Assessment and recommendations

Sustainable development is a central cross-cutting goal of Finland’s Government Programme. The country should be commended for its commitments to become carbon neutral by 2035, to pioneer the world’s first circular economy and to halt biodiversity loss. Much analysis is being developed on how these ambitious targets could be achieved. The challenge for the next decade will be to get the right policies in place, to secure sufficient resources and ensure buy-in from businesses and citizens. The generally high environmental awareness of the Finnish population, and its deep connection to nature, can support implementation of the country’s environmental policy.

Despite marked progress in the last decade, Finland is not fully on track to meet all its ambitious goals. The country achieved visible reductions in the emission of greenhouse gases (GHGs) and air pollutants (Figure 1). Several factors contributed to this decline, including a shift from fossil fuel use to electricity and renewable energy sources, and improved vehicle technology. The long period of lacklustre economic performance following the 2008/09 global financial crisis also played a role. The economic recovery starting in the mid-2010s has slowed down progress. Waste generation has continued to grow, while recycling has not progressed as fast as hoped. Agriculture and Finland’s large forestry sector exert pressures on the country’s sensitive ecosystems and threaten its flora and fauna. As in other countries, the COVID-19 crisis has had some positive environmental effects such as a drop in GHG emissions in 2020. Nonetheless, targeted policy measures are needed to steer the economic recovery towards low-carbon and circular patterns and avoid a rebound of environmental pressures.

Finland has one of the least carbon-intensive energy mixes among OECD countries. In 2020, renewables accounted for 37% of energy supply, up from 25% in 2010. Bioenergy (solid and liquid biofuels), largely from residues of the forest industry, is the main renewable source (Figure 2). The country exceeded its 2020 renewable energy targets under the European Union (EU) directive. If energy and climate policies are implemented as planned, Finland is projected to overshoot its EU 2030 target of 51% renewables in gross final energy consumption (MEAE, 2019). The share of fossil fuels in the energy mix declined steadily to 38% in 2020, or about half the OECD average. This decline will likely continue with the planned expansion of nuclear, phase-out of coal and reduced used of peat. Peat is the only domestic fossil fuel but is highly carbon-intensive. It accounted for 4% of energy supply in 2019.

Energy demand picked up with the economic revival in the second half of the 2010s. Both the energy intensity of the economy and energy consumption per capita are high compared to the OECD average. This is due to the cold climate, a low population density and a relatively large share of energy-intensive industries. The energy intensity of the economy improved over the past decade but more modestly than in many other OECD countries. Nonetheless, Finland met its 2020 energy efficiency targets under the EU Energy Efficiency Directive. The National Energy and Climate Plan envisages only a marginal decrease in final energy consumption over the next decade. Therefore, progress towards the 2030 energy saving target needs to be closely monitored (Section 4).

The remarkable decline in GHG emissions of the last 15 years allowed Finland to meet its 2020 mitigation commitments under the Kyoto Protocol and the EU climate policy (Section 4). In 2019, Finland set one of the most ambitious climate targets announced to date: to become carbon neutral by 2035 and carbon negative soon after that. This target requires additional measures to those in the pipeline, which are to be included in the revised cross-sector climate strategies. Maintaining the valuable carbon sink provided by Finland’s forests and carbon-rich soils (e.g. peatlands and mires) will be crucial to reach the climate neutrality goal (Section 4).

Finland will be strongly affected by climate change, with mean temperatures projected to rise faster than average temperatures globally. Acknowledging its exposure to climate risks, the country was among the early movers to enhance climate resilience. Knowledge on the vulnerability and risks in specific sectors is generally good. Online and communication tools facilitate knowledge diffusion among businesses and society. The Climate Change Act (which was under revision at the time of writing) requires the development of a national adaptation plan at least every ten years. The first plan was published in 2014; a multi-stakeholder group monitors its implementation. Since 2017, environmental impact assessments need to include an assessment of climate risks. Thanks to these efforts, awareness of climate change impacts and adaptation needs has increased and climate resilience is generally well integrated into sectoral planning and activities. Several research projects to enhance knowledge about climate risks and adaptation opportunities are ongoing. However, uncertainty about concrete options, and their costs and benefits, as well as unclear division of responsibilities and insufficient co-ordination, remain obstacles to better manage climate-related risks on the ground (MoAF, 2020).

Air quality is among the best in the OECD and good air quality is nearly uniform across the country. In 2019, citizens’ annual average exposure to fine particulate matter (PM2.5) pollution was below the guideline value of the World Health Organization and 60% below average exposure in the OECD. The economic and health damage resulting from air pollution is lower than in most other OECD countries. Still, ambient PM pollution is estimated to have caused some 1 600 to 2 000 premature deaths in Finland each year in 2005-15.

The emission of air pollutants declined compared to 2010, mostly driven by more stringent EU requirements and a shift towards cleaner fuels. Finland is expected to meet its 2020 targets for all five air pollutants targeted under EU legislation, although there is a risk that ammonia emissions (caused by agriculture) will exceed the target.2 The country seems on track to meet the 2030 targets using existing measures. However, PM2.5 and ammonia emissions have declined more slowly in the second half of the 2010s, and are projected to decline slightly over the next few years. Nitrogen oxides (NOx) emissions per capita and per unit of gross domestic product (GDP) remain high by OECD comparison, mainly due to a relatively old vehicle fleet and the high share of coal, peat and biomass burning. Hence, there is scope for further reductions of emissions. This can bring considerable health benefits to Finland, without affecting economic growth (OECD, 2021a).

The National Air Pollution Control Programme 2030 refers extensively to the co-benefit of climate policy in terms of lower air emissions (from the switch to cleaner fuels, technological improvements, modal shift in transport, etc.). The plan contains a long list of measures to reduce pollution from wood burning for home heating and saunas, as well as the use of studded tyres, and sanding or salting, for the winter maintenance of roads. Small-scale wood burning causes about half of PM2.5 pollution and is projected to become the largest factor of premature deaths from air pollution in 2030 (MoE, 2019). However, due to funding limits, not all of the measures outlined in the national plan are being implemented.

The reduction in traffic volume in densely populated areas will remain one of the most efficient measures to cut emissions from both road dust and exhaust, with important co-benefits for climate change mitigation (Section 4). It should remain a priority in Finland’s efforts to improve air quality. At the same time, Finland should consider regulating the use of studded tyres in areas facing higher pollution levels, as done for example in Norway. Additional measures and resources also seem justified to accelerate replacement of inefficient fireplaces, space heaters and sauna stoves, given the considerable health benefits such investments would bring, especially in densely populated areas.

