areas with accommodative infrastructure and high proximity, including Oulu (22% bicycle) and Helsinki (35% walking). High car dependency indicates significant emission reduction potential from systemic change.

As in most OECD countries, Finland’s climate policy focuses on decarbonising system parts (e.g. electric vehicles or biofuels) to reduce emissions. Finland’s early strategy to achieve its 2030 goal builds on three pillars: i) improve the carbon efficiency of vehicles; ii) improve the energy efficiency of vehicles; and iii) shift towards more sustainable transport modes and avoid trips through integrated land-use planning (MoE, 2017a).

More than two-thirds of estimated emissions reductions are attributed to the first and second pillars. This is clearly related to decarbonising system parts and accounts for 1.5 MtCO2e/year and 0.6 MtCO2e/year, respectively. In contrast, the third pillar, which is closely related to transformational change, is predicted to reduce emissions by only 1 MtCO2e/year (MoE, 2017a).

In a welcome development, Finland’s roadmap on fossil-free transport suggests that vehicle kilometres of passenger cars will no longer increase in the 2020s. However, 17 of 20 measures announced for the first phase focus on decarbonising system parts. Conversely, only three measures would trigger systemic change (e.g. promotion of public transport; and an investment programme for walking and cycling (MoTC, 2021a).

Reducing car dependency and car traffic requires a larger shift towards more sustainable modes of transport. These include active modes (walking, cycling, micro-mobility), public transport and shared mobility. In addition, car dependency can also be reduced substantially by redesigning public space at the local level and by integration of land use and transport.

Reducing car dependency requires a reorientation in transport infrastructure from road to more sustainable modes of transport. Public investments in road infrastructure increased between 2005 and 2018 both in absolute and relative terms (e.g. percentage of gross domestic product [GDP]) (Figure 4.5). In addition, Finland’s public spending on maintenance and investment in transport infrastructure is heavily skewed towards road transport, accounting for 75% of total road and rail spending. This is one of the highest shares in OECD countries and higher than that of other Nordic countries (Figure 4.5). Reorienting spending towards rail and sustainable modes of transport would reverse the erosion of sustainable transport modes.

Increasing financial support for sustainable modes of transportation is one of the key recommendations of the roadmap to fossil-free transport (MoTC, 2021a). COVID-19 has led many passengers to shift away from public transport, causing a funding crisis for transport operators (MoTC, 2021a). As part of the government response to COVID-19, Finland allocated the highest funds per capita (EUR 7.76/capita) to cycling infrastructure across all European countries (Watson, 2020). The first recovery package includes large-scale investment in public transport infrastructure, notably inter-city rail connections (Chapter 3).

Both the government and the Finnish Transport and Communications Agency (Traficom) also grant subsidies for large and medium-sized urban areas for the purchase of transport services and tariff obligations. For example, the 2020 Government Programme pledges an annual amount of EUR 20 million, mainly focused on decarbonising system parts (e.g. greening public transport fleets and fuels) (MoE, 2020a).

In addition, the central government reserved EUR 24.9 million for investments in walking and cycling infrastructure in 2020. This represents a significant increase compared with previous years (MoE, 2020a). The roadmap to fossil-free transport envisions doubling public transport subsidies for large and medium-sized urban areas for 2022-24 and setting up an investment programme for walking and cycling in municipalities for 2022-24 (MoTC, 2021a).

A national transport system plan was developed by 2021 under the lead of a parliamentary steering group to provide, among other things, long-term guidance for road and rail investments. The plan aims at delivering accessibility to all parts of Finland. It highlights that people should be able to choose sustainable modes of transport, notably in urban areas (MoTC, 2021b). The new plan covers 2021-32, addressing criticisms of stakeholders for its previously short-term approach (EC, 2020). It includes plans for three high-speed railroad lines (a western rail line from Helsinki, an eastern rail line from Helsinki and investment in the main line network). The investment costs of the main line and the western rail line from Helsinki are estimated at EUR 8.5-8.9 billion in the 2020s (MoEAE, 2019).

Metropolitan transport planning could be strengthened. At the metropolitan level, the Helsinki Region Transport System Plan (HLJ) is the long-term strategic transport plan for the Helsinki region. It was developed in co-ordination with 14 municipalities, the Metropolitan Transport Authority (HSL) and the central government (e.g. Finnish Transport Agency, Ministry of Transport and Communication, Ministry of Environment).

The plan of the Helsinki Metropolitan Area provides a vision of the transport system for the longterm (2050) while carving out tangible short-term actions. These actions focus on needed infrastructure investments for public transport but increasingly encompass a broader set of actions. Such broad actions include making pedestrian areas more attractive; enhancing the bicycle network; implementing digital tools (e.g. to facilitate Mobility as a Service [MaaS]); strengthening parking policies; and introducing congestion pricing (HSL, 2015). This is a welcome step and should be increasingly mainstreamed in plans both for Helsinki and other metropolitan areas. Importantly, the development of the HLJ was closely linked to the Helsinki Region Land Use Plan and the Housing Strategy (MAL).

Finland needs to build on its pioneering role in MaaS to develop multimodal networks across the country after exploring practical challenges. Built around public transport as a key pillar, MaaS engages the public sector, private transport operators and service users. Together, they offer seamless mobility by creating a sustainable multimodal transport system (e.g. public transport, bike and car sharing, micro-mobility), enabled through smart technologies (MoE, 2017a).

The Ministry of Transport and Communications launched the Transport Code project in 2016, which overhauled transport market legislation and supported development of new services, including MaaS. Moreover, experiments and pilot projects have been launched in different areas to re-organise passenger transport services into larger entities. Monitoring activities concerning implementation of the Act on Transport Services have continued, and legislation was developed as a response to changes in the operating environment.

All of these activities were key enablers for the uptake of MaaS, notably in the Helsinki Metropolitan Area, where MaaS is a key pillar of the HLJ. Simulations for the Helsinki Metropolitan Area integrating shared on-demand mobility services (e.g. shared taxis or shared taxi buses such as Kutsuplus in Helsinki) into MaaS suggest significant savings in CO2 emissions through replacing car travel (ITF, 2017). In addition, shared mobility options would also enhance accessibility and service quality while freeing up public space used for parking.

Despite the progress in MaaS, more is needed to mainstream this innovative service to all Finns. Public and private actors need to enhance communication and co-operation to overcome silo thinking based on individual transport modes, paving the way to a multimodal sustainable transport system. Public and private actors also need to ensure sufficient levels of investment in transport infrastructure to meet users’ needs.

Fully unlocking the benefits of MaaS needs to go hand-in-hand with creating the right conditions to develop multi-modal networks across Finland. For example, it needs to enable infrastructure for sustainable modes and road management tools. Without such an enabling environment, MaaS risks limiting benefits to places like Helsinki, while exacerbating low occupancy vehicle travel in other areas (e.g. through ride-hailing that is not shared).

Shared on-demand mobility services could also enhance accessibility and quality of services in Finland’s rural areas. Mobility services are more important in urban areas, where the potential for reducing emissions is also the highest. However, people in sparsely populated areas more often depend on a private car. The Finnish government had made efforts to maintain high levels of public transport services in these areas. Accessibility, however, is increasingly a problem. This is especially true for vulnerable population groups with limited access, such as the elderly.

Public expenditure on public transport has been increasing with the ageing and declining rural population, increasing the funding gap for government-supported rural public transport (Kauppila, 2015). More efficient procurement and planning of public transport services could realise savings, which would help sustain high-quality services. In some areas, moving from support for public transport towards supporting on-demand services could be more cost-effective and lead to higher accessibility. However, regulations must be in place related to areas such as monitoring of service provision and safety. Furthermore, any strategy must promote awareness of on-demand services to customers.

Local authorities play a key role in delivering mitigation in the transport sector through enabling the shift to more sustainable modes of transport and reducing car dependency. Within their respective territories, local governments are responsible for transport system planning, as well as regulation on land use and zoning. Strategic local and regional plans, co-ordinated between municipalities and across different levels of government, are the foundation for improving the competitiveness of sustainable modes of transport.

Several cities (e.g. Turku) have a long history in developing long-term strategies for spatial and transport planning that are updated every ten years. While these plans usually align transport and urban development effectively, they typically do not integrate the energy system (e.g. heat or electricity) into the planning process. This results in missed opportunities to further leverage synergies, such as planning for public electric vehicle (EV) charging infrastructure.

Finland could make more use of redesigning public space and road management, which is key to a paradigm shift towards more sustainable modes of mobility. This would involve a shift from the traditional “predict and provide” approach towards more efficient management of available road space. Redesigning public space includes reallocating and redesigning road and parking space that can better promote sustainable transport modes. Road management encompasses the efficient use of road and parking space, including through parking policies and road pricing.

