Green growth potential in the nordics concito by Global Utmaning

Walk the Talk: Green Growth Potential in the Nordic Countries

1. maj 2013

MEMO

This memo provides a selection of policy options available to the Nordic countries in their efforts to achieve both ambitious climate policy goals and an innovative, competitive and prospering economy. Traditionally, the fulfilment of these two separate goals is seen to involve a trade-off. An ambitious climate policy does, however, also entail business opportunities and if other regions follow suit may actually boost the private business sector in the first-mover region.

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Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Summary - key messages for decision-makers. Ambitious climate and environmental regulation is good for the environment, but it also enhances the potential for green growth. It is important that politicians follow best practice regulation and that new policies are put in place. Most important are:   



 

The establishment of a binding and ambitious long-term cap on EU emissions (and eventually a global cap). Movement towards a common price on emissions through either the inclusion of additional sectors in the EU-ETS or supplemental taxes. If a tighter cap on the EU-ETS cannot be achieved, then to develop a system of certificates of origin, thereby making it possible for individual countries to tax electricity based on the carbon content used for its production. If a common and sufficiently high price on emissions cannot be established, then to use technology-neutral subsidies which can utilize comparative advantages between the Nordic, or ideally, EU countries. A sustained increase in RD&D funding. To improve the regulations of waste management to enhance a higher degree of recycling.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

1. Introduction The purpose of this memo is to provide a selection of policy options available to the Nordic countries in their efforts to achieve both ambitious climate policy goals and an innovative, competitive and prospering economy. Traditionally, the fulfilment of these two separate goals is seen to involve a trade-off. An ambitious climate policy does, however, also entail business opportunities and if other regions follow suit may actually boost the private business sector in the first-mover region. An increase in RD&D and investments in green technologies may also promote growth. From a Nordic perspective, the unequivocally most important policy change is a more ambitious greenhouse gas (GHG) reduction target in the EU and the world. This will lessen problems of carbon leakage, produce a more level playing field for firms and increase demand for green technologies. The memo is organized as follows: First, we present the rationale for an ambitious climate policy in a small country or region. The primary rationale is that it can increase the chance for global action, but in addition it may also have a positive impact on business opportunities. Second, we give a summary of a recent study by the IEA and the Nordic Council showing the potential for the Nordic countries to significantly reduce their greenhouse gas emissions by 2050. Third, we give a list of examples of policy instruments to enhance ambitious climate goals for the Nordic countries. Finally, we summarize the key findings for decision makers.

2. Why an ambitious climate policy goal makes good sense In principle, the Nordic countries’ share of global GHG emissions is of no significant importance to climate change. Still, there is valid reason for the Nordic countries to adopt an ambitious climate policy as they thereby have the possibility to influence other countries’ incentives. In particular, this can happen via two channels (which can be combined): 

Leading by example: By showing that GHG reductions can be made in a cost efficient manner, it is demonstrated to other countries that it is possible to combine lower emissions with a high standard of living.



Technology: By developing and demonstrating competitive technologies which either directly or indirectly reduce emissions to the atmosphere, other countries’ costs of emission reductions can be lowered.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Also, it is possible that the Nordic countries can achieve economic advantages by adapting ambitious climate policies and taking the lead. Below, two potential advantages are emphasized: One: Public funding of RD&D has an economic advantage when the development of technologies promotes business and employment development. The existence of so-called market failures justifies public RD&D funding. Two: Supporting high environmental standards can have an economic advantage if high environmental standards in one country anticipate the development in other countries. Several studies support the thesis that ambitious climate policy goals are compatible with and may even spur economic growth under certain conditions. Andersen and Ekins et al. (2009) present studies of environmental tax reforms (ETR) in Europe and find that countries which engaged in ETR experienced improved competitiveness and a positive effect on employment. EEA (2011) concludes that ETR’s have the potential to “deliver a double dividend, increasing employment and improving the environment.” OECD (2012) points at a risk of negative impacts on employment if labour markets are imperfectly flexible, but also stresses the possibility of a recycling of carbon tax revenues to lower the tax wedge on labour income and possibly achieve gains in both environmental outcomes and employment1.