In early 2021, Finland launched the Strategic Programme to Promote a Circular Economy to 2035. The programme includes specific targets on domestic primary raw materials and resource production, among others. To achieve this, Finland needs to develop regulatory and incentive frameworks that support new business models but also prioritise waste prevention and recycling. Total waste generation has grown by about 20% and municipal solid waste (MSW) generation by 24% since 2010. Per capita MSW generation also grew (Figure 3) and is well above the OECD-Europe average. Finland missed its goal to reverse the trend of growing MSW generation by 2016. In the absence of strong policy measures, MSW volumes are expected to continue to increase alongside economic growth.

Finland has seen a massive shift from landfilling to incineration in the past decade (Figure 3). This was mostly driven by a ban on landfilling of organic waste adopted in 2016, supported by a tax on the landfilling of recoverable wastes. The share of waste recovery (i.e. recycling or composting) has grown, thanks to comprehensive extended producer responsibility schemes, efforts to expand separate collection in urban areas and a high level of awareness among the public. Even so, Finland fell short of the target set by both EU and Finnish legislation to recover at least half of MSW by 2020 (Figure 3). Both the circularity rate and the material productivity of the Finnish economy are low in international comparison.

As in many countries, the fragmentation of waste management responsibilities, both in terms of institutional roles and collection operations, has been a key barrier to increasing recycling rates. Municipalities collect residential mixed wastes, but producer responsibility organisations collect residential recyclable wastes. The revision of the Waste Act, approved in mid-2021, aims to address inefficiencies by strengthening collaboration among different service providers. It also establishes a basic obligation for separate waste collection and requires door-to-door collection for selected properties (as opposed to the less efficient collection of household recyclables through drop-off points). These changes are expected to help improve separate collection and recovery rates.

The framework for waste charges remains unchanged. While all municipalities use pay-as-you-throw schemes, only a few provide incentives for separate collection (e.g. imposing higher collection fees for unseparated waste). However, others have struggled to introduce such incentives in the face of vested interests among numerous local waste management companies.

Full implementation of the National Roadmap to a Circular Economy (last updated in 2019), the 2018 National Waste Plan and the 2018 Plastics Roadmap will be needed for Finland to become a circular economy model within the next few years. As part of its waste and circular economy policy, the country plans to strengthen green public procurement; foster innovations; pay more attention to material efficiency in environmental permits; and expand the use of voluntary agreements and material efficiency audits. Green Deal voluntary agreements between the government and industry sectors can contribute to achieving circularity and climate neutrality goals (Section 2). Additional measures will be needed to promote circular business models and achieve the ambitious objectives of the Strategic Programme to Promote a Circular Economy to 2035. This could include encouraging ownership-free and sharing models; circular design, repair, sharing and reuse; labelling for longer lasting products; and new deposit-refund schemes.

Finland has not achieved its goal of halting biodiversity loss by 2020. The number of threatened species has been slowly increasing. Meanwhile, the state of habitats has not significantly improved over the past decade. In 2019, 12% of species and 48% of habitats were classified as threatened. The situation is particularly worrisome in southern Finland, where habitats are often fragmented and land-use pressures are greater than in the north.

Mires, forests and semi-natural grasslands are facing the largest pressures (Figure 4). Finland’s large forestry sector has been responsible for the historical drainage of many mires and still constitutes the single largest pressure on wood habitats and species. Drainage of mires not only has negative consequences on biodiversity but also causes significant GHG emissions (Section 4). Peat extraction is permitted only in already drained or otherwise altered bogs; draining intact peatlands for forestry has been reduced. However, peatlands have continued to be converted to fields and peat production areas and limited progress has been made in restoring mires (MoE, 2017).

The National Strategy and Action Plan for the Conservation and Sustainable Use of Biodiversity 2012-20 has proven effective in raising awareness and helped advance the integration of biodiversity into sectoral policy making. However, the effectiveness of the strategy has been limited due to a host of factors. These include limited resources; insufficiently ambitious or poorly defined goals and policy measures; delayed implementation; and conflicting development goals. Finland makes limited use of economic instruments to raise revenue for biodiversity protection. In 2020, the government increased the budget for biodiversity protection to a record-high level, which will enable enhanced restoration measures. The development of the post-2020 biodiversity framework provides an opportunity to target efforts and resources more efficiently. Building on the success of the Climate Change Panel (Section 4), Finland should consider legally recognising the Nature Panel to strengthen its role in advising public institutions in assessing the potential and actual impact of policies on ecosystems.

Finland considers that it has met its commitment under the UN Convention for Biological Diversity to conserve at least 17% of land and at least 10% of territorial waters by 2020. Statutory protected areas on state-owned land cover about 13% of the country’s land area, but nature conservation measures apply also to private land. As in many other countries, better connectivity and better representativeness of ecologically valuable areas would strengthen the effectiveness of the protected area network in conserving biodiversity. An expansion of protected land (especially forests) would be particularly welcome in southern Finland, where land-use pressures are larger and where the current share of protected land is smaller. The ongoing revision of the land-use planning law provides an opportunity to strengthen the connectivity of nature protection zones (Section 2).

Finland will furthermore need to strengthen nature management on private lands. The two main programmes to achieve this are the Helmi and the Forest Biodiversity Programme for Southern Finland, which compensate private land owners for protecting part of their land. Both programmes recently received substantial budget increases. However, despite ongoing efforts, the level of nature management in commercial forests is insufficient to halt the endangerment of species and habitats. The emphasis on bioenergy in Finland’s climate change mitigation strategy will increase forestry activity and may add to pressures (Section 4). As demand for forestry products rises, the focus on bioenergy is also likely to increase the costs of compensating landowners for biodiversity protection. Identifying additional ways to promote better nature management in forests will therefore be vital to improve the conservation status of forest and woody habitats species and habitats.

Agriculture also exerts pressures on biodiversity, especially due to nutrients leached into ditches and water bodies. While organic farming covered 13% of agricultural area in 2019 (above the EU average), the main tool to reduce the impacts of agriculture on biodiversity is the agri-environmental payments under the EU Common Agricultural Policy (CAP). However, as in the rest of the European Union, these payments have had limited impact on agricultural practices. The ongoing CAP reform and Finland’s implementation plan provide an opportunity to improve the effectiveness of agri-environmental measures in reducing impacts on biodiversity and water, as well as the carbon footprint of farming.

In line with EU requirements, Finland has developed management plans for all Finnish river basins and a national strategy for its marine environment. The quality of groundwater is generally suitable for human consumption without any treatment, with only 2% of groundwater bodies not achieving good chemical status. Most surface waters comply with quality standards for chemical substances. However, nearly a third of rivers and more than 85% of coastal waters fail to achieve good ecological status. The ecological status of lakes is generally better than that of rivers (Figure 4), but many smaller lakes in agricultural areas suffer from eutrophication. Point-source pollution (e.g. from urban and industry sectors) is generally well controlled. However, some individual treatment systems, which cover 15% of the population, do not comply with the tertiary treatment standards required by legislation.