Reallocating road space can trigger the shift away from a car-based mobility system. With such a policy, streets or parking can be turned into urban space such as green space or buildings. It also makes space for new users, including public transport, cyclists and pedestrians. At the same time, the shift can liberate space for other urban functions, increasing the well-being of city dwellers.

Many cities in Finland reallocate road and parking space. Helsinki is planning to transform inner city highways into urban boulevards. This will create new mixed neighbourhoods of housing and new infrastructure for sustainable modes of transport (City of Helsinki, 2015).

Many Finnish cities have converted parts of their city centres to pedestrian areas, a trend expected to continue. Helsinki is planning to extend pedestrian zones, making some of the streets car-free while restricting access of cars for other streets. However, it is also planning an underground distributor road beneath the centre that enables driving around the city centre. While this road could reduce congestion in the short term, it would support car dependency in the long term, with the risk that Helsinki falls short of its mitigation targets.

Redesigning streets, following a “complete street approach” both in urban and rural areas, would bring the largest well-being benefits (OECD, 2021c). The design of complete streets safely balances space between multiple users (e.g. walking, cycling, public transport, private vehicles) and activities (e.g. commercial and residential) (Litman, 2015). By redistributing user hierarchies, complete street approaches have been shown to reduce GHG emissions, contribute to public health and increase road safety. They also deliver economic benefits such as increased property values, tax collections and business activity (OECD, 2021c).

Parking policies differ widely across cities and regions in Finland. Some cities increasingly use parking policies to deter car use through removing on-street parking. To that end, they increase parking fees or reduce minimum parking requirements for different land-use types. These efforts need to be adopted across the country, notably in urban and suburban areas.

Helsinki is planning to increase parking fees by up to 100%, which is expected to contribute to more than 5% towards the city’s 2035 reduction target in transport emissions (City of Helsinki, 2018). Helsinki is also substituting on- or off-street parking through underground parking to free up public space for urban development (e.g. transport infrastructure for sustainable modes, residential buildings).

The availability of underground parking in Helsinki, while expected to be more expensive for users, continues to perpetuate car dependency. Similarly, free parking at the workplace is a non-taxable fringe benefit and encourages the use of cars for commuting (Chapter 3). Phasing out this parking subsidy and reducing minimum parking requirements (notably in areas with good accessibility) or shifting from minimum to maximum parking requirements would further reduce available parking space and car dependency (OECD, 2021c). On the other hand, the tax treatment of commuting expenses and allowances goes in the direction of reducing car dependency, as it makes commuting by public transport or bike more attractive than driving (Chapter 3).

To date, Finland has not implemented road or congestion pricing (Chapter 3). However, the Government Programme aims to introduce legislation that would enable the implementation of congestion pricing, notably in urban areas (Finnish Government, 2019). The working group on the reform of transport taxation acknowledged that lower costs of driving (once the fleet is electric) may increase vehicle use. This, in turn, may require policy interventions such as congestion charges in regions suffering from high traffic volumes (MoF, 2021a).

Helsinki has considered congestion pricing but has taken no steps to implement the policy (City of Helsinki, 2018). Congestion pricing would alleviate congestion in the city, reducing its external costs. These costs include time for drivers, air pollution and GHG emissions. At the same time, congestion pricing can play a key role in reducing car dependency.

Pricing of vehicle traffic could contribute more than 10% to Helsinki’s transport-related emissions target by 2035 compared to business as usual (City of Helsinki, 2018). Congestion pricing should be embedded in a broader policy package to manage road space with a focus on re-ordering user priorities. In this way, it can enhance accessibility and limit urban sprawl when coupled with investments in public transport (OECD, 2021c).

Urban form and effective functioning of urban regions are expected to have one of the biggest potentials to reduce emissions in Finland (MoE, 2017a). According to the working group on fossil-free transport, “community planning is at the centre of sustainable mobility”. As such, community planning creates the conditions to shift mobility from private cars to sustainable modes of transportation (MoTC, 2021a). As land use and urban structure are slow to change, the impacts of decisions concerning these dimensions can be expected to be long-lasting (MoE, 2017a).

Urban sprawl in Finland increased between 1990 and 2014 (OECD, 2018). Finnish cities experienced a decrease in population density of urban areas. At the same time, the share of urban land allocated to low population density areas increased (OECD, 2018). Urban sprawl, along with increasing commuting distances and service-related mobility due to the location of retail centres outside the city core, have been key drivers for increasing travel distances and transport-related emissions (MoE, 2017b). Finland started promoting densification of urban cores (Section 4.6.3) only recently. It has pursued infill construction and development of a polycentric urban structure with regional centres and sub-centres around public transport nodes (MoE, 2017a).

In a welcome approach, Finland has identified the need to steer jobs and services around public transport nodes in addition to residential buildings (IEA, 2018). Mixed land use integrates housing, shopping, offices and leisure activities. By bringing these closer together, it creates proximity and reduces travel demand and transport emissions while enhancing quality of life. Encouraging commercial activities in city cores rather than on or outside city fringes would further reduce travel demand.

Finland has enhanced co-ordination of urban and transport systems through agreements between the central government and multiple municipalities of functional urban areas concerning land use, housing and transport (MAL). The central government concluded MALs with the four largest metropolitan areas (Helsinki, Tampere, Turku and Oulu) from 2020 to 2031. It also signed MALs with three other areas (Jyväskylä, Lahti and Kuopio) in 2021.

MALs are negotiated between the competent municipal and state authorities that are relevant to the three themes. In Helsinki and other urban areas, the MAL aims at developing a dense urban core. This would be connected to district centres of neighbouring municipalities with mixed land use through sustainable modes of transport (co-funded by the central government). This reduces transport-related GHG emissions while providing access to services, jobs and businesses.

MALs have successfully enhanced co-ordination on land use, housing and transport at the metropolitan level. However, they have been insufficient to prevent further urban sprawl (Tiitu, Naess and Ristimäki, 2020). Reasons for this include tax competition of municipalities; the relatively powerful position of municipalities; and the voluntary nature of MALs, which are not legally binding (Tiitu, Naess and Ristimäki, 2020).

Finland could expand the scope of metropolitan transport authorities to enhance co-ordination across municipalities and between different levels of government on transport. Metropolitan transport authorities, such as HSL in the Helsinki Metropolitan Area, are key to co-ordinate planning, investment and operation of transport infrastructure and services. HSL mainly plans, organises and procures public transport services, while managing the region’s bike-sharing system. Extending the mandate of HSL beyond public transport would enhance coherence of the infrastructure beyond municipalities’ borders. In so doing, it would improve the competitiveness of sustainable modes of transport (ITF, 2018). An expanded mandate could include co-ordination of cycling networks, road management and road safety (as Transport for London in the United Kingdom).

In addition, evidence from other European countries suggests that metropolitan transport authorities can also successfully co-ordinate planning for sustainable modes of transport across municipalities for smaller metropolitan areas (e.g. in France). This could be key to developing strategic plans for restoring proximity and developing multimodal networks. It would need to consider the specific contexts of different territories (ITF, 2018).

Improve-type policies focus on increasing energy efficiency or decreasing the carbon intensity of transport modes, predominantly cars. Such polices must not undermine the systemic change to reduce car dependency. In addition, the policies need to be underpinned by strong sustainability criteria. This must ensure that technologies are indeed low carbon and sustainable, such as by considering life-cycle emissions.

Policies to decarbonise system parts are expected to deliver most of the emission reductions in Finland through EVs and biofuel mandates (MoE, 2017a). Given Finland’s low-carbon intensity in the power sector (Section 4.5), electrification is a cost-efficient option to improve the carbon efficiency of car transport. Finland aimed to have 250 000 EVs (7% of the car stock in 2020) by 2030 (MoE, 2017a). The roadmap to fossil-free transport updated this figure to 700 000 EVs, which represented some 25% of the car stock in 2020.

The roll-out of EVs is not expected to increase peak power demand with the right incentives in place (e.g. smart charging) (Section 4.5). Instead of an absolute target, a relative target (e.g. a share of 30% EVs in 2030) would increase the policy levers to achieve this target, including through policies to deter car use (Section 4.4.3).

Finland’s vehicle taxation is partly based on vehicles’ CO2 emissions, thereby favouring EVs (Chapter 3). Finland also introduced a purchase subsidy (not including plug-in hybrid models) of up to EUR 2 000 in 2018 and extended the subsidy through 2022. Uptake of EVs has increased after introduction of the subsidy. In 2020, Finland had around 60 000 EVs, fewer than Sweden or Norway on a per capita basis. Despite the upper limit of the purchase price of EUR 50 000, rebates for EVs tend to disproportionately benefit richer households in urban areas. They are thus highly regressive (Guo and Kontou, 2021).

In 2020-21, Finland introduced a scrapping bonus of up to EUR 2 000 for the purchase of a new low-emission passenger motor vehicle (e.g. electric vehicle) (MoTC, 2021c). In a welcome move, 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.