3. The Nordic possibilities for a significant GHG emission reduction In 2013, the possibilities for the Nordic countries to reduce their GHG emissions significantly were analysed in a joint report from the International Energy Agency (IEA) and Nordic Energy Research (2013). The conclusion of the report indicates that there are realistic technological possibilities for more ambitious climate objectives towards 2050. The report’s main results are summarized in box 1.

For more pessimistic views regarding the impact of ambitious climate policies on competitiveness, employment, welfare gains and global climate policies, see Hoel (2012).

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Box 1. The Nordic road to a low-carbon economy in 2050 as envisioned by the International Energy Agency (IEA) and Nordic Energy Research

Based on IEA’s scenarios for a global GHG emission reduction, the following scenarios are analysed:  

A 4 °C scenario A 2 °C scenario (implies a CO2 emission reduction of approximately 70% in 2050, compared to 1990 levels).

Furthermore, in light of the Nordic governments’ ambitious announcements, the following is also considered: 

CNS: A carbon neutral scenario, where the CO2 emissions are reduced by 85% in 2050, relative to the 1990 level (the additional 15 percentage points are assumed achieved by buying foreign reductions).

The report reaches the conclusion that it is technically possible to carry out the ambitious reductions. However, in four areas significant changes are required. 1) The electricity production has to be fossil-free by 2050. This implies i.a. an increased use of wind power, requiring an expansion of the energy net, smartgrid and electricity storage. 2) The industry’s direct emissions must be reduced by 60% by 2050, relative to 2010 levels. This requires significant energy efficiency measures and use of CCS technologies. 3) The emissions from the transport sector must be reduced by almost 90% in 2050 compared to 2010 levels. This can be accomplished through improved fuel economy (especially important towards 2030) and the transition to nonfossil technologies (especially important after 2030). Road freight, flights and shipping are all estimated to be bio-fuel based; however, it should be noted that this requires sustainability criteria for bio-fuels. 4) Energy consumption related to buildings (heating, etc.) must be reduced by approximately 90% by 2050 relative to 2010 levels. This requires i.a. the above-mentioned conversion of the electricity production, insulation of the building mass and long-term development of new building technologies. Source: IEA and Nordic Energy Research: ”Nordic Energy Technology Perspectives”, 2013.

The report stresses that pursuing an ambitious climate goal entails business opportunities as “the Nordic countries are well positioned to “export” both low-carbon energy and energy system know-how, along with other products and services vital to a green growth strategy.”

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

4. Policy instruments to enhance ambitious climate goals for the Nordic countries This chapter looks at policy instruments to enhance the possibility of adopting ambitious scenarios in the Nordic countries. Naturally, it has not been the ambition to produce a complete list. Rather, the list should be seen as an attempt to present a selection of important examples. The examples cover a broad picture of policy issues ranging from institutional arrangements to more specific initiatives. Table 1 summarizes the examples of the policy options we describe.

TABLE 1. EXAMPLES OF IMPORTANT POLICY ISSUES AND INSTRUMENTS 

Carbon price: o EU-ETS – a common Nordic reform proposal

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Green certificates – lessons to be learned from the SwedishNorwegian common market

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Transport: o Urban road pricing – lessons to be learned from Sweden and Norway o Road-pricing – potential for the development of a common Nordic infrastructure

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RD&D – increases in funding

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Building-standards – lessons to be learned

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Initiatives to secure sustainable exploitation of bio-energy

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Energy-systems – grids

4.1. Sound macroeconomic environment as a remedy against uncertainty The ability and the willingness to pursue ambitious climate policy goals are enhanced by a sound macroeconomic stance, which, in addition, also reduces uncertainty for investment in low-emission technologies as it is less prone to the practise of go-stop policies. Additional instruments to reduce uncertainty are the Swedish-Norwegian market for green certificates (see section 4.3 below) and commitments such as those established in the EU (common and binding targets and the EU-ETS). The credibility of climate policies can also be increased by anchoring goals and the use of cost-effective instruments in formal climate laws; an option used by the UK, which is also considered in Denmark.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