The most significant pressures on surface water bodies stem from diffuse nutrient pollution from agriculture. The nutrient surplus of agriculture has remained relatively unchanged since 2005, in the middle range of OECD countries. Better recycling of nutrients from manure would reduce reliance on chemical fertilisers and excess nutrients. At the same time, better manure management would reduce carbon dioxide (CO2) emissions associated with their production, which is energy-intensive. Finland provides financial support for the use of manure for biogas consumption. Additional measures, including economic incentives, could help tackle nutrient pollution to soil and water bodies (Lankoski et al., 2018).

The pricing policy for water supply and sanitation (WSS) services enables recovery of most costs for public water supply and wastewater treatment. However, much of the WSS infrastructure is ageing and may be vulnerable to climate change risks (e.g. untreated storm water overflow). Water prices will eventually have to increase to finance the rehabilitation and modernisation of infrastructure (OECD, 2020a). Finland could consider sharing the infrastructure rehabilitation bill at the watershed level. This could help the country avoid exacerbating regional disparities in tariff levels. Since 2020, housing companies have been required to charge tenants for their actual water consumption (and not based on the household size). This creates incentives to reduce water demand and, in doing so, reduces the need for WSS infrastructure.

Finland has a well-functioning environmental governance system based on good international practices in the areas of permitting, compliance promotion and monitoring, as well as access to information and public participation. The country’s traditional compliance culture relies predominantly on voluntary conformity to the rules and honest reporting of infringements by operators rather than on coercive measures. Finland has made progress in the implementation of most environmental recommendations of the 2009 OECD Environmental Performance Review (OECD, 2009). However, the high degree of independence of local authorities and the resource disparity across municipalities lead to a few gaps in the implementation of environmental assessment and land-use planning.

Government programmes are structured around horizontal policy objectives, which leads to extensive collaboration between ministries. In 2010, a regional administration reform restructured several agencies into two cross-sectoral state authorities operating at the regional level. The reform separated the permitting and compliance monitoring functions of the predecessor regional environmental authorities. It integrated these functions into the respective administrative bodies covering several domains in addition to the environment (economic development, transport, etc.). The new structure has contributed to whole-of-government management at the regional level. However, it has increased the influence of economic interests on environmental decisions and dispersed environmental regulatory resources.

Municipalities serve both as permitting and supervising authorities on local environmental issues. The central government provides guidance to municipalities to harmonise practices in these areas across the country and ensure consistency. Agreements on land use, housing, and transport between relevant state authorities and Finland’s larger metropolitan areas are another good example of vertical co-ordination. Seven ten-year agreements – for Helsinki, Tampere, Turku, Oulu, Jyväskylä, Kuopio and Lahti – were signed in 2020-21. Municipalities put forward specific goals and detailed plans for achieving them, while the central government participates in the required investments.

In the last decade, Finland has undertaken several initiatives to streamline its environmental permitting system. It has reduced the number of environmental permits by adopting a registration system for smaller polluters based on sector-specific general binding rules. The notification regime has also expanded for lowest-impact activities regulated by municipalities. In addition, Finland has reduced administrative costs by introducing electronic permit applications and maintaining an information system that brings together information on environmental performance and compliance records of individual operators.

Environmental impact assessment (EIA) is essentially not applied to forestry projects, although this sector is the main cause of biodiversity loss in the country. The threshold for assessment is set so high in terms of the size of the forest, wetland or peatland area affected that almost every project falls outside its coverage. Furthermore, EIA and permitting are not directly linked, distinguishing the Finnish system from those of many other countries. Building, land extraction, water and environmental permits can be issued to projects that have received a negative environmental assessment. This may lead to the location of facilities, mineral mining operations and infrastructure in environmentally sensitive areas. This implementation gap is notable where EIA is conducted under sectoral legislation.

Finland has made progress by approving its first Maritime Spatial Plan 2030 in December 2020. The plan outlines opportunities for multipurpose use in the Gulf of Finland and the Bothnian Sea, accounting for interactions between land and sea areas. In recent years, the central government’s role in regional planning has been substantially reduced, and more land-use planning powers were transferred to municipalities. The concerns raised by the 2009 OECD Environmental Performance Review persist with regard to insufficient enforcement of construction rules in coastal areas (OECD, 2009). Strategic environmental assessment (SEA) – part of the country’s well-established regulatory tradition – is often reduced to general statements for local land-use plans. The government’s planned comprehensive reform of the land-use planning system offers an opportunity to make the required improvements.

The well-functioning Finnish compliance model places a heavy emphasis on compliance promotion, voluntary actions by businesses, reliance on self-monitoring and self-reporting by operators, and keeping coercive actions by enforcement authorities as a last resort.

Practically all inspections are announced to the operator in advance to ensure on-site presence of relevant enterprise staff. Since the operator must report all operating incidents anyway, inspectors do not see the sense of unannounced site visits. An increasing number of meetings between inspectors and operators do not involve site visits. Such regular discussions are based on mutual trust and are considered crucial for maintaining compliance. There are also a significant number of operator-requested inspections, a unique practice used by operators to demonstrate their environmental performance. Inspection reports are maintained in the Compliance Monitoring Data System. This system also contains links to all permitting documentation and records of communication with operators, as well as data on materials use, production and pollution releases of individual installations.

Non-compliance is low: on average, 15% of inspections detect some sort of regulatory breach. If a violation is discovered during an inspection or reported voluntarily, the operator can present a plan of corrective actions to return to compliance. Administrative penalties, not to mention criminal prosecution, are rarely used. Even when a compliance notice is issued in case of inadequate corrective actions, it is regarded as a sanction in itself (as it is disclosed to the public) and rarely includes penalties. There is strong enforcement collaboration between regional and municipal environmental inspectors, the police, the border guard and customs through information exchange, co-operation groups and joint training programmes.

Finland has strict liability for damage to the environment: companies must cover the costs of rehabilitating any areas they have contaminated. However, when the liable party is insolvent or unknown, the remediation burden falls on the government. To address this issue, the Ministry of the Environment is looking to expand the scope of the mandatory environmental insurance (initially designed to cover compensation payments to private parties) to reimburse the government’s remediation costs in such cases.

Finland has implemented a comprehensive set of compliance promotion measures. These include technical assistance, regular dialogue with the regulated community, dissemination of guides on best practices and co-financing with business associations of environmental management studies. Inspectors often have discussions with operators on existing and potential compliance problems and possible solutions.

The government has, as of October 2021, concluded nine Green Deal voluntary agreements with business sectors, usually represented by a trade association, municipalities and other organisations. Many companies have developed their own initiatives within the framework of corporate social responsibility and have made sustainability commitments. The implementation of environmental management systems has grown by more than a third over the last decade.

The central government fully recognises the importance of green public procurement (GPP). In 2020, Finland launched a national public procurement strategy aiming to improve the effectiveness and sustainability of the use of public money. There are environmental criteria and guidance for procurement; a long list of products and services; and some evidence of the use of these criteria at the local level (Alhola and Kaljonen, 2017). However, there is so far no systematic monitoring of progress on GPP.