Finland aims to have installed 25 000 EV charging stations by 2030. The target will be updated in light of revisions to the EV target in the roadmap to fossil-free transport. The development of the private and public charging infrastructure needs to be embedded in the wider strategy of reducing car dependency. It must also be co-ordinated with the redesign of public space to prevent stranded assets.

In accordance with the Energy Performance of Buildings Directive, Finland also plans to implement a national obligation. This would require provision of EV chargers whenever a large-scale building renovation is completed (Finnish Government, 2019). The number of charging points per building could be lower where accessibility of public and active modes of transport is greater. It could also be embedded in a wider reform of minimum parking regulation (Section 4.4.3).

Finland supports development of public charging infrastructure. At the time of writing, it was exploring the option of obliging petrol stations to provide charging points for EVs. This would advance the public charging infrastructure (Finnish Government, 2019).

Between 2017 and 2019, in another positive move, Finland also subsidised the deployment of public and smart charging stations. The subsidy was 30% for normal chargers and 35% for fast chargers (MoEAE, 2017b). In July 2020, the government amended the policy to award financial support (EUR 5.5 million in 2020) based on competitive tenders. In this way, it could channel financing to projects with the greatest impact (e.g. in municipalities lacking charging stations) (MEAE, 2020).

Finland plans to increase the amount of grants (Finnish Government, 2019). Public support, however, could be increasingly targeted towards enabling conditions for the charging infrastructure, including distribution grid upgrades (Bannon, 2020). Public charging stations would support Finland’s ambition towards a sustainable transport system based on MaaS and multimodality. At the same time, they would reduce the risk of stranded assets if mobility patterns increasingly shift towards more sustainable or shared modes. These public stations, or charging hubs, would service a variety of users (private cars, car sharing fleets, e-bikes, e-scooters) and speeds (slow and fast charging).

Since 2010, Finland has used blending obligations for fuel suppliers to create demand for biofuels. The obligation (defined as a percentage of energy content) increased from 4% to 20% over 2010-20. This included double counting of advanced biofuels in 2020.8 This policy effectively halted the growth of gasoline and diesel demand of Finland’s road transport sector (IEA, 2020). In 2019, Finland passed legislation increasing the share to 30% by 2030 (excluding double counting for advanced biofuels). According to the roadmap to fossil-free transport, the share may even increase to 34% or 40% to achieve the 2030 target depending on expected emission reductions from other measures (MoTC, 2021a). Finland’s plans to include biogas and non-biological fuels such as hydrogen in the fossil-free fuels obligation are also welcome (MoEAE, 2021a). However, there is no plan to include electricity from EVs.

Stronger focus on transport electrification would reduce demand for the limited supply of biofuel feedstock and second generation biofuels. EVs could be included in the obligation and trade allowed between fuel distributors and electric charging operators as in Germany (CLEW, 2020). This would increase the flexibility of compliance in a technologically neutral way, while reducing compliance costs. Under such a system, charging EVs with low-carbon electricity would generate tradeable credits and revenues. These would enhance the business model of public-charging operators and accelerate EV uptake, reducing demand for biofuels.

Some biofuels and associated feedstock also raise issues of biodiversity, land-use change and related emissions. Finland expects most biofuels (both transport and non-transport) to be domestic, sourced from biodegradable waste, side streams of the forest industry and logging residues. Finland is a global leader in the production of second generation biofuels from woody biomass. However, according to the LT-LEDS, biofuel imports could be as high as 10 petajoules in 2035 in the “Savings” scenario (MoEAE, 2020a).9

While Finland refines a large portion of biofuels domestically, it imports a significant fraction of raw materials from other countries (T&E, 2020). To that extent, imported raw materials and biofuels must also comply with strong sustainability criteria to avoid pressure on food prices or deforestation abroad. One controversial issue is the treatment of Palm Fatty Acid Distillate (PFAD), which is part of the raw material portfolio of Neste oil (Finland’s state-owned refiner). In contrast to other European countries (e.g. United Kingdom, Norway, Germany and Sweden), Finland classifies PFAD as residue rather than as co-product. This reduces the sustainability criteria with respect to the traceability of the feedstock under the EU Renewable Energy Directive II (T&E, 2020).

Electricity demand in Finland decreased between 2006 and 2015 but started to increase by more than 5% thereafter. Due to COVID-19, electricity demand in 2020 decreased by 6% (Statistics Finland, 2021). Increased demand due to economic growth, digitalisation and electrification has been moderated by improvements in energy efficiency. As of 2019, the industry sector accounts for almost half of electricity demand, while the buildings sector accounts for the other half (IEA, 2020). Transport accounts for just 1%, primarily reflecting public transport (rail, tramway).

Electricity demand is expected to grow from 86 terawatt hours (TWh) in 2019 to 91-93 TWh in 2030 and to 105-127 TWh in 2050, depending on the scenario (MoEAE, 2020a). Demand growth is primarily due to several factors. There will be increased electrification of end uses, including for electric heat pumps in the building sector, electric vehicles and electric motors in industry. Other factors include digitalisation, energy storage and anticipated production of electrofuels such as hydrogen. Much of the expected growth also depends on the climate strategies in the end-use sectors, notably transport (Section 4.4) and buildings (Section 4.6).

Finland aims to make electricity (and heat) generation “nearly emissions-free” by the end of the 2030s (Finnish Government, 2019). GHG emissions in the electricity sector – including combined heat and power (CHP) plants – decreased by 33% between 2005 and 2019. However, they still account for almost 30% of total GHG emissions in Finland (OECD, 2020a).

Most (85%) of Finland’s electricity generation is low-carbon (including nuclear), among the highest shares in the OECD (Figure 4.6). This is up from 66% in 2005. Wind and biomass replaced coal and peat in power plants thanks to the EU ETS, CO2-based fuel taxation (e.g. coal and peat) and renewables support.

In 2020, the share of renewables was 52%, with biofuels and waste (predominantly used in CHP plants) and hydro accounting for the bulk of this share (Figure 4.6). Nuclear accounted for 34%, but this share will increase when Olkiluoto-3, a 1 600 MW nuclear power plant unit, comes on line in 2022. This unit is 12 years behind schedule and three times over its original budget (Edwardes-Evan, 2020). The delays and extra costs highlight the uncertainties of using nuclear power to decarbonise the power sector. Fossil fuels (coal, peat and natural gas) accounted for the remaining 13.5% of electricity generation in 2020.

Fossil generation and thus electricity-related GHG emissions fluctuate substantially depending on the availability of hydro resources in neighbouring countries. In years with low annual precipitation, hydropower production in Sweden and Norway decreases, requiring larger domestic fossil-based generation. Electricity net imports decreased by 12% between 2005 and 2020, accounting for 18% of total electricity demand in 2020.10

A well-being lens to policy making in the electricity sector can support Finland to further decarbonise the electricity sector. This would increase the chances of achieving the carbon neutrality target. At the same time, it would deliver a number of well-being benefits, including better health, green jobs and higher resilience due to a more decentralised power system.

Systemic change, notably the shift from a centralised to a more decentralised grid, would enable customers to play a larger role through onsite generation, storage and demand response as envisioned by Finland’s Smart Grid Working Group. This, in turn, would empower consumers. At the same time, it would reduce energy bills and investments in low-carbon plants (e.g. wind) and network infrastructure, reducing trade-offs with biodiversity (Gasparatos et al., 2017).

The transition to a zero-carbon power system also requires managing the phase-out of fossil power infrastructure and addressing the impacts on affected workers, communities and regions (Section 4.5.1). As electricity demand is expected to increase, further renewable power capacity needs to come on line (Section 4.5.2). The demand side, including small customers, can play an increasingly active part to provide flexibility, which is limited in Finland (Section 4.5.3). Sector integration increases the potential of demand response while decarbonising end-use sectors. This requires integrated strategic planning of the entire energy sector. Examples of integration include electrification of end uses and production of electrofuels such as hydrogen.

Finland plans to phase out coal in energy generation by 2029 and to cut peat consumption by at least 50% by 2030 (MoEAE, 2020a). Finland could consider adjusting the coal phase-out date in view of the carbon neutrality target. Due to the availability of (low-cost) alternatives, reducing peat and coal consumption for energy production is one of the measures with the lowest abatement costs across all sectors (Sitra, 2020).

Both coal and peat, which are mainly used in CHP plants, are increasingly being replaced by solid biomass. Coal and peat consumption in electricity generation decreased by 28% and 36%, respectively, between 2005 and 2019. These decreases stem from higher EU ETS prices and CO2-based fuel taxes, and more support for renewables. Projections indicate this trend would continue. Only minor additional measures would be needed to reach the coal phase-out and peat reduction targets.