4.2.Carbon pricing: EU-ETS and CO2e-taxation The EU-ETS is an example of a successful use of a cost-effective instrument. Before addressing its present troubles, the merits of the EU-ETS should be noted. One, it is the first and the most ambitious (in terms of controlling GHGemissions at an international level) institutional arrangement that has appeared. Two, it has influenced other countries to adopt similar mechanisms. Third, on an optimistic note, it may be the initiative which paves the way for a linking of several regional ETS’s so as to achieve a global mechanism. The EU-ETS has, however, lost momentum. One interpretation is that the low price of emission unit allowances (EUA) demonstrates that an ETS is an inadequate instrument. Figure 1 in the appendix shows the recent price development. It is correct that the price of EUA’s is so low that it hardly produces a significant incentive to reduce emissions. This does not, however, imply that the ETS is an inadequate instrument to reduce emissions. The low price reflects partly the economic recession in Europe (which is caused by, among other things, irresponsible fiscal policies in certain EU-member countries), partly a too generous issuance of emission allowances (reflecting an unambitious reduction target)2 and acceptance of international credits. Various proposals have been made to resolve the impotence of the current EUETS. The European Commission has listed possible remedies (see appendix 1): The preferable solution to the challenge of ensuring a cost-effective reduction of EU emissions should be one which addresses the fundamental challenges and which provides the basis for the union’s objectives towards 20503. The fundamental challenges are: 1) that in the present set-up, member states operate with a (very low) price in the sectors covered by the ETS and with nationally set prices (often differing prices even within the same country) in the non-ETS sectors; and 2) that in order to move towards the objectives for 2050, more ambitious intermediate reduction goals should be integrated in the EU-ETS. The most effective step would be for the EU to formally commit to the reduction path indicated in the Roadmap and to integrate the commitment into the EU-ETS. 2

In his book Economic Choices in a Warming World, Christian de Perthuis puts it like this: “If the price is considered to be too low, then it is the level of the cap that should be called into question, and the lack of resolve on the part of public authority to curb the right to emit” (p. 105). 3 In the ”Roadmap for moving to a competitive low carbon economy in 2050”, the EU Commission notes that the European Council in February 2011 reconfirmed the EU objective of reducing greenhouse gas emissions by 80-95% by 2050 compared to 1990.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

4.3. Tradable Green Certificates: Sweden and Norway seek to increase role of renewable energy technologies through an international and marketâ&#x20AC;&#x201C;oriented system

The primary instrument to create an incentive to develop and deploy renewable energy technologies is to establish a price on CO2-emissions. If this is not feasible then it is necessary to introduce a scheme with subsidies to promote the deployment. The EU-Commission has tried, but unfortunately failed to develop, a common EU subsidy-system. The renewables directive did, however, allow member states to develop their own cross-border systems. Since 2012 Sweden and Norway have operated a joint green certificate (electricity certificates) market. The expected effect of a joint market is that renewable resources will be deployed in a more cost effective manner than would be the case if countries had pursued national goals separately. In addition, entering into an international agreement can also serve as a commitment to the expansion of renewable technologies and thereby increase credibility and reduce investor uncertainty. It would be beneficial to extend this type of cooperation for other Nordic countries as well as other EU member states.