Finland has a well-established practice of public participation in legislative drafting. It is one of the EU countries with the highest online interaction between public authorities and citizens (EC, 2019). Non-governmental organisations (NGOs) enjoy substantial financial support from the government.

Finland’s joint environmental administration portal is the source of most comprehensive environmental data. Environmental authorities maintain user-friendly websites and contain links to specific environmental information systems. Compliance records of private entities are also accessible to the public. The country is also making progress in giving the public broad access to geospatial data and environmental research.

Expanding its environmental education system, Finland has created new coursework and support materials, engaging a broad range of non-governmental actors. In 2018, sustainable development was made a compulsory component of vocational degrees. In addition, environmental aspects have been integrated into competence requirements for every profession. Multiple actors contribute to education and awareness on climate change, but ensuring co-ordination and long-term impact of their efforts is a challenge.

Environmental disputes are usually handled by administrative courts. Citizens have access to courts only if they are directly affected by the matter; in other cases, they have to complain to environmental authorities. To have standing, an NGO must be registered and fulfil certain requirements with regard to the geographic area of operation and purpose of the activity. For example, the NGO’s area of operation should suffer from the environmental impact in question. These conditions may limit NGOs’ access to justice in environmental matters.

Finland has a solid policy framework to achieve the Sustainable Development Goals (SDGs). It topped the SDG Index ranking in 2021 (Sachs et al., 2021). Finland established innovative institutional mechanisms to support and monitor their national implementation and engage civil society. The national sustainable development strategic framework, reviewed in 2016, is aligned with the SDGs. In 2021, the National Commission on Sustainable Development started developing a 2030 Agenda roadmap. The government’s 2021 sustainability roadmap translates the Government Programme’s goal of a “socially, economically and ecologically sustainable society” into specific objectives. Since 2018, state budget proposals have included a sustainable development chapter. This provides a qualitative assessment of the budget contribution to the SDGs and identifies the state expenditure and revenue that are relevant to the carbon-neutrality goal.

However, Finland should move from good goal-setting and strategy-making to effective and coherent implementation. More needs to be done to truly anchor the SDGs in decision-making processes, especially related to budgets. There are no systematic ex ante and ex post assessments of the environmental and social consequences of policy packages and resource allocations. Finland could build on policy evaluation and scientific evidence to create consensus around policies, reconcile trade-offs and move towards a systemic transformation of the economy.

There is also a need to further integrate sustainable development into development co-operation and to increase the level of official development assistance (ODA). After years of cuts, the ODA budget increased to 0.47% of gross national income (GNI) in 2020, below the commitment of a 0.7% ODA/GNI ratio. Only a quarter of Finland’s bilateral allocable aid focuses on the environment and the goals of the Rio Conventions, well below many OECD donors (OECD, 2021b).

A swift and well-targeted policy response helped limit the health and economic effects of the COVID-19 pandemic. The Finnish economy shrank by 2.8% in 2020, less than on average in the Euro Area. The economy is projected to return to pre-pandemic levels at the end of 2021 and to continue growing by 2.7% in 2022 (OECD, 2021c). Fiscal support was sizeable, amounting to about 3.8% of GDP in 2020 and 2.4% of GDP in 2021. Most of this support aimed specifically to cope with the pandemic and prepare for economic recovery (MoF, 2021a). The Minister of Environment established an independent working group to elaborate sustainable recovery criteria, which were used to guide budget allocations.

Between the inception of the crisis and mid-2021, Finland allocated 58% of recovery spending to “green measures”, which is high by international comparison (O’Callaghan et al., 2020). Measures included funding for public transport and active mobility; clean energy infrastructure, energy efficiency and charging stations for electric vehicles (EVs); investment in national parks and forest biodiversity; and support to research and innovation. In mid-2021, the government started implementing the Sustainable Growth Programme 2021-26, which builds on four pillars: green transition, digital economy, employment and skills, and access to health and social services. The programme encompasses the Recovery and Resilience Plan (RRP) funded by the Recovery and Resilience Facility (RRF) (EUR 2.1 billion in 2021-23 or about 1% of Finland GDP). According to the government, the green transition pillar is allocated over half of the RRF, which is well above the 37% EU benchmark. Measures for digitalisation (e.g. to facilitate remote working) and research and development (R&D) can also contribute to the green transition. The RRP is expected to reduce annual GHG emissions by 6% by 2026 (MoF, 2021b). However, the RRP pays relatively little attention to biodiversity and the bioeconomy (Green Recovery Tracker, 2021).

To be eligible for funding, most projects in the RRP need to be climate-friendly and/or meet the “do no significant harm” principle. However, how this assessment will work in practice is still unclear. The actual contribution to the green transition goal will depend on the design of the relevant measures and on the balance of resource allocation in the government budgets until 2026. There are concerns that the scope of the RRP is too broad and not commensurate to available resources, which may hamper its effectiveness.

Finland’s policy framework places high emphasis on innovation for the circular and carbon-neutrality transition. National expenditure on R&D is about 2.8% of GDP, above the OECD average, and the government announced a target of 4% of GDP by 2030. Most of the public energy R&D outlays target energy efficiency and renewables. However, environment- and energy-related R&D accounts for 5.5% of public R&D budgets, a relatively low share among OECD countries. This reflects the fact that most R&D spending occurs in the business sector. Despite a marked decline in public and business R&D expenditure in the aftermath of the global financial crisis, Finland remains an OECD leader in terms of patent applications for environment-related technology (Figure 5). The country has often pioneered the implementation of EU environmental policies, which has given Finnish companies a first-mover advantage (Hjelt et al., 2020).

There is scope to improve collaboration between the basic research institutions and the business sector, particularly small and medium-sized enterprises (SMEs), to bring innovative cleaner technology and products closer to the market. To this aim, the newly established Finnish Climate Fund (a state-owned company) provides funding for industry-scale demonstration projects of climate and digital technology solutions. In 2018, the institutions promoting innovation, exports and investment were merged into Business Finland, a one-stop shop that implements innovation support programmes and aims to facilitate collaboration. The agency has provided considerable R&D funding for investment in low-carbon solutions. Energy-related projects accounted for one-third of Business Finland’s total innovation funding in 2006-19 (Hjelt et al., 2020). While Finnish SMEs are more innovative than on average in the European Union, there is a gap in innovation investment and capacity between them and large companies. Most public support to private R&D is directed to SMEs. However, this could better target investment in environmental and low-carbon technology, which can pose a higher financial burden.

In addition to applying GPP (Section 2), Finland is the most advanced EU country in implementing public procurement for innovation (PPI). In 2020, the government launched an action plan to reach 10% of PPI in all public procurement by 2023. This aims to stimulate demand for innovative goods and services, including in the environment field, thereby encouraging industries to produce them commercially on a large scale.