Due to the permit price uncertainty of the EU ETS, the Finnish government has been considering a floor price. This would ensure reduction of peat use, under which energy tax on peat will increase if the EU ETS price falls below a certain threshold. This, in turn, can help increase price certainty. However, the floor price will be combined with an increase in the tax-free allowance for peat use. The net effect of these measures is an increase in GHG emissions in the short term.

The government has been working on an energy tax reform that includes peat. As a first step, it nearly doubled the energy tax on peat in 2021, from EUR 3/MWh to EUR 5.7/MWh (Chapter 3). Peat has long enjoyed lower energy tax rates than other fossil fuels, in addition to an exemption from the carbon component of the energy tax. These benefits reduce the incentives for utilities to switch to more sustainable generation technologies. Energy taxes that better reflect external costs, including climate change, would be a cost-effective way to reduce the consumption of peat. CO2 emissions from burning peat are higher than those from coal and natural gas (IPCC, 2014).

While coal is imported and mainly used in coastal regions close to harbours, 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, 0.1% of total employment in Finland (MoEAE, 2020a). With multiplier effects, the figure rises to about 4 200 full-time equivalent workers.

While the macroeconomic impact of phasing out peat extraction can be expected to be small, it will affect some local economies in Finland’s rural areas. Peat consumption is directly related to employment in peat extraction. Under a business as usual scenario, the number of full-time equivalent jobs for peat production is expected to decrease to 500 by 2025 (Patronen, 2020). Managing the transition away from peat will be key to gaining broad support from and beyond affected communities, which are mostly in rural areas with few other job opportunities.

Finland takes the just transition of the peat industry and affected regions and workers seriously. In a welcome step, the Ministry of Economic Affairs and Employment has appointed a working group to propose ways to help the sector transition. However, other strategies may be more effective. As in Ireland, Finland could appoint a commissioner to engage with all relevant (local) stakeholders (OECD, 2021b). Alternatively, it could set up a commission to determine the path of peat production and peat use for energy. Such a commission would encompass multiple stakeholders, including local representatives, trade unions, energy suppliers and scientists. As such, it would be more likely to ensure broad support for the transition.

Experience from previous transitions related to fossil fuel extraction (e.g. coal) suggests the need for a clear phase-out date for use of peat, complemented with a transition plan. This would provide certainty for investment and education decisions for workers and firms, preventing lock-in of high-carbon educational choices. Preparing territorial transition plans in co-operation with relevant local stakeholders would create tailored alternative economic futures beyond peat. At the same time, they would outline spatially fine-grained timelines and targeted measures.

The working group proposals emphasise improving the situation of peat industry operators while strengthening the security of energy supply. This would be achieved notably through reducing peat consumption at a “moderate rate” during the transition (MoEAE, 2021b). While the latter could maintain some jobs in peat production, the approach would prolong substantial GHG emissions. Indeed, peat production through drainage or groundwater extraction caused 1.8 Mt of GHG emissions in the land-use sector in 2018 through release of methane or marsh gas emissions (Sitra, 2020). In addition, peat production irreversibly damages sensitive peatland ecosystems. This damage reduces biodiversity, while polluting and acidifying water bodies with iron or nutrients (Sitra, 2020).

The working group also proposes a one-off package for peat industry operators to shut down their operations. Among other measures, it would compensate peat producers for unsold stock and for disposal of peat production machinery. It would offer adjustment allowances to operators who discontinue peat extraction. In addition, it would offer early retirement arrangements for older peat workers.

This one-off package is expected to reduce peat extraction effectively. However, the use of public funds needs to be weighed against other uses. Some funds could create alternative economic futures, for example, including new business opportunities. The working group could inform about the measures with the highest social returns depending on local factors. Key factors could include age distribution and skill level of peat operators.

The working group also proposes a controlled transition to new business activities that go in the right direction. For example, the “From peat to bioeconomy, nature management and multi-sectoral entrepreneurship” programme (MoEAE, 2021b) is expected to create green jobs in affected areas. This could offset some negative employment effects from reduced peat extraction. Local green jobs would avoid relocation of workers to mitigate potential negative effects on family life and communities more broadly. Incentives for peatland restoration would create local jobs, while increasing the capability of peat to store carbon, and enhance adaptation and biodiversity (OECD, 2021b). In addition, some jobs may be created in the bioenergy sector to replace peat for energy production (Sitra, 2020).

Finland plans to tap at least EUR 750 million from the EU Just Transition Fund (JTF) over 2021-27 to finance investments in training and infrastructure (MoEAE, 2020a). The government has decided to top-up the JTF contribution with an additional EUR 70 million. In line with JTF guidelines, Finland will direct most of the funds towards strengthening the local economy and the local workforce apart from peat.

This welcome move to strengthen the local economy includes various measures. It will invest in energy efficiency of public and private buildings or distributed energy generation (e.g. mini CHP). It will also train and reskill workers to enable them to seek job opportunities in other sectors. In addition, training for entrepreneurship can help workers set up their own businesses. Investments in physical infrastructure (e.g. information and communication technologies) or soft location factors (e.g. culture, public services, civil society) could attract human capital, as well as new and innovative businesses. If the local economy cannot absorb all workers, mobility programmes could facilitate job search and matching in other regions (OECD, 2017).

Decarbonising the electricity grid requires more investment in renewables. Use of renewables in electricity generation is expected to increase from 48% to 53% over 2019-30. In the “with additional measures” (WAM) scenario, this will translate into projected capacity for wind of 5.5 gigawatts (GW) (up from 2 GW in 2018) and of 1.2 GW for solar (up from 120 MW) (MoEAE, 2019). These figures will be updated in view of the carbon neutrality target.

Generation from wind power increased by more than tenfold between 2011-19 thanks to feed-in-tariffs (FiTs). To spur wind development in the early years, wind energy was eligible for an increased FiT rate until the end of 2015 (Wikberg, 2019). In 2018, Finland changed the support system for renewables from sliding FiTs to technology-neutral auctions for feed-in-premiums to enhance cost-effectiveness and price discovery.11 The first auction was oversubscribed by a factor of three, with all bids coming from onshore wind. The premium tariffs awarded averaged at EUR 2.52/MWh. The auction awarded contracts to projects capable of generating 1.36 TWh of electricity.

In a welcome move, Finland shifted support for onshore wind (both operating aid schemes and auctions) to less mature technologies for both generation and flexibility in 2019 (MoEAE, 2019). Onshore wind is a mature technology with generation costs around EUR 30/MWh (MoEAE, 2019). Therefore, project developers would continue investing in wind using power purchase agreements or on market terms if wholesale prices (between EUR 20 and EUR 40/MWh) are sufficiently high. In 2018, Finland saw its first wind power investments made without any subsidies (IEA, 2018). As of 2021, the pipeline of planned wind power projects amounts to more than 21 GW (18 GW onshore, 3 GW offshore) (FWPA, 2021a). This is almost four times the expected wind capacity in 2030 according to the WAM scenario. While removing financial support, Finland continues to remove administrative, zoning-related and other barriers to onshore wind.

There is a location mismatch between onshore wind generation and power consumption. Most of the planned onshore capacity is expected in Finland’s Central part (e.g. Li, Kaajani, Haapavesi) far from the major consumption centres in the south. Eventually, the transmission network will need an upgrade (FWPA, 2021b). More granular spatial pricing would provide incentives for project developments closer to consumption centres while avoiding investments in transmission infrastructure (IEA, 2016).

Further support for offshore wind may be needed. The levelised cost of electricity for offshore wind is almost four times higher than that of onshore wind (EIA, 2021). Finland has excellent wind conditions for offshore wind, but conditions in the Finnish sea require specialised technical solutions due to ice. A maritime spatial plan outlines potential areas of offshore wind production that would have least impact on underwater natural and cultural values (MoE, 2020b).

Finland will improve conditions for construction of offshore wind. In a first step, Finland reduced the property tax that offshore wind developers pay to municipalities for the foundations of the plants. Finland’s national recovery and resilience plan submitted to the European Union includes support for a first large-scale (6 GW) demonstration wind park in the Åland area, combined with a power-to-X solution (MoF, 2021b).12 Further financial support for offshore wind, such as competitive tenders, would spur deployment.

Distributed generation and prosumers (i.e. households that both consume and produce electricity) are playing an increasing role in the Finnish grid even with limited direct financial support from the government. Across the European Union, Finland has the most favourable conditions for prosumers (SmartEN, 2020). Finland has a long tradition of distributed generation. Notably, this includes off-grid solar photovoltaic (PV) to power a significant share of electricity use for lighting, refrigeration and consumer electronics for around 500 000 summer houses.

Utility-scale solar PV is not yet cost-competitive in Finland, while solar PV is mainly considered as an element to enhance the energy efficiency of buildings. In 2019, the Finnish government granted investment subsidies worth EUR 13.2 million to support 500 small-scale PV installations in companies, communities and public organisations (IEA-PVPS-TCP, 2019). Households can get a tax credit for the work cost component of the PV installation, equivalent to 10-15% of total PV costs.