4.4.Transport The purpose of road pricing is to regulate the efficiency of the transport system by reducing congestion whereas toll financing is to finance or contribute to the financing of road infrastructure (Lauridsen, 2010). Road tolling has been used extensively for funding of national roads in Norway since 1982. Denmark has two toll bridges: The Great Belt Bridge (1998) and the Oresund Bridge (2000). Sweden has two toll bridges and has furthermore introduced a congestion tax in the cities of Stockholm (2007) and Gothenburg (2013). In Sweden, the purpose of the congestion tax is to increase accessibility in both of the cities, improve the environment and contribute to financing the infrastructure. In Stockholm, the amount of traffic decreased by 20% after the charge was introduced. In Finland, there has been a debate about congestion charging in Helsinki, but the proposal was refused in 2011 (Finnish government, 2011). In Norway, the payments have financed infrastructure that has attracted more traffic. For the business sector, the costs of transport have increased with the new types of payments, but at the same time there have been advantages such as a better infrastructure, less congestion and time saving for the workforce and for business transport. Future policies enhancing green growth will probably recommend road user charges as they can both accommodate for the externalities of climate and congestion at the same time. Furthermore, road user

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

charges can facilitate any future transition to differentiated road pricing like GPS-based road pricing (see for example the recommendation by the Danish Council of Environmental Economics, 2013). Imposing a tax on using the roads may lead to tax reliefs in other areas.

4.5. Research, Development and Demonstration (RD&D) â&#x20AC;&#x201C; increases in funding A report from IEA and Nordic Energy Research (2013) emphasizes RD&D in the Nordic countries among five central policy challenges to reach the targets of CO2 reduction. Figure 1 shows the increase in money spent on RD & D in four of the Northern countries since 2005. The figures include both private and public RD & D, but the far majority of the funds are public and only few countries have tiny contributions from private funds. Figure 1

RD & D in renewable energy resources in % of GDP

Source: IEA, Energy statistics, https://wds.iea.org/WDS/TableViewer/dimView.aspx. See data in Appendix 2 together with data from other OECD countries.

Public funds for RD & D are justified as investment in research has public good characteristics. The Nordic countries have a higher level of RD & D compared to other OECD countries. On average the Nordic countries have spent 0.0142 per cent of GDP annually between 2005- 2010 on RD & D whereas the other OECD countries have spent 0.0056 (see Appendix 2). At the EU level, the overall targets for RD & D in per cent of GDP are 3% for Denmark and 4% for Finland and Sweden.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

4.6.Energy-systems â&#x20AC;&#x201C; grid, smart grid An intelligent power system â&#x20AC;&#x201C; a Smart Grid â&#x20AC;&#x201C; can make it possible for consumers of electricity to interact with the production side of the power system by means of automatic and intelligent control of their electrical appliances. As regards the production, a Smart Grid can draw on different energy resources. Wind mills can be connected to the Smart Grid and there is a future need to be able to store electricity for later use. The wind mill industry is an example of a successful sector, which has arisen in the wake of the green transition. It is an advantage for the business sector that the Smart Grid can draw on both the cheapest available types of energy resources and the most environmentally friendly ones. In future, the price of CO2 may increase and then it will be an advantage for both consumers and businesses that the production of electricity has been optimised in the form of the Smart Grid. On 5 April 2013, The Danish Government presented a new Smart Grid strategy. On the production side, more intelligence has to be built into the net of power to handle the fluctuating production of wind energy. On the consumption side, the consumption of power has to become more flexible to make use of the power efficiently, which is possible if the consumers can react to changes in the prices. Norway has the Norwegian Smartgrid Centre where they want to support the conversion to a new and better energy system. The Smartgrid Centre provides knowhow to the energy sector and to increase the competitiveness of the Norwegian industry. In Sweden, the minister for IT stated in October 2012 that Sweden needs to modernize the electricity grid though they have a good starting point to reach their climate targets.