Finland’s businesses are particularly active in providing environmental goods and services. Most environmental protection investment is carried out by business, and more so than on average in the European Union. The share of environmental protection investment in total investment of corporations is one of the highest among the European countries of the OECD. The proportion of SMEs offering green products or services is one of the highest in the European Union. The environmental goods and services (EGS) market has grown faster than the rest of the economy. It contributed nearly 8% to the Finnish economy in 2019, more than in all other EU countries. The sector is dominated by the management of energy resources, minerals and forest resources. The energy sector is also the single largest source of EGS-related jobs.

Finland has made progress in facilitating investment related to climate change, energy transition and sustainable transport. However, additional investment will be needed for the climate-neutrality and circular transition. The General Government Fiscal Plan 2022-25 allocates 3.1% of 2022 budget expenditure to measures targeting the carbon-neutrality goal (which will gradually decline to 2.1% in 2025). Public financial support should target investment that would not occur otherwise, with a view to enhancing cost-effectiveness of public spending and leveraging private investment.

The transition to a carbon-neutral and circular economy will bring significant opportunities to create jobs. The accelerated deployment of new technology is projected to lead to increased exports and manufacturing, with positive impacts on the economy and employment (MEAE, 2020). Skills shortages are a barrier to innovation and to the uptake of digital and clean technology (OECD, 2020b). Finland has an effective system to identify the skills required to address future labour market needs. Circular economy is included in education curricula at all levels. The country needs to continue investing in up-skilling and re-skilling its labour force to support the deployment of clean technologies. New green jobs are expected mainly in sectors with traditionally limited female representation, such as forestry and clean-tech. Women need encouragement to participate more in science, technology and engineering studies.

Finland has a long tradition of using green taxes. In 2019, environmentally related taxes raised revenue equal to 2.8% of GDP, well above the OECD average. However, the government recognises the country’s ambitious environmental goals call for a reassessment of the tax structure. The 2019 Government Programme announced a “tax reform for sustainable development” to support the country’s carbon neutrality, circular economy and nature protection goals, while maintaining tax revenue. This is in line with several recommendations from the 2009 OECD Environmental Performance Review about reviewing taxes and subsidies and increase the cost-effectiveness of economic instruments (OECD, 2009). Until 2021, the reform has focused on energy and transport taxation. The government also announced plans to reform mining taxation and promote the circular economy by tax means.

As in many other countries, the bulk of environmentally related tax revenue comes from taxes on energy products and vehicles. Taxation of pollution and natural resource use is limited to the landfill tax, some product charges, a noise charge on aircraft, and fishing and hunting licensing fees. Further extending the use of environmentally related taxes can help accelerate the green transition, while reducing the tax burden on labour. This would also help achieve fiscal consolidation once the recovery from the pandemic is firmly in place.

In 1990, Finland became the first country to put an explicit price on carbon. Today, the carbon tax applies relatively uniformly across sectors. It is uniquely based on lifecycle GHG emissions. In other words, it considers emissions occurring when the fuel is used but also those occurring during the production and disposal process. This approach eliminates the need for special tax discounts for liquid biofuels. The carbon tax nominal rate is among the highest in the OECD. The energy tax rates on transport and heating fuels were raised in 2020/21 and are high by international standards. This means the effective tax rates imposed on CO2 emissions from energy use in both the transport and non-transport sectors are among the highest in the OECD (OECD, 2019). As such, they provide relatively strong incentives for energy savings and GHG emission reductions across the economy. Tax rates should be regularly adjusted to maintain their incentive function and revenue.

Nonetheless, there is scope to continue moving towards a more stringent carbon pricing policy. Less than half of Finnish CO2 emissions are subject to a carbon price (via taxes and emission trading) above EUR 60/tCO2. This is a mid-point estimate of carbon costs today (Figure 6). Indeed, the percentage drops from less than half to less than a quarter if emissions from solid and liquid biofuels, which face zero or lower taxes, are also considered. While emissions from road transport face high carbon prices, nearly three-quarters of emissions from residential and commercial energy use are unpriced, reflecting the prevalence of biomass for heating in this sector. Finland could better assess the potential net effect of taxing solid biofuels on GHG emissions and revenue. As recommended by Parry and Wingender (2021), Finland should consider progressively increasing the effective carbon price to reach a target level by 2030 (e.g. EUR 125 per tonne of CO2), as part of a broader tax reform.

Some weaknesses remain in the energy tax structure. As in most OECD countries, diesel faces a lower energy tax than petrol, despite diesel’s higher local air pollution effects. Higher taxes on diesel vehicles aim to compensate for lower rates on diesel fuels (see below). In addition, tax reductions and exemptions to certain energy sources or users weaken incentives to save energy, switch to cleaner energy carriers and reduce emissions. Notably, despite recent tax increases, peat benefits from a separate, beneficial energy tax regime, which is not justified on environmental grounds. If peat were subject to the same tax model as other energy sources, its tax level would be nearly six times as high.

Finland has long granted tax refunds for agriculture and energy-intensive industries. As part of the ongoing energy tax reform, the government started reducing the tax refund for energy-intensive industries in 2021, with a view to a complete phase-out by 2025. To partly compensate companies, the electricity tax for industry (as well as for certain other users) was reduced to the EU minimum rate in 2021. The two reforms are expected to support decarbonisation through electrification, and to be budget-neutral. With the same purpose, data centres, heat pumps and electric boilers generating heat for district heating (DH) networks will be transferred to the lower electricity tax category in 2022. Finland also reduced the energy tax discount for fossil fuels used in combined heat and power (CHP) plants. The combined effect of taxation and allowance prices within the EU Emissions Trading System (ETS) provides incentives to CHP, and especially to biomass use in these plants.

As part of its energy tax reform, Finland could do more to reduce support to fossil fuel use. Expenditure on fossil fuel support equalled 0.55% of GDP and USD 268 per capita in 2019 (OECD, 2021d). Nearly all support measures are tax expenditure resulting from reduced energy tax rates to lower the cost of energy consumption. As recommended by the working group on energy tax reform, Finland should gradually remove tax expenditures for peat, agricultural fuels and mining activities (MoF et al., 2021). As a first step, the government nearly doubled the tax rate on peat in 2021. It also plans to introduce a carbon floor price for peat to help reach the target of halving peat use by 2030.

Carbon dioxide emissions from transport declined in the early 2010s but stagnated in the second half of the 2010s. Vehicle registration and ownership taxes are linked to CO2 emissions, encouraging citizens to purchase lower-emission vehicles. EVs have been exempted from the registration tax since October 2021. A special vehicle ownership tax (the motive power tax) applies on cars powered by means other than petrol engines. This tax aims primarily to rebalance the effect of lower energy taxes on diesel, natural gas and electricity compared to petrol. However, it does not reflect the marginal environmental cost of fuel use. A purchase subsidy for EVs was in place between 2018 and 2021, and is expected to be prolonged. In addition, a scrapping bonus for the purchase of new low-emission passenger vehicles, electric bicycles or a seasonal pass for public transport was granted in 2020-21 (Section 4).