Electricity generators under 100 kW are exempted from the electricity tax and value added tax. Most of the financial incentives for onsite electricity generation, however, come from onsite optimisation and self-consumption of electricity. These incentives bypass network tariffs and taxes, which account for roughly 60% of the retail price (SmartEN, 2020).

Some distribution system operators (DSOs) offer imbalance settlements in housing companies. This ensures that self-generated electricity is first consumed onsite and, thus, exempted from tariffs and taxes. Overproduction of onsite generation can be sold to electricity suppliers at market prices. From 2022, DSOs are required to offer imbalance settlements for housing companies, which is welcome. In addition, Finland will introduce the datahub, a centralised information exchange system, covering all 3.7 million electricity accounting points in Finland. This is expected to support imbalance settlements while reducing barriers to market entry of new energy service companies (Fingrid, 2021).

Power system flexibility ensures that electricity demand and supply are balanced at all times. Flexibility demands are expected to increase with larger penetration of variable renewable energy such as wind both in Finland and in the Nordic market. On the supply side, flexibility from nuclear plants is limited, while that of CHP and hydro plants is higher (IEA, 2018).

The primary source of Finland’s flexibility is through interconnections to other electricity systems (notably Sweden). As of 2019, the level of interconnectivity (e.g. the ratio of interconnection capacity and domestic power plant capacity) was 22% (excluding interconnection capacity to Russia). This exceeded the EU’s target to reach interconnections between member states of at least 15% by 2030. The interconnection level will decrease to 18% once Olkiluoto 3 comes on line. Jointly with Sweden, Finland is planning an 800 MW transmission line between their northern frontiers to be operational by 2025 (MoEAE, 2019).

Finland is well integrated in the Nordic wholesale market Nordpool. Further strengthening inter-regional co-operation with neighbouring system administrators could increase the benefits of electricity trading and network planning. For example, increased co-operation on balancing services and reserve markets would enhance flexibility and reliability in a cost-effective way, while addressing peak capacity needs (IEA, 2018). In addition, co-ordinated electricity system planning and regional electricity security assessments would improve utilisation of resources (IEA, 2018).

Finland is a pioneer in the development of smart grids and demand response, which are expected to play an increasingly important role for flexibility. Finland has been emphasising the role of demand-side flexibility for many years. Notably, this includes smart grids, aggregation, demand response, storage and distributed generation. The Smart Grid Working Group presented major proposals in electricity markets in 2018, including increased demand-side participation and enhancing cross-sectoral co-operation13 (MoEAE, 2018).

Finland was a frontrunner in the roll-out of smart meters in the European Union, reaching over 99% of all consumers by the end of its roll-out in 2013. Many smart meters will reach the end of their lifetime in the next few years. Replacing them with next-generation devices that include load control functionality would enable many customers to engage in demand response more cost effectively (MoEAE, 2018). Preparing for data and cybersecurity threats is essential to enhance uptake and customer confidence. Comprehensive roll-out of next-generation smart meters would ensure that all customers, including low-income households, could benefit from the new energy architecture.

Implicit demand response through time-based electricity retail rates is well established in Finland. All Finnish electricity customers can choose an electricity contract with time-of-use or real-time pricing. As of 2018, approximately 9% of retail customers had a dynamic electricity price contract (MoEAE, 2019).

Switching the default electricity contract from opt-in to opt-out (as in Spain) would considerably increase dynamic pricing participation rates. Complementing this change with information on the functioning and risks of dynamic pricing would improve effectiveness. At the same time, it would protect vulnerable consumer groups that may be unable to shift electricity consumption (e.g. elderly or disabled people) away from high-price hours.

Explicit demand response (i.e. demand response participating in electricity markets) is available but not yet mainstream in Finland. As of 2020, around 20 aggregators were active in Finland. Aggregators are third-party entities that cumulate a variety of small-scale generation or flexible loads against a payment. More households, notably large consumers (e.g. for electrical heating) with time-of-use tariffs, are expected to shift to market-based load control schemes through aggregators (MoEAE, 2020b).

Finland was one of the first countries that enabled small customers to participate in electricity markets through aggregators. Technical barriers for aggregators and other resources in markets tend to be low (SmartEN, 2020). Explicit demand response and storage are already participating in balancing and reserve markets (MoEAE, 2019). For example, demand response contributes 22 of 729 MW in Finland’s strategic reserve for short-term supply shortages (IEA, 2018).

In addition, Finland reduced barriers for smaller players in the balancing market through lower minimum bid sizes and electronic automation of bids, among other measures. Finland also increased funding for research and development in smart energy solutions. Measures included storage, microgrids, smart EV charging, smart homes, power to gas or aggregators through TEKES’ Smart Energy Program (2017-21). Finland is among the leading IEA member states in terms of energy-related research, development and deployment expenditure as a percentage of GDP (IEA, 2018).

In 2019, Finland announced the removal of double taxation for storage (battery and pumped hydro). This is a welcome step to increase investments in large-scale or behind-the-meter storage. Further reducing entry barriers for demand response and storage, including for aggregators and renewable energy communities, would unlock additional flexibility potential. For example, the tariff structure for DSOs may present a barrier for third-party entry (IEA, 2018). Greater consistency and harmonisation of distribution tariff methodologies would reduce these barriers.

Sector integration, such as the electrification of end uses and the production of electrofuels like hydrogen, could add further flexibility potential while decarbonising end-use sectors. Exploiting cross-sector synergies though sector integration are key aspects of systemic redesign (Figure 4.3). Finland sees electrification as a key strategy to reduce emissions in end-use sectors given the limited scope for large-scale replacement of fossil fuels with sustainable bioenergy (MoEAE, 2020a). In 2020, Finland appointed a working group on sector integration to explore opportunities and barriers to enhance sector integration and to promote the hydrogen economy and other power-to-X applications. Support for power-to-X is also included in Finland’s national recovery and resilience plan.

Although Finland has one of the highest electrification rates, electrification of transport and heating is lower than in Norway and Sweden (NER, 2019). Electricity taxes may discourage electrification, notably when competing fuels for energy services (e.g. peat for heating) are not taxed according to their full social costs. Finland had the seventh highest average electricity tax rate across all OECD and G20 countries in 2018 – almost three times higher than the average rate across all OECD and G20 countries (OECD, 2019b). Electricity taxes encourage consumers to improve energy efficiency. However, they do not directly provide incentives to decarbonise power supply because they put a price on all electricity sources regardless of the carbon content (OECD, 2019b). In a welcome move, the government started to reduce industrial energy tax rebates in 2021 (which will be fully phased out by 2025). At the same time, it lowered the electricity tax for class II users (or those benefitting for a lower tax rate, i.e. industry, mining, greenhouses and data centres) to the EU minimum rate (0.05 cents per kWh). These measures aim to support decarbonisation through electrification. To speed up electrification, Finland also plans to transfer large-scale heat pumps and electric boilers that generate heat for district heating (DH) networks to the lower electricity tax category in 2022 (Chapter 3).14 This is a welcome step. The reduced rate should be extended to public EV and multimodal charging stations to provide incentives for transport electrification.

The structure of distribution network tariffs increasingly favours electrifying end uses. DSOs recover some of their costs through the fixed part of the tariff and the remaining share through the variable part. Low variable costs provide incentives for consumers to electrify end uses. However, they reduce incentives for investments in energy efficiency as per unit consumption costs are low.

Finland’s retail electricity prices for households are around the EU average. With increasing self-consumption of prosumers (Section 4.5.2), DSOs could further reduce the variable part while strengthening the fixed part (MoEAE, 2019). Introducing capacity-based components as in Norway would help avoid or postpone distribution grid upgrades. To that end, it would provide incentives for customers to reduce peak electricity consumption and to participate in demand response. Both of these would reduce consumers’ distribution network bill (MoEAE, 2018).

Finland could consider amending its network management and regulation of DSOs to save network costs and strengthen the role of innovative energy services such as aggregators. So far, DSOs have focused on reinforcing the distribution grid to alleviate network congestion (IEA, 2018). However, an output-based approach would be more flexible. This would allow procurement of storage, demand response or energy efficiency as an alternative to grid reinforcements (as is partially the case for the transmission operator).

DSOs should not actively engage with these activities but rather procure flexibility in a competitive and technological-neutral manner when needed. Consumers and aggregators would thus need to be allowed to participate in local network management markets in addition to national electricity markets. Procuring flexibility could be more cost-effective than traditional investments in distribution network upgrades in many cases. If investments in distribution networks are more cost-effective, then the capacity of the distribution grid should be upgraded substantially due to favourable economies of scale and in view of increasing electrification (Vivid Economics, Imperial College London, 2019).