4.7. Waste All Nordic countries have a quite strict regulation of waste with a high degree of recycling of materials, but though Nordic countries have the necessary regulatory framework to ensure appropriate disposal of waste, there may still be room for improvement (se for example a report by Norden, 2011). Municipalities and companies can specialise in a proper handling of waste, which creates job opportunities. The strict regulation of waste has several advantages. First, recycling of waste can save both money and scarce resources. Furthermore, waste which cannot be recycled has been useful fuel for heat production and later on also combined heat and power production. The incineration of waste has required that strict environmental standards should be fulfilled. Third, treating waste carefully can help to meet global efforts to reduce environmental, harmful effects.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Today, companies in the Nordic countries have comparative advantages in trade because they have developed high production standards that have a high degree of efficiency regarding the use of resources and can live up to strict environmental requirements (The Danish Environmental Protection Agency, 2012). Furthermore, production in the Nordic countries has the advantage of being well prepared for future environmental requirements. Already now, several Danish companies can export goods that can contribute globally to a better environment. A ladder of greenness can be used to define how far up the steps a company is. The further up the steps, the closer the society is at an ideal situation of growth without harming the environment.

4.8.

Building standards

For decades, the Nordic countries have had a building tradition where the focus has been on energy efficiency in the operational phase. Additionally, the Nordic countries have strong building actors and consulting agencies with international influence. With regards to new construction, energy efficiency in the operational phase is well established, whilst a systematic minimization of the inherent energy consumption as well as the additional climate impact from the building materials are still in the development phase. Large corporations like Skanska, COWI, etc. are currently developing tools to incorporate the climate impact of building materials into their decision making processes, however, there is still a long way to go before the building materials’ share of the buildings’ total climate impacts in a life cycle perspective systematically will be a part of the decision making processes alongside energy consumption in the operational phase. On the 8th of August 2012, the Nordic Built project within the framework of the Nordic Council of Ministers launched a charter which i.a. included a goal of zero emissions in a life cycle perspective: “We will strive to create an environment built with zero carbon emissions related to production, operation and demolition.” Today, this charter has been signed by several Danish associations such as VELUX, COWI, Albertslund Municipality, Rødovre Municipality, KAB, Gaia Solar and Henning Larsen Architects. The Nordic countries could advantageously take the lead in this field and e.g. demand a minimization of the climate impacts of new public construction and renovation projects from a life cycle perspective. A future perspective could be to require that it is possible to disassemble everything in a building to be able to recycle all the materials.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

4.9. Initiatives to secure sustainable exploitation of bioenergy IEA and Nordic Energy Research (2013) project that bioenergy will be the single most important energy source in the Nordic Region in 2050. In this case, the Nordic countries will become a net importer of bioenergy, which requires a high ethical standard to secure that the bioenergy is sustainable. There are sustainability criteria laid out in the EU Renewable Energy Directive and the ISO standardization work on sustainability. According to Chrintz (2013), the assessment of sustainability should among other things take the total CO2 emission into account inclusive of the Indirect Land Use Change, ILUC. Sustainability issues are persistently being raised. A new report from the Joint Research Centre of the European Commission (2013) provides a critical review of sustainability issues. Conclusions with key messages for decision-makers Summary - key messages for decision-makers. Ambitious climate and environmental regulation is good for the environment, but it also enhances the potential for green growth. It is important that politicians follow best practice regulation and that new policies are put in place. Most important are:   



 