The vehicle tax structure and the EV purchase subsidy have influenced the pattern of new car sales. The share of internal combustion engine cars has declined, while that of hybrid and electric cars has risen markedly since the mid-2010s. Overall, the average CO2 intensity of newly registered cars declined steadily over the past decade, but it is still some 20% above the EU fleet-wide target for 2021. In addition, the share of diesel cars in the stock rose until 2019, due to the large share of used (imported) diesel cars. The passenger car fleet is older than on average in the European Union and in the other Nordic countries. Old diesel vehicles are a major driver of air pollution. Additional measures (fiscal and others) therefore seem needed to accelerate the uptake of EVs and the decarbonisation of the transport sector (Section 4).

The taxation treatment of company cars and commuting expenses aim to avoid distorting choices between means of transport, but they still tend to encourage the use of cars for commuting to work. Parking space provided by the employer is not taxed, which is a hidden subsidy to the use of cars for commuting. In 2021, Finland reduced the taxable value of the in-kind benefit for company-owned EVs. While this can help further boost sales of EVs, it is a costly way to reduce transport-related CO2 emissions (MoF, 2021c). There are plans to extend this benefit to non-electric low-emission company cars. These benefits provide an incentive for employees to receive part of their salary in the form of a vehicle, albeit “clean”. This encourages car ownership and, in turn, car dependency and associated social costs (Section 4).

Finland does not charge for road use. It is one of only three European countries not to have either distance-based or time-based road charges for heavy goods vehicles. In 2021, a working group on transport taxation concluded that fuel taxation is the most effective means to reduce CO2 emissions. However, it acknowledged that revenue from fuel taxes will likely decline over the next decade as EVs replace combustion engine vehicles.

While introducing a nationwide road pricing system would be an appropriate tool to maintain revenues and to address other externalities related to vehicle use, it would also entail excessive administrative costs (MoF, 2021c). A mix of vehicle taxation and localised road pricing (e.g. congestion charges in selected urban areas) would provide revenue; it would also moderate the potential increase in vehicle use as the average cost of driving declines with the progressive electrification of the fleet. Analyses for the Helsinki region indicate that congestion pricing would help achieve sustainable mobility goals (HLS, 2016), but legislative barriers need to be overcome. The government plans to introduce legislation enabling congestion charging in city regions.

Finland met its national and international climate mitigation goals, including the targets of the Kyoto Protocol (Figure 7). According to preliminary data, the country is positioned to achieve the target of reducing emissions outside the EU ETS (i.e. mostly from transport, buildings and agriculture) by 16% by 2020 compared to the 2005 level. Finland expects to meet the 2030 target of cutting non-ETS emissions by 39% from 2005 through domestic measures and flexibility mechanisms.

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 decline due to a shift from fossil fuels and peat to low-carbon energy carriers (electricity, biofuels). The decline was driven by supportive policies (carbon pricing and renewable support and mandates), as well as by the modest economic growth that followed the great financial crisis (Section 1). The energy industry and transport account for more than half of emissions. According to preliminary data, GHG emissions decreased by 9% in 2020 compared to 2019. This reflects a warmer winter and a further shift away from fossil fuels in power generation, as well as reduced transport activity due to the COVID-19 pandemic (MoE, 2021).

Finland should be commended for its ambitious goal to become carbon neutral by 2035 and to be the “world’s first fossil-free welfare society”. The climate neutrality target is widely supported across the political system. Finland will include the target in the update of the Climate Change Act, expected to be passed in 2022. Reaching the target would require annual emission reductions of 5.6%, more than 2.5 times the rate observed between 2005 and 2019. With current and planned measures, it is estimated that the country will miss the target by 13 MtCO2eq. The government has developed sector-specific decarbonisation roadmaps in co-operation with relevant stakeholders. At the time of writing, Finland was updating its key cross-sector climate strategies, i.e. the Medium-term Climate Change Policy Plan (KAISU) and the climate and energy strategy, and was preparing a strategy for the land-use sector. In September 2021, the government decided on the policy measures to be included in these key strategies to close the gap between existing measures and the carbon neutrality target.

The carbon neutrality target and Long-term Low Emissions Development Strategy (LT-LEDS) rely on carbon removal of forests to offset emissions from hard-to-abate sectors. There are trade-offs between forest harvesting levels, including for solid biomass, and the forests’ potential as a carbon sink (FCCP, 2019). Adding up future demands for biomass from key sectoral roadmaps would not be consistent with delivering the required carbon absorption capacity in 2035. Lowering energy demand through systemic and behavioural changes in addition to technological improvements would reduce the need for bioenergy and bio-based materials. This would increase the potential of forests to store carbon and thus the likelihood of achieving the carbon neutrality target. As Finland’s LT-LEDS shows only modest energy reductions, exploring a low energy-demand scenario could be beneficial (OECD, 2021e). The LT-LEDS could also include indicative and flexible sectoral reduction targets to provide more clarity and accountability on sectoral abatement (Aguilar Jaber et al., 2020).

Finland needs to bring all cross-sector strategies and sector-specific decarbonisation roadmaps together in a coherent way to achieve the carbon neutrality target effectively. In a welcome step towards a whole-of-government approach, the government established the Ministerial Working Group on Climate and Energy Policy, which includes representatives from several ministries, to identify additional measures needed to achieve the target. Finland increased resources to the Finnish Climate Change Panel in 2020. However, the Panel could be given more responsibilities (e.g. monitoring progress to targets and providing recommendations to close the gaps), as well as commensurate resources, to further strengthen independent advice.

Finland has an excellent framework for well-being through its SDG framework (Section 3). The government announced that “Solving the sustainability crisis will require prompt, systemic changes in society.” This is a welcome approach, broadly in line with the OECD well-being lens process (OECD, 2021f). However, as with all countries, Finland’s climate policy has mainly focused on decarbonising system parts, such as vehicles or buildings. Finland would benefit from adopting a well-being lens by systematically aligning the climate mitigation and sustainable development agendas through system redesign. System redesign implies shifting the policy focus from parts towards systems as wholes. In this way, it supports transitioning towards systems that are sustainable by design and that unleash the potential for emission reduction, while delivering on well-being goals (OECD, 2021e).

Transport-related GHG emissions 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). Most transport emissions originate from the road sector. Vehicle and fuel taxation, together with biofuel mandates, encouraged the shift to more fuel-efficient vehicles and alternative fuels that drove emissions down. Finland aims to reduce transport-related GHG emissions by at least 50% by 2030 compared to 2005. While previous existing and planned measures fell short of this target, Finland’s roadmap on fossil-free transport is likely to achieve the target. However, uncertainties remain.