Direct and indirect emissions in Finland’s building stock accounted for about 15% of total GHG emissions (MoEAE, 2019). Energy use for heating of the Finnish building stock in 2020 is estimated at about 20% of total final energy consumption (MoE, 2020c). Energy consumption of residential buildings increased by 2% between 2005 and 2019 (IEA, 2020). Energy savings from energy efficiency largely mitigated increased energy demand. Demand rose due to the increasing number of dwellings and increase in floor area per person, which climbed from 35.3 m2 in 2000 to 40.8 m2 in 2018 (Statistics Finland, 2019). Average dwelling-occupancy has decreased constantly. Between 1970 and 2018, the number of people per dwelling fell from three to below two, with 44% single-person dwellings (Statistics Finland, 2019).

Finland has a large stock of old buildings and 30% of floor area was constructed before 1970. None of this stock faces any regulation on energy efficiency (IEA, 2018). Finnish housing units are in extremely good condition (e.g. no leaking roof, damp walls or rot in window frames) when compared to other European countries (Eurostat, 2020). However, the energy performance of the building stock leaves room for improvement. Depending on building type (single-family dwelling, terraced house, block of flats), only 22-26% of buildings are classified as energy efficient (energy labels A, B or C on a scale up to G) (MoE, 2020c).

Progress in improving energy efficiency was lower than in other countries. Between 2005 and 2019, climate-corrected15 energy consumption per square metre for space heating in Finland decreased by 15% (Figure 4.7). This is below the European average (21%) and lower than in Denmark (17%) or Sweden (25%). In 2019, Finland had higher energy consumption per square metre for space heating than the EU average (Figure 4.7). This is, however, primarily related to the harsh climatic conditions. In fact, if Finland would face the average European climate, its energy consumption for space heating per square metre would be among the lowest in the European Union.

A well-being approach to policy making in the residential sector can support Finland to reduce energy demand through energy efficiency (Section 4.6.1). It can also exploit cross-sector synergies and decarbonise heat supply (Section 4.6.2) while systematically advancing well-being outcomes. These include limiting climate change, alleviating energy poverty, ensuring housing quality and enhancing the affordability of dwellings and their supply (OECD, 2019a).

Achieving these priorities requires a systemic view between sectors (e.g. electricity and transport) and scales (e.g. dwellings, neighbourhoods and cities). It also demands understanding of how urban forms evolve and interact within their ecosystems. This gives decision makers multiple levers of action to advance the systemic change in the residential sector beyond the dwelling. Such changes could include creating green spaces as carbon and rainwater sinks, improving quality of neighbourhoods, protecting biodiversity and adapting to climate change (Section 4.6.3).

In 2020, Finland published its long-term renovation strategy that aims to reduce emissions by 90% by 2050. The strategy also provides an overview of the building stock in 2020 and indicative targets for the years 2030 and 2040 (MoE, 2020c). To achieve the targets, Finland is planning a mix of efficiency improvements through renovation, phasing out fossil fuel use (see below) and demolishing buildings that are underused and not expected to be used again. This process, which targets regions with decreasing population, will consider demographic change and within-country mobility. The renovation strategy does not consider possible additional reductions in energy demand at the neighbourhood or city level, e.g. through green infrastructure (Section 4.6.3).

By 2050, the renovation strategy aims to increase the share of nearly-zero energy buildings (NZEB) from 10% in 2020 to 82% (apartment buildings), 99% (single-family homes) and 100% (terraced houses) (MoE, 2020c). Where buildings cannot achieve the NZEB standard, a combination of renovation and low-carbon heat could ensure that buildings have net-zero emissions. However, Finland uses a relatively low primary energy factor values in its calculation (Kurnitski, 2019).16 Therefore, its definition of NZEB is less ambitious than the EC recommendation for Nordic countries.

The lower NZEB standard leads to a continuation of above-average energy consumption. For example, energy consumption of apartment buildings would decrease between 2020 and 2050 according to the renovation strategy. However, consumption would be still more than 100 kWh/m2/year in 2050. This is much more than what the EC recommendation considers as technically feasible for apartment buildings in Nordic countries (65 kWh/m2/year) (Kurnitski, 2019).

Achieving low-energy demand neighbourhoods with high shares of NZEBs by 2050 requires deep retrofits that would deliver a number of well-being outcomes. Deep retrofits are whole-building renovations that cut energy use by more than half. The retrofits achieve this goal through a bundle of measures that look at elements of renovation holistically rather than in isolation.17 Compared to shallow retrofits (e.g. a one-off replacement of a boiler), deep retrofits can enhance the quality of buildings by lowering energy demand (e.g. through improved insulation and window replacements), improving the health of occupants.

Deep retrofits can also help further reduce long-term energy poverty. In 2019, 1.8% of the Finnish population reported problems keeping their homes warm enough. Meanwhile, 7.8% had arrears on their utility bills (EU Energy Poverty Observatory, 2021), one of the lowest figures across the European Union. Energy poverty is directly linked to the income situation of households. Low-income households can apply for a government subsidy for their housing costs through the Social Insurance Institution of Finland (MoE, 2020c). Deep retrofits could potentially reduce government subsidies overtime.

Finland’s policy approach is mixed, encouraging both deep and shallow retrofits of buildings. As in most OECD countries, some of Finland’s fiscal incentives have encouraged shallow or staged deep renovation of buildings. For example, Finnish households can deduct the labour costs of renovating detached houses from their income tax to increase demand for renovation services and reduce the informal economy. The annual deduction limit (EUR 2 250 in 2020) provides incentives to modernise building parts over multiple years. Ideally, it should encourage holistic retrofits that could exploit synergies by modernising multiple components at the same time. In addition, Finland introduced grants to phase out oil heating, specifically targeting one building component rather than buildings as whole.

Finland has voluntary energy efficiency agreements with rental housing companies. These agreements, in place since 2002, aim to increase individual energy efficiency measures related to heating, ventilation or lighting. Voluntary agreements cover around 250 000 housing units, approximately 17% of apartment blocks and terraced in Finland. The agreements’ energy saving target for 2017-25 is at least 7.5%, in line with the EU Energy Efficiency Directive, i.e. less than 1% annual reduction. Voluntary agreements alone are not enough to be in line with the renovation strategy. The renovation strategy calls for annual energy savings in apartment blocks of 2.5% between 2020 and 2030.

In a welcome step, Finland introduced mandatory energy performance certificates. These certificates are required when selling or renting a building, or a part thereof (MoE, 2020c). Following the example of the United Kingdom, Finland could also consider requiring property owners to retrofit rentals to a higher energy performance. For example, it could set an energy performance rating of at least “E” to enhance incentives for deep retrofits (Energy Saving Trust, 2019).

Finland is, however, moving in the right direction regarding deep retrofits. In an ambitious move, Finland requires major renovations to fulfil the same energy performance standard that applies to new buildings (MoE, 2020c). Energy subsidies for retrofits of residential buildings are conditional on improving the energy efficiency of the building as a whole. Subsidies require energy performance of the building to be 20% (apartment block) or 30% (detached house) better than in the building regulation (Decree 4/13). A larger subsidy is available if the energy efficiency of the whole building is at least equivalent to the energy efficiency requirement for a new NZEB building.

Finland also offers targeted subsidies. One set of subsidies targets retrofitting residential buildings with humidity damage or indoor air problems. Another set offers subsidies for improving the living conditions of elderly or disabled people. These two subsidies target synergies between reducing energy demand and improving public health and equity (MoE, 2020c). Providing more clarity on those subsidies beyond 2022 would help prevent short-term market distortions and rising prices. At the same time, it would improve predictability and long-term planning of relevant stakeholders.

Efforts to industrialise retrofits, following the Dutch/EU Energiesproong model, could significantly reduce the costs of deep retrofits. High costs are a key barrier to deep retrofits. Finland tested industrialising retrofits in the past, but the project failed due to high costs. Yet Finland could replicate other examples from the European Union.

In a welcome step, Finland piloted joint building ventures that combine multiple renovation projects in the same neighbourhood (MoE, 2020c). If embedded in a broader effort of urban renewal, this could upgrade entire neighbourhoods, increasing residents’ quality of life. Aggregating multiple projects into one large project creates economies of scale, attracts a larger number of contractors and allows for a tendering process. This could reduce costs or improve the quality of the renovation.

Finland should continue promoting joint procurement of building elements (e.g. rooftop solar PV) and joint renovation projects with a view to reaching scale to industrialise retrofits. It could also explore alternative financing mechanisms for deep retrofits. These could include financing through energy service companies or on-bill financing to address high up-front costs.