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

References Andersen and Ekins et. al. (2009): Carbon-Energy Taxation”, OUP, UK. Chrintz, Torben (2013): Klimapåvirkningen fra biomasse og andre energikilder. CONCITO, København. Preliminary. Danish Energy Association and Energinet.dk (2010): “Smart Grid i Danmark”. Danish Energy Association and Energinet.dk (2011): ”Smart grid in Denmark 2.0. Implementation of three key recommendations from the smart grid network. Smart grid concept, information model for data communication and road map focusing on the role of the grid companies.” Danish Environmental Protection Agency, 2012: Grøn omstilling. Store danske eksportvirksomheders potentiale for at bidrage til grøn omstilling. NIRAS og DAMVAD. de Perthuis, C. (2011): “Economic Choices in a Warming World”, CUP, UK. EEA (2011): “Environmental tax reform in Europe: implications for income distribution”, European Environmental Agency, Technical report No 16/2011, Copenhagen. EEA (2011): “Environmental tax reform in Europe: implications for income distribution”, EEA Technical report No 16/2011. European Commission, The Joint Research Centre (2013): “Carbon accounting of forest bioenergy – Conclusions and recommendations form a critical literature review. Edited by Luisa Marelli and the co-authors are A. Agostini, J. Giuntoli and A. Boulamanti. Finnish government link: http://roadpricing.blogspot.dk/2011/02/finnishgovernment-opposes-helsinki.html Hoel, M. (2012): ”Klimatpolitik och ledarskap – vilken roll kan ett litet land spela?”, Rapport till Expertgruppen för miljöstudier 2012:3, Finansdepartementet, Stockholm. IEA and Nordic Energy Research (2013): ”Nordic Energy Technology Perspectives”, 2013 Lauridsen, H. (2011): “The impacts of road tolling: A review of Norwegian experience. Transport Policy 18 (2011) p. 85-91.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Lian, Jon Inge (2008): “The Oslo and Bergen toll rings and road-building investment – Effect on traffic development and congestion”. Journal of Transport Geography 16 (2008), p. 174-181. Maersk Line’s Triple-E skibe – Ressourceøkonomi set fra et virksomhedsperspektiv – Mærsk Containerskibe. Eskild Lund Sørensen, Environmental Manager, Maersk Line. Norden, 2011: ODS waste treatment in the Nordic Countries. A Nordic Ozone Group Project.OECD (2012): ” The jobs potential of a shift towards a lowcarbon economy - FINAL REPORT FOR THE EUROPEAN COMMISSION, DG EMPLOYMENT”, Paris. Sveriges riksdag, Regeringens proposition 2006/07:109. Införande av trängselskatt i Stockholm. The Danish Council of Environmental Economics (2013): ”Economics and Environment 2013”. Chapters on Energy and Climate Policy, Car taxation, accidents and environment and Waste. http://en.wikipedia.org/wiki/List_of_toll_roads

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Appendix 1 Figure 1. Price (€/ton CO2) EU Emission Unit Allowances, 20122013. 10 9 8 7 6 5 4 3 2 1 03-03-13

03-02-13

03-01-13

03-12-12

03-11-12

03-10-12

03-09-12

03-08-12

03-07-12

03-06-12

03-05-12

03-04-12

03-03-12

03-02-12

03-01-12

Various proposals have been made in order to resolve the impotence of the current EU-ETS. The European Commission has listed possible remedies:       

Increasing the EU’s greenhouse gas emissions reduction target for 2020 from 20% to 30% below 1990 levels; Retiring a certain number of phase three allowances permanently; Revising the 1.74% annual reduction in the number of allowances to make it steeper; Bringing more sectors into the EU-ETS; Limiting access to international credits; Introducing discretionary price management mechanisms such as a price management reserve; To postpone, as a short-term measure, the auctioning of 900 million allowances from the years 2013-2015 until 2019-2020.

Relevant, Economic Instruments to Control the Green Transition in the Nordic Countries

Appendix 2 Table: Means of RD & D in renewable energy in per cent of GDP in national currencies, 20052010. Renewable energy is a group consisting of solar energy, wind energy, ocean energy, biofuels, geothermal energy, hydroelectricity and other energy sources.

Australia

0,004869

Austria

0,007998

Belgium

Canada

0,006348

Czech Republic

0,002444

Denmark

0,020427

Finland

0,018882

rance

0,004636

Germany Greece

0,00532 ..

Hungary

0,004514

Ireland

0,006875

Italy

0,003673

Japan

0,004282

Korea

0,009581

Luxembourg

Netherlands

0,011664

New Zealand

0,006086

Norway

0,005827

Poland Portugal Slovak Republic

.. 0,00035 ..

Spain

0,003014

Sweden

0,011546

Switzerland

0,008143

Turkey

United Kingdom

0,005519

United States

0,005909

Note: Countries where one or more years have missing data over the time period 2005-2010 are recorded as missing. Source: IEA energy statistics, https://wds.iea.org/WDS/TableViewer/dimView.aspx.