Systemic change would reduce the challenges of decarbonisation while also increasing safety and health outcomes, improving use of public space and, thus, quality of life. More proximity between people and places, and better access to activities and services, would reduce car dependency, notably in urban and suburban areas where 55% of the country’s population live. Finland would benefit from putting further emphasis on reversing car dependency and encouraging people to avoid unnecessary trips or long distances and to shift towards sustainable transport modes (e.g. walking, cycling, public transport) (OECD, 2021e).

In a welcome move, the roadmap on fossil-free transport suggests halting the increase in vehicle-kilometres of cars in the 2020s, which is also put forward in the National Transport System Plan. Finland’s modal split of car use (constant over time) and car ownership (increasing over time) are above the EU average and rates of other Nordic countries. These are indicators of high levels of car dependency, which is associated with social costs (e.g. health costs from air pollution, accidents, congestion), but also significant emission reduction potential from systemic change.

Municipal governments play a key role to encourage sustainable transport through land use and zoning regulations and system planning. Some Finnish cities started to use road management tools (e.g. reallocating road and parking space, parking fees, regulation of on- and off-street parking). These efforts need to be more widespread. Policies that encourage car ownership (e.g. tax-free workplace parking, minimum parking requirements) need to be removed.

Finland needs to build on its pioneering role in Mobility as a Service (MaaS) to develop multi-modal networks across the country. However, further exploration of the practicalities is necessary (e.g. to overcome silo thinking based on individual transport modes of public and private actors). The MaaS model allows public and private operators to collaborate on seamless mobility. Using smart technologies, they can offer a sustainable multi-modal transport system (e.g. public transport, bike and car sharing, micro mobility). Fully unlocking the benefits of MaaS needs to go hand-in-hand with creating the right conditions, including infrastructure for sustainable modes and road management tools, to develop multi-modal networks across the country. Otherwise, MaaS risks limiting benefits to places like Helsinki, while exacerbating low-occupancy vehicle travel in other areas.

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 and initiated MALs with three other areas (Jyväskylä, Lahti and Kuopio) in 2021. In Helsinki and other urban areas, the MAL aims at developing a dense urban core connected to district centres of neighbouring municipalities with mixed land use through sustainable modes of transport (co-funded by the central government). This is a welcome approach that shifts from single-use neighbourhoods towards mixed-use, creating proximity. The Helsinki metropolitan region has established a metropolitan transport authority (HSL), which is key to co-ordinate public transport across neighbouring municipalities.

Policies to decarbonise system parts are expected to deliver most of transport-related emission reductions in Finland through EVs and biofuel mandates. The roadmap for fossil-free transport aims to have 700 000 EVs by 2030 (or some 25% of the car stock in 2020). This compares with around 60 000 EVs in 2020, fewer than Sweden or Norway on a per capita basis. A relative target – in terms of share of the EV stock in the target year – would be more in line with the objective of reducing car ownership and dependency. Finland introduced a purchase subsidy for EVs in 2018 for cars worth less than EUR 50 000 and extended the subsidy through 2022. The subsidy and the CO2-based vehicle taxation spurred EV sales (Section 3). In 2020-21, Finland also provided a scrapping bonus for the purchase of new low-emission passenger vehicles. The scrapping bonus could also be used for purchasing electric bicycles or a seasonal pass for public transport, with a view to encouraging the use of sustainable modes of transport. Finland actively promotes public charging infrastructure through public tenders. At the time of writing, it was exploring the option of obliging petrol stations to provide charging points for EVs. Public charging hubs that enable charging for a variety of users and charging methods would support the shift towards multimodality.

Finland increased the biofuel blending obligation for fuel suppliers from 4% to 20% over 2010-20, halting the growth of petrol and diesel demand. It will increase this share to 30% by 2030. While it is welcome that Finland plans to include non-biological fuels such as hydrogen in this fossil-free fuel quota, there is no plan to include electricity from EVs. EVs could be included in the obligation and trade allowed between fuel distributors and electric charging operators. Stronger focus on transport electrification would reduce the demand for the limited supply of biofuel feedstock and second generation biofuels. Biofuels could be channelled to harder-to-abate sectors (e.g. aviation and shipping). Some biofuels may also raise issues of biodiversity, land-use change and related emissions. In contrast to some other European countries, Finland classifies Palm Fatty Acid Distillate as residue rather than as co-product. This reduces the EU sustainability requirement concerning the traceability of the feedstock (T&E, 2020).

Electricity demand decreased between 2005 and 2015 but has since been increasing. While demand is expected to increase further due to digitalisation and sector integration (e.g. electrification and production of electrofuels), the scale of the increase depends on the climate strategies in end-use sectors. This requires enhanced co-ordination in system planning, aligning transport infrastructure (e.g. EV charging points) and heating infrastructure (e.g. heat pumps in DH networks) with network planning and resource adequacy assessment.

Systemic change, notably the shift from a centralised to a more decentralised grid, would enable consumers to play a larger role through on-site generation, storage and demand response as envisioned by the Smart Grid Working Group. This, in turn, would empower consumers while reducing energy bills and investment in plants and network infrastructure, reducing trade-offs with biodiversity.

The share of low-carbon electricity generation (renewables and nuclear) increased from 66% to 85% over 2005-20, among the highest shares in the OECD. This helped reduce CO2 emissions from power generation by 33%. Wind and biomass replaced coal and peat in power plants thanks to the EU ETS, fuel and carbon taxation and renewables support. Nuclear accounted for 34%, but this share will increase when a new nuclear power unit will come on line in 2022, more than a decade behind schedule and three times over its original budget. This highlights the uncertainties of nuclear power to decarbonise the power sector regarding timeline and cost.

Finland aims to phase out coal in energy generation by 2029 and to at least halve peat consumption by 2030. It could consider adjusting the coal phase-out date in view of the carbon neutrality target. Peat is a local energy source, employing 2 000-2 500 full-time equivalent workers (0.1% of total employment). While the macroeconomic impact of phasing out peat extraction can be expected to be small, it will affect some local rural economies. The Working Group on Peat proposed improvements for peat industry operators in 2021, tapping funds from the EU Just Transition Fund. Finland could appoint a commissioner to engage with all relevant (local) stakeholders or set up a multi-stakeholder commission to ensure broad support for the transition.

Many proposals, such as emphasis on peatland restoration, are welcome. Others need to be evaluated against their effectiveness in reducing GHG emissions from peat, as well as alternative use of public funds to promote business and job opportunities in other sectors. For example, the idea of keeping peat consumption at a moderate rate and offering a one-off compensation package to shut down peat production needs more analysis.

