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  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

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© 2021 International Monetary Fund

WP/21/171

IMF Working Paper

European Department

Fiscal Policies for Achieving Finland’s Emission Neutrality Target

Prepared by Ian Parry and Philippe Wingender1

Authorized for distribution by Peter Dohlman

June 2021

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Abstract

Finland has pledged to cut net greenhouse gas emissions to zero by 2035 and has sectoral targets for deploying electric vehicles, phasing out coal generation, and oil-based space heating. Fiscal policies at the national and sectoral level could play a critical role in achieving these objectives. Carbon dioxide emissions are already priced significantly in Finland but prices vary substantially across fuels and sectors. The paper discusses a reform to both scale up, and progressively harmonize, pricing while using revenues to address equity issues. It also discusses the potential use of revenue-neutral feebate schemes to strengthen mitigation incentives for the transportation, industry, building, forestry, and agricultural sectors.

JEL Classification Numbers: Q48, Q54, Q58, H23

Keywords: Climate change, Finland climate mitigation, carbon pricing, feebate, revenue recycling, border carbon adjustment, transportation, forestry.

Author’s E-Mail Address: iparry@imf.org; pwingender@imf.org.

Contents

  • Abstract

  • I. Introduction

  • II. Background on Emissions Trends and Policies

  • III. Fiscal Incentives for Progressing on National and Sectoral Targets for Fossil Fuel Emissions

    • A. National Level Carbon Pricing

    • B. Transportation

    • C. Industry

    • D. Buildings, Appliances, and Machinery

  • IV. Addressing the Burden of Carbon Pricing on Households and Firms

    • A. Promoting Equitable Pricing Reform

    • B. Carbon Pricing, Leakage, and Competitiveness

  • V. Mitigation Policies for Forestry and Agriculture

    • A. Promoting Carbon Storage from Forestry and Land Use Changes

    • B. Agricultural Emissions

  • VI. Conclusion

  • References

  • Tables

  • 1. Recommended Package of Fiscal Instruments to Reinforce Finland’s Climate Mitigation Strategy

  • 2. Comparing Emission Reduction Targets from EU and National Pledges

  • 3. Effective Carbon Prices by Major Fuel Type in Finland, €/tonne 2020

  • 4. Selected Carbon Pricing Schemes, 2020

  • 5. Key Design Issues for BCAs: A Summary

  • 6. Impact of a €20 Per Tonne of CO2 Equivalent Feebate on Agriculture

  • Figures

  • 1. Global Fossil Fuel CO2 Emissions

  • 2. Trends in Fossil Fuel CO2 Emissions

  • 3. GHG Emissions and LULUCF Withdrawals in Finland

  • 4. Breakdown of GHG Emissions, 2018

  • 5. Historical EU ETS Allowance Prices

  • 6. Supply Cost, Environmental Cost, and Fuel Product and Country, 2017

  • 7. Registration Tax Schedule by CO2, Emission Rate (Percent)

  • 8. Basic Vehicle Tax Schedule by CO2, Emission Rate (€/year)

  • 9. Reduction in Fossil Fuel CO2 From Emission Target and Carbon Pricing in 2030, Selected Countries

  • 10. CO2-Based Components of Vehicle Taxes, Selected Countries.

  • 11. Energy Price Impact of Carbon Price, 2030

  • 12. Household Energy Consumption, By Source

  • 13. Energy Consumption Share by Source

  • 14. Carbon Tax Burden by Source

  • 15. Marginal Tax Rate Schedules for Labor Income

  • 16. Incidence of Higher Carbon Pricing and Reform Options

  • 17. Carbon Leakage Rate of National Policies

  • 18. Illustrative Impact of a Feebate on Agriculture

  • Appendices

  • I. Burden of Carbon Mitigation Policies on Industries

  • II. Household Incidence of a Carbon Tax

  • III. Design Issues for a BCA: Further Discussion

  • IV. Carbon Taxes: 2018 vs 2021

1

With contributions from Raju Huidrom. The authors are grateful to Veli Auvinen, Peter Dohlman, Raju Huidrom, Jussi Kiviluoto Jenni Oksanen and Ilari Valjus for very helpful comments on an earlier draft. All errors remain our own.

Fiscal Policies for Achieving Finland’s Emission Neutrality Target
Author: Ian W.H. Parry and Mr. Philippe Wingender