Implementing Finland’s long-term renovation strategy would create an additional 12 000 full-time jobs in the manufacturing, service and construction sector (MoEAE, 2020a). Finland’s workforce, however, needs better training to keep up with new requirements on buildings and new technologies. Energy efficiency of buildings constitutes an integral part of the construction industry’s education curriculum at all levels (MoE, 2020c). A few undergraduate-level degrees focus exclusively on retrofitting or energy efficiency. Finland offers a variety of lifelong learning opportunities through vocational schools or public education facilities at all levels of government. Enhancing digital learning, including through the provision of free digital teaching materials and online courses, would support lifelong learning of the workforce.

Ahead of the EU’s Energy Performance of Buildings Directive (EPBD, 2010/31/EU) 2021 deadline, Finland implemented a regulation in 2018 requiring all new buildings to be NZEB. Energy use of buildings is responsible for around 80-90% of life-cycle emissions. Conversely, 10-20% of emissions occur during the construction phase (including embodied carbon in materials) and the demolishing phase (OECD, 2020b).

Finland plans to double the use of wood in construction (Finnish Government, 2019), which is welcome. Wood already accounts for 40% of all building materials, including in 90% of detached houses and in virtually all summer houses. However, concrete and steel, which are more carbon-intense than wood, are dominant in multi-storey residential and commercial buildings. Increasing the share of wood in construction would store carbon captured by forests for a long time, while improving the health of occupants due to better indoor air quality.

Finland is a pioneer in tackling the life-cycle emissions of new buildings. In 2017, the Ministry of Environment published a roadmap to low-carbon construction, laying the foundation for legislation on low-carbon buildings (Kuittinen and Häkkinen, 2020). Finland is planning to include carbon limits on buildings’ life-cycle emissions for different building types before 2025. Based on the European Commission’s Level(s) method, Finland has developed an assessment method to determine the carbon footprint and handprint (i.e. the net benefits in terms of carbon storage or production of renewable energy) of new buildings (MoE, 2019). Finland may extend the calculation method to renovation (MoE, 2020c). On a local level, cities like Helsinki already incorporate the carbon footprint and eco-efficiency of construction projects as procurement criteria for buildings and infrastructure. They also use it to assess plot conveyance (i.e. for selling or renting city plots for private or commercial users) (City of Helsinki, 2018).

Finland’s heating technologies differ between rural or urban areas and building type. In rural areas and single detached houses, small-scale wood-based (35%), electric heating (30%), electric heat pumps (16%) and fossil-based heating (10%) dominate heating technology (MoE, 2020c). Electric heat pumps have started to replace electric heating and fossil-based heating. Finland already has a well-established heat pump market (IEA, 2018). Consequently, direct residential CO2 emissions more than halved between 2005 and 2018 (IEA, 2021). Finland introduced a 10% liquid biofuel blending obligation for light fuel heating (MoEAE, 2019). Oil heating will be phased out by the start of the 2030s (MoE, 2020a). In addition, the central government and municipalities will cease using oil heating by 2024 (Finnish Government, 2019).

District heating is the major heating source for residential buildings in Finland (Figure 4.8). In urban and suburban areas, the share of DH is as high as 89%. Due to ongoing urbanisation and expansion of the DH network, the number of households with access to DH is expected to increase. CO2 emissions from heat plants and CHP plants decreased by 20% between 2005-18 (IEA, 2021). The share of fossil fuels and peat in Finland’s DH production decreased from 76% in 2010 to 45% in 2019 (Figure 4.8). Coal and peat have been replaced by biomass, other energy sources (e.g. waste) and increasingly waste heat recovery.

Renewables and other energy sources (e.g. heat recovery, heat pumps) in DH accounted for 39% and 16%, respectively, in 2019. Based on WAM projects, they are expected to reach 50% and 20%, respectively, in 2030 (MoEAE, 2019). Among renewables, solid biomass from wood and wood residues from side streams of the forest industry account for the largest share (>85%).

The share of renewables on DH energy supply was still lower than in other Nordic countries in 2018 (Figure 4.8). Almost 70% of DH production is based on CHP plants, which minimise energy losses in terms of waste heat (MoEAE, 2019). Trigeneration, the simultaneous production of heat, cooling and power, further minimises energy losses and has been successfully implemented in Helsinki.

The switch from fossil fuels and peat to biomass and other energy was largely driven by policies. Fossil fuel use in CHP and DH is taxed. However, despite energy tax rates on peat nearly doubled in 2021, peat still faces substantially lower tax rates than other fossil fuels (Chapter 3). Aligning tax rates to reflect the real social cost would accelerate the pace of the fuel switch. The EU ETS covers most of the CHP and DH plants (i.e. those with a rated capacity exceeding 20 MW). Thus, they also face the ETS permit price. While the permit price applies to fossil generation, biomass is assumed to be carbon neutral. This effectively exempts biomass from carbon pricing and provides incentives for biomass combustion.18

Finland’s operating aid for electricity and heat from forest chips also triggered the fuel switch to renewables. The maximum aid for electricity produced from forest chips is EUR 18 per MWh (MoEAE, 2019). The aid depends on the EU ETS permit price. No aid is paid if the price exceeds EUR 23.7/tCO2 per tonne, which has been mostly the case since 2019.

To support phase-out of coal in CHP plants (Section 4.5.1), the government supported the early switch of CHP plants to biomass (EUR 90 million) and non-combustion technologies (EUR 45 million). It thus indicated a preference for fuel substitution with biomass over non-combustion technologies.

Non-combustion technologies, including heat pumps, heat storage and waste heat recovery, have fewer trade-offs with well-being dimensions (Section 4.2.2). The extensive DH network in urban areas allows for exploiting cross-sector synergies through recovery of wasted and recycled heat, further reducing primary energy demand. The share from heat recovery increased from 3% to 10% over 2010-19 (Figure 4.8). Early non-combustion projects explored options to recycle heat from data centres (e.g. Mäntsälä) or wastewater (e.g. Turku) (Sitra, 2019). For example, the data centre in Mäntsälä delivers around 20 gigawatts per hour (GWh) heat to the local DH system, covering roughly half of DH demand (Patronen, Kaura and Torvestad, 2017). In Espoo, waste heat accounts for 20% of heat production.

The DH market is unregulated. Finnish law does not guarantee or regulate third-party access to DH networks. Consequently, bilateral agreements set out conditions for third-party access. Absence of guaranteed access could add uncertainty to third-party heat providers, preventing heat sources to be tapped.

Decarbonising heat supply of DH networks within a short period is challenging. Although DH is a key infrastructure to deep decarbonisation, DH companies face increasing financial challenges. First, energy efficiency improvements are expected to reduce heating demand. This means that revenues for DH companies to maintain the infrastructure will also decline (MoEAE, 2019). Second, customers in some regions increasingly switch from DH to decentralised solutions (e.g. heat pumps) in response to rising DH prices due to higher fossil fuel prices (both policy and market driven). While DH prices are moderate compared to other Nordic countries, they have been rising disproportionately between 2007 and 2017 (IEA, 2018).19

Hybrid systems that combine DH with large-scale electric heat pumps and water thermal storage. These could enable DH companies to generate new revenue streams by participating in electricity markets and providing flexibility (Averfalk et al., 2017). Hybrid systems are commercially viable in most places and Finland could consider supporting these systems where they are not. It is therefore welcome that Finland plans to reduce the electricity tax rate for large-scale heat pumps, electric boilers and data centres to the minimum level of the EU Tax Directive (Section 4.5).

Urban form significantly determines GHG emissions. Most of Finland’s urban areas only started to see rising population density after 2010. For example, Helsinki’s development was characterised by low-density housing development and the creation of jobs outside the city centre. This led to a polycentric city structure until the 2010s (Tiitu, Naess and Ristimäki, 2020).

Densification in the Helsinki region started only after 2010. The process was guided by national land-use guidelines (e.g. Land Use and Building Act) that aimed to reduce carbon emissions while preserving biodiversity. More recently, densification has become a key part of Helsinki’s climate action plan to reach carbon neutrality by 2035 (City of Helsinki, 2018). The plan foresees continuing development of housing in inner-city brownfield areas (Tiitu, Naess and Ristimäki, 2020). Some Finnish cities are increasing or are planning to increase density. They will achieve this goal by demolishing and replacing old, energy-inefficient and low-density apartment buildings through multi-storey buildings with a substantially higher numbers of flats.

As in other OECD countries, Finland would benefit from improving its built environment through better urban and regional planning, mixed-use development and integrated, multimodal transport. Increasing the compactness of cities and creating proximity would reduce mobility and thus transport emissions. Moreover, compactness is also associated with lower energy use for buildings. Evidence from modelling global building-related energy use suggests that urban density influences future energy use as much as energy efficiency (Güneralp et al., 2017). Higher urban density is associated with smaller dwelling size (in terms of floor space per capita) and thus lower per capita energy use for heating and cooling (Güneralp et al., 2017). Energy savings are also due to synergies in heating apartment blocks compared to single-family houses. Evidence from the United States suggests that doubling population density in cities could reduce CO2 emissions from household travel by 48%, and those from residential energy use by 35% (Lee and Lee, 2014). Energy savings from more compact forms tend to be larger in cool climates (Güneralp et al., 2017).