Finland is on track to deploy large amounts of wind capacity. Most of the planned onshore wind projects will be financed privately. In a positive move, the government stopped financial support for mature technologies, redirecting public funding to less mature technologies for generation and flexibility. Most onshore wind is, however, located far from major consumption centres. This means it will eventually require transmission network upgrades. More granular spatial pricing would provide incentives for locations closer to centres of consumption. Offshore wind benefits from property tax breaks. Further support may be needed to spur deployment of offshore wind farms.

Increasing shares of wind power in Finland will increase demand for flexibility. Finland’s primary flexibility source is interconnections to neighbouring countries. Flexibility through smart grids, including demand response, is well developed. The country was a frontrunner in smart meters (completing roll-out in 2013). As these meters reach the end of their lifetime, a roll-out of the next-generation devices would enable many customers, including low-income households, to engage in demand response more cost effectively. Finland has also been a pioneer in enabling participation of small customers in electricity markets through aggregators and has the most favourable regulations for prosumers in the European Union. Finland implemented the datahub, a centralised information exchange system, which will reduce market entry barriers of new energy service companies. In 2020, the government removed double taxation for storage, which will help increase investment in large-scale or behind-the-meter storage.

Sector integration could add further flexibility potential while decarbonising end-use sectors. Electrification of transport and heating in Finland is lower than in Norway and Sweden (NER, 2019). Finland is planning to transfer large-scale heat pumps and electric boilers for DH to the reduced electricity tax rate to speed up electrification in 2022. The rate will be set at the EU minimum rate. This is welcome; the reduced rate should be extended to public EV charging stations to provide incentives for electrification. Reform of the tariff structure of distribution system operators (as proposed by the Smart Grid Working Group) would be an additional incentive.

Finland’s building stock is responsible for 20% of total final energy consumption. Between 2005 and 2019, climate-corrected energy consumption per square metre for space heating in Finland decreased by 15%. This was less than the average rate of decline in Europe and in some other Nordic countries. Finland’s long-term renovation strategy aims to reduce emissions from buildings by 90% by 2050 through several measures. These include renovating buildings, phasing out fossil fuel use and demolishing underused buildings in regions with decreasing population. The strategy envisions increasing the share of nearly-zero energy buildings (NZEBs) from 10% in 2020 to between 82% (multi-family buildings) and 100% (single-family buildings) by 2050. However, Finland’s definition of NZEB is less demanding than one recommended by the European Commission for Nordic countries (Kurnitski, 2018).

Achieving low energy-demand neighbourhoods with high shares of NZEBs by 2050 requires deep retrofits, i.e. whole-building renovation that reduces energy use by more than 50%. In a welcome move, Finland requires major renovations to fulfil the same energy performance standards that apply to new buildings. High costs are a key barrier to deep retrofits. Finland provides targeted financial support for those renovations and plans to implement dedicated one-stop shops. Clarifying subsidies for deep retrofits beyond 2022 would help prevent short-term market distortions and improve long-term planning of relevant stakeholders. Mandatory energy saving targets or efforts to industrialise retrofits, following the Dutch/EU Energiesproong model, could significantly reduce costs. Finland should continue promoting joint procurement of building elements (e.g. rooftop solar photovoltaic [PV]) and joint renovation projects with a view to reaching scale to industrialise retrofits. It could also explore alternative financing mechanisms for deep retrofits such as through energy service companies or on-bill financing to address high up-front costs.

As in all countries, some of Finland’s fiscal incentives (e.g. income tax deductions and financial support for building parts such as oil heating) have encouraged shallow or staged deep retrofits rather than deep retrofits of existing buildings as a whole. Voluntary energy efficiency agreements with rental housing companies, in place since 2002, could be more ambitious. The agreements’ energy saving target for 2017-25 is at least 7.5%, i.e. less than 1% annual reduction. The required annual energy savings for apartment blocks according to the renovation strategy need to be 2.5% between 2020 and 2030. Yet, other measures in the renovation strategy (e.g. financial incentives) are expected to make up for the gap.

Deep retrofits in line with the renovation strategy are expected to create 12 000 full-time jobs. Finland offers lifelong learning opportunities in vocational and public education facilities to upgrade skills for improving energy efficiency in buildings and holistic retrofits. However, the workforce needs better training to keep up with the necessary skills.

Finland is a frontrunner in tackling the lifecycle emissions of new buildings. The country plans to include carbon limits on buildings’ lifecycle emissions before 2025. Cities such as Helsinki already incorporate the carbon footprint of buildings as a criterion in the allocation of building plots.

Finland’s heat supply has increasingly decarbonised in recent years. In rural areas, electric heat pumps have started to replace electric heating and oil heating. Oil heating will be phased out by the beginning of the 2030s. In urban and suburban areas, Finland has an extensive DH network. Almost 70% of DH production is based on CHP, which improves supply-side energy efficiency. Biomass (39%), fossil fuels (30%) and peat (15%) accounted for the major part in the DH fuel mix in 2019.

The government supported the early switch of CHP plants to biomass and non-combustion technologies, including heat pumps and storage. More emphasis on non-combustion technologies would reduce the use of woody biomass, thereby helping to address the trade-offs with biodiversity and the health of soils. DH operators increasingly tap other heat sources, including waste heat recovery. Bilateral agreements set out conditions of third-party access as the DH market is unregulated. Finnish law does not guarantee or regulate third-party access to DH networks, which adds uncertainty to third-party heat providers.

Although DH is a major technology for deep decarbonisation, DH companies face financial challenges to maintain the infrastructure for several reasons. First, energy efficiency improvements are expected to reduce heating demand. Second, rising DH prices (in part due to fossil fuel prices) have led some customers to switch to electric heat pumps. Hybrid systems combine DH with large-scale electric heat pumps and water thermal storage. Such systems could enable DH companies to generate new revenue streams by participating in electricity markets and providing flexibility. Hybrid systems are commercially viable in most places and Finland could consider supporting these systems where they are not.

New housing developments are needed to reduce pressure on urban housing prices and improve housing affordability. Some Finnish cities aim to become more compact through densification while enhancing mixed land use. This approach is associated with lower energy and materials demand, higher potential for tapping multiple sources of heat (e.g. through recovering waste energy streams) and higher proximity, all of which reduce emissions.

Helsinki (e.g. carbon-neutral Helsinki 2035 action plan) prioritises densification through new building developments in urban infills close to public transport hubs. This approach minimises car dependency, while extending green spaces. In so doing, it limits trade-offs between densification and well-being. Helsinki also applies the green factor method for the built environment. This ensures sufficient green spaces to mitigate flood risk, store CO2, and enhance the well-being and health of citizens. The green factor method could be mainstreamed to other jurisdictions. However, its effectiveness could benefit from more ambitious targets and improved monitoring and evaluation, notably regarding the diversity of green infrastructure (Juhola, 2018).


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← 1. See Section 4 for details on climate mitigation.

← 2. Final official estimates of 2020 emissions of air pollutants were not available at the time of writing.

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