Climate policy in the Nordics: How to maximise global impact?

The Nordic Region accounts for less than 0.5 per cent of global CO2-emissions. This is in fact quite a lot as the Nordics amount to less than 0.4 per cent of the world population. However, the figure still shows that even if all Nordic countries would succeed in becoming carbon neutral, it would have a very limited direct impact on total global emissions. To maximise the global impact of Nordic climate policy, Norwegian economists Greaker, Golombek and Hoel recommend a shift of focus from national emissions reductions to international emissions trading and clean technology development. Their conclusions have just been published in Nordic Economy Policy Review 2019.

Are reductions at home the right way to go?

This year’s Nordic Economy Policy Review (NEPR 2019) evaluates the cost-effectiveness and global impact of Nordic climate policy. The publication features five articles that analyse different aspects of the highly ambitious national climate policies in the Nordic countries, in the context of the Paris Agreement and the mechanisms for international emissions trading.

“Nordic countries have the most ambitious climate policies in the world,” says Mads Greaker, Professor in Economics at Oslo Metropolitan University, who co-authored the article Global Impact of National Climate Policy in the Nordic Countries together with Rolf Golombek and Michael Hoel.

“However, because the region makes up such a small share of global emissions, the direct impact of achieving our national climate targets is miniscule. In fact, even if we reduced our emissions to zero, it would have very little impact on global warming. This leads us to the question if there’s any rational reason for the Nordic countries to maintain such ambitious national climate polices.”

Greenhouse gas emissions are a global problem. It doesn’t matter where the emission reductions take place; what matters is to reduce the overall global emissions as much as possible at the least possible cost. The economists therefore encourage Nordic countries to make better use of international emissions trading systems, notably the EU market mechanisms.

“It’s natural to ask how we can be most efficient in our climate efforts,” says Lars Calmfors, co-editor of NEPR 2019 and Professor Emeritus at IIES, the Institute for International Economic Studies at Stockholm University. “The marginal abatement costs – the costs of reducing emissions – are high in the Nordic countries. It’s quite costly for us to achieve further reductions, so it may very well be more cost-effective and better for the climate to trade with other countries so that we finance their emission cuts.”

EU takes care of power sector and heavy industry

“It’s important to understand that our climate policies are an integrated part of the EU’s climate policies and emission reduction targets,” Greaker says. In the Paris Agreement, the 28 EU member states, together with Norway and Iceland, have committed to reducing their emissions by 40 per cent compared to 1990 levels. “These targets are much more ambitious than in the remaining OECD countries.”

The target is divided into two parts. Companies in the sectors covered by the EU Emissions Trading System (ETS), such as power production, energy intensive industry and commercial aviation, must reduce emissions by 43 per cent by 2030, compared to 2005 levels. Each year, these companies receive or buy emission permits for their activities. The system sets a ceiling for the total amount of emissions, and the permits can be traded in the market.

“The EU issues less and less permits every year to ensure that by 2030, these companies will have reduced their emissions by 43 per cent,” says Greaker. “The individual states, including the Nordic governments, can therefore choose to rely on the system to ensure that the target is met. Moreover, up until recently, it didn’t make much sense for the Nordics to aim for more ambitious national reductions in the ETS sector, as it did not have any real impact on total European emissions. This has changed with the recent reform of the emissions trading system.”

“Future issuance of emissions rights is now dependent on the stock of saved rights, which increases when emissions are reduced at the national level. This means that additional national reductions will lead to an overall reduction in the total European emissions from the sector.”

Emissions trading between nations

Other sectors, including transport, buildings and agriculture, are required to reduce emissions by 30 per cent from 2005 levels by 2030. Often referred to as the non-ETS sector, these emissions are regulated by the EU Effort Sharing Regulation (ESR), which sets differentiated targets for the countries according to their GDP per capita.

In the ESR sector, Nordic countries have set the bar even higher than the rest of the EU, aiming for emission reductions of up to 39-40 per cent. Fossil fuels are heavily taxed in the five countries and they have all implemented a number of sector-specific policy measures addressing ESR emissions. These include Norway’s much publicised electric vehicle policy, promotion of biofuels in Finland and Sweden, and policies to encourage electric ferry operation in Norway and Iceland.

The EU has developed a new trading mechanism for the ESR sector, allowing countries to trade emissions between them. This means that Nordic countries, where marginal abatement cost is relatively high, could trade emissions with countries with less demanding targets. As an example, Poland, Croatia and Hungary have a reduction target of 7 per cent, while Bulgaria is not expected to cut emissions at all by 2030. According to the article, however, Nordic politicians seem hesitant to use this new flexible mechanism for the ESR sector.

“In our view, Nordic countries should acknowledge that it will be very difficult to achieve the target of reducing ESR emission by 30 per cent, especially because much of the reduction must come from transport,” says Greaker. “Rather than focusing on large emission cuts at home, we should use the opportunity to buy permits from other European countries with lower targets. That would in fact create greater impact, as it would allow these countries to start transforming their ESR sector.”

Climate technology for export

The economists’ main conclusion is that developing technologies that would also benefit other countries in the transition to a low-carbon society is key to maximising the global impact.

“Our primary focus should be to develop technologies that lower the cost of reducing emissions, also for other countries,” says Greaker, adding that increased Nordic cooperation is required to promote this agenda. “We propose that the countries should establish a new commission to identify ways in which to expand Nordic cooperation on technology development, for instance by investing in joint R&D programmes. Currently, most of these programmes are conducted nationally.”

“This could be a game changer, provided that we’re efficient enough,” says Calmfors. “It’s important to identify the areas in which Nordic countries have a comparative advantage with regard to developing new technology that can be applied broadly. I’m convinced by the argument that this is where we could make the biggest difference.”

Some of the Nordic technologies mentioned in the article are offshore wind and floating wind energy, battery production to drive the necessary transformation of the transport sector, electric ferries and advanced biofuels. Carbon Capture and Storage (CCS) is highlighted as one of the most important climate technology areas in which closer Nordic cooperation would be beneficial. The technology captures carbon from the combustion processes in industrial facilities such as power plants, cement factories, steel and aluminium plants. The carbon is then stored underground to avoid its release into the atmosphere. Norway recently launched a full-scale CCS project at a large waste-to-energy plant in Oslo and cement factory in Telemark.

“You could actually store a century’s worth of carbon dioxide from the whole of Europe in Norway,” says Greaker. “We know that there are cement factories in Sweden, coal power plants in Denmark and Finland and aluminium smelters in Iceland that would also be interesting sites for CCS, but there has been no attempt to lift the project up to the Nordic level. It’s an area in which we should work much more closely together.”

Nordic Economic Policy Review is produced by Nordregio for the Nordic Council of Ministers for Finance. The articles and results presented there are expressions of the views of the authors only, and not part of official Nordic policies.

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