In addition, denser areas offer more potential for a diverse pool of heating supply options. Options like DH need a sufficiently high heat density demand to be cost-competitive with other heating solutions. In addition to density, mixed land-use (i.e. the integration of multiple forms of land-use, including housing, shopping, offices and leisure activities) would further reduce travel demand and transport emissions. At the same time, it provides opportunities to recycle waste heat streams from different urban functions within buildings or neighbourhoods.

Increasing the compactness of cities can come at the expense of other well-being priorities. These include reducing access to green spaces, ecosystem services, city carbon sinks or climate change resilience. Less access to these priorities reduces the well-being of citizens. The lockdowns during the COVID-19 pandemic have made the negative well-being effects of being confined in (small) apartment buildings visible.

Holistic spatial plans can minimise trade-offs between different goals. For example, to increase density, Helsinki plans 30% of new building developments for urban infills. They will also be close to public transport hubs, following transit-oriented developments to minimise car dependency and leverage on existing transport infrastructure. At the same time, Helsinki aims to preserve the most significant carbon sinks while reforesting open spaces. This will complement the city structure with trees, keeping forests vegetative and diverse (City of Helsinki, 2018).

In addition, Helsinki applies the green factor method. This method ensures sufficient green spaces while mitigating flood risk, storing CO2, cooling down heat islands of built environments and enhancing the well-being and health of citizens (Inkiläinen, Tiihonen and Eitsi, 2016). Improving monitoring and evaluation of the green factor method would strengthen its effectiveness. In this regard, the diversity of green infrastructure projects should be a priority (Juhola, 2018).

The green factor method is a step in the right direction for Helsinki and could be mainstreamed to other cities and municipalities. Green space planning looks beyond individual green spaces, considering them as functionally interconnected units. This further improves the ability of green spaces to deliver on the SDGs, including clean air and biodiversity (e.g. avoiding fragmentation of habitats) (Andersson, 2018).

Housing in urban areas is costly. Among all dimensions of the OECD well-being framework, Finland scores worst in housing affordability compared to other OECD countries (OECD, 2020c). In the last years, housing prices have further diverged regionally, notably between the Helsinki Metropolitan Area and the rest of the country (Putkuri, 2018).

Lack of affordable housing is also considered a major bottleneck for people seeking employment opportunities (Putkuri, 2018). To mitigate short-term affordability problems, Finland is offering state-subsidised rental housing (council housing) or general housing allowances for low-income households (both tenants and owner-occupied).

New (green) housing developments are needed to reduce pressure on urban housing prices from increased urbanisation, notably for low-income families. In a welcome move, many cities are locating different housing types in the same area (e.g. private ownership, rental housing, social housing). This practice, which prevents segregation of new development areas, ensures access to modern housing for low-income housing and strengthens social cohesion. In addition, spatial plans for new developments such as in Helsinki increasingly ensure that green infrastructure complements housing developments. This provides important ecosystem services and enhances the well-being of inhabitants.

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Notes

← 1. An increase of harvesting of 1 million Mm3 would reduce the carbon sink by approximately 1.5 MtCO2e within the next 40 years.

← 2. The sustainable logging maximum ensures stable forest growth and keeps a forest’s absorption capacity in line with the carbon neutrality target.

← 3. Finland does not have a strong focus on carbon capture, utilisation and storage (CCUS) and BECCS. Finland also banned onshore storage due to lack of suitable geological formations, but captured CO2 could be transported abroad through ships. Cost calculations for BECCS suggest that biomass CHP and DH plants and the pulp and paper industry would be most cost-effective (Kouri et al., 2017). Finland neither provides financial incentives for CCUS nor includes this option in its energy planning (IEA, 2018). However, the “Savings” scenario of Finland’s LT-LEDS assumes the deployment of BECCS, which forms an integral part to meet both the carbon neutrality target and the 90% emission reduction in 2050 target (MoEAE, 2020a). According to this scenario, CCUS would amount to emission reduction of 14 MtCO2e in 2050. If CCUS were to play an increasingly important role, a clear commitment to that technology along with a policy roadmap and incentives would be needed to provide certainty for project developers and investors.

← 4. The Roundtable convenes nominated representatives across society to create a common understanding of a just transition towards a carbon neutral society.

← 5. As required under Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action.

← 6. Mobility is a bad proxy or performance indicator of the contribution of transport systems to well-being for a number of reasons. In fact, growing mobility may be a symptom of deteriorating accessibility (ITF, 2019). Total mobility can grow when people and places of interest (e.g. schools, shops, hospitals, gardens, etc.) are badly connected, and when connections by active and shared transport modes are limited. For example, mobility increases if children cannot go to school by walking or cycling due to safety concerns, or when the proximity to shops decreases (e.g. local shops close), and people need to drive to meet their basic needs. Also, as motorised private vehicles become the most attractive or only way to get to places, access to opportunities may be reduced for less affluent households. This widens the inequality gap and reduces well-being. Yet because those who drive do so for more and longer distances, overall mobility can indeed increase (OECD, 2021c).

← 7. Induced demand refers to the phenomenon by which investments in road expansion increase rather than reduce congestion. This is because more roads increase the attractiveness of cars so that more people choose to drive. Urban sprawl is the phenomenon by which people move farther from cities when they can get to city centres within a reasonable time budget (e.g. 30 minutes by car). Urban sprawl increases daily travel distances and reduces the attractiveness of active modes such as walking, cycling or micro-mobility. As density decreases, and single-use development is fostered, public transportation is also less of an option as it is difficult to maintain good service quality. Both dynamics lead to the erosion of alternative modes either because these modes are not safe, and/or because they are less convenient than driving a car.

← 8. The energy content of advanced biofuels (e.g. produced from waste material) is taken into account as double its actual energy content when calculating the share of biofuels for the purposes of the distribution obligation.

← 9. Meeting the biofuel targets (along with other bioliquids targets) domestically would require additional biofuel production capacity of 400 000 tonnes of oil equivalent (toe), almost double the amount of the current capacity of 500 000 toe.

← 10. While the high share of net imports is not a problem in itself as Finland is well-connected to neighbouring electricity systems, resource adequacy during winter peak hours is increasingly a concern. Generation during winter peak demand (10 600 MWh in 2018) falls short of peak winter demand (14 000). Olkiluoto 3, the 1.6 GW nuclear power plant, is expected to be operational in 2021. This would reduce the gap in the medium term, while supporting Finland’s target to be 55% energy self-sufficient by 2030. Another 1.2 GW nuclear power plant (Hanhikivi I) is proposed for construction but is not expected to be operational before 2028. Peak demand is expected to increase to 16 200 MW by 2030 and to 17 000 MW by 2040 (MoEAE, 2019). This will require higher levels of flexibility, including through demand-side management.

← 11. Under the new 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 will be paid if the market price is higher than the sum of the reference price and the approved premium.

← 12. Power-to-X refers to the conversion of electricity to other energy carriers, including hydrogen, methane or ammonia.

← 13. The working group proposed to enhance action in the following areas: i) clarifying roles and rules in the electricity market; ii) enabling market-driven incentives; iii) creating technical preconditions to increased consumer participation; and iv) enhancing cross-sectoral co-operation (MoEAE, 2018).

← 14. 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.

← 15. Climate-corrected consumption refers to consumption that would have occurred, with a normal climate (e.g. the average climate observed in the past 20 years) over the heating and cooling periods.

← 16. Finland uses primary energy factors of 1.2 and 0.5 for electricity and district heating, much lower than those recommended by the European Union for Nordic countries and applied in other Nordic countries, including Sweden (Kurnitski, 2019).

← 17. Techniques include building envelope improvements or Heating Ventilation Air Conditioning optimisation. These technologies, when applied as a bundle, will often cut total energy demand by at least half (Zhivov and Lohse, 2020).

← 18. The European Union is updating rules regarding the carbon neutrality and sustainability of biomass. If biomass was not considered carbon neutral and faced the same price as fossil combustion under the EU ETS, then forest owners would need to be subsidised for carbon stored in forests. Otherwise, woody biomass supply would be inefficient and too low (Kooten, Binkley and Delcourt, 1995).

← 19. In contrast to Denmark, Norway and most other countries, the DH market in Finland is unregulated. DH companies are local natural monopolies. Customers cannot switch their DH providers, which usually warrants price regulation to prevent abuse of market power. Finland (like Sweden), however, does not put any rules on the price setting of DH companies. It emphasises the free competition of DH with other heating technologies (e.g. heat pumps) to discipline DH companies (IEA, 2018). If abuse of market power is suspected, the Finnish Competition Authority can initiate investigations, the last of which was carried out in 2012 (IEA, 2018).

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