Stefan Speck

The Use of Economic Instruments in Nordic and Baltic Environmental Policy 2001-2005

This new report commissioned by the Environment and Finance Group of the Nordic Council of Ministers continues the tradition of reviewing the use of economic instruments in environmental policy in the Nordic countries by providing a comprehensive overview. At the same time, this report extends the country coverage and content of the report. The application of economic instruments is not only discussed for the five Nordic countries, but also for the three Baltic countries. In addition, a discussion on the opportunities and shortcomings associated with the use of economic instruments in the field of environmental policy has been undertaken. The report is a follow-up of the previous five reviews – the last was published in 2002 (TemaNord 2002:581) – and discusses the latest development of the application of economic instruments covering the time period 2001-2005.

Carbon taxation: two decades of experience and future prospects

Twenty years ago the first European countries started to introduce CO2 taxes. Since then countries all over the world followed or are showing interest in making use of carbon taxation as part of their climate change policies. One of the key features of carbon taxation is their design that differs widely between countries, not only with regard to the tax rates, but also in the way they work in conjunction with existing energy taxes and in terms of the scope of energy products covered. Now, the political discussion has moved ahead and carbon pricing – either being implemented in the form of CO2 taxes or tradable permit systems – is very high on the policy agenda, in particular as a consequence of the Stern report on the effects of climate change. Furthermore, carbon pricing is today regularly endorsed as an important policy instrument in the context of fiscal consolidation strategies and as a cornerstone in the transition to a green economy. The focus of this article is to shed light on the use of CO2 taxes following the experiences gained over the last 20 years since the first CO2 taxes have been implemented. The other policy measure in the context of carbon pricing is the EU ETS; however, ETS is still a rather new instrument, implying that the experience is rather limited, in particular when compared with the rich knowledge of CO2 taxes.

The fiscal implications of climate change and policy responses

This paper is concerned with the implications of climate change, and government policies to address it, for countries’ fiscal systems at the national level. Given the uncertainties associated with climate change and countries’ responses to it, the article can do no more than review and suggest some of the major issues of likely importance for fiscal sustainability and how they might be addressed. First the paper defines fiscal sustainability and addresses some general issues related to countries’ attempts to adapt to or mitigate climate change. It then works through a number of more specific issues, discussing policies such as the implementation of environmental taxes or other instruments for the mitigation of climate change. The assessment of the impacts of such policies on fiscal sustainability requires the application of sophisticated economic models, and the paper briefly explores the relative advantages of different modeling approaches in relation to the assessment of fiscal sustainability under policies to mitigate climate change. The major research need identified by the paper is for the development of macroeconomic models that will enable countries identify the wider effects of environmental taxes and help them undertake multi-year budgeting processes.

The Green Economy in Europe: In Search for a Successful Transition

A green economy has initially been adopted as a policy concept and tool to address the financial and economic crisis. Then it became a strategy now extensively endorsed by the EU and international organisations to guide a transition for a fairer society living in a better environment. Although a broadly agreed definition of a green economy does not exist, three objectives are commonly reflected in the green economy paradigm: improving resource efficiency, ensuring ecosystem resilience, and enhancing social equity. The central question is how to implement a transition to a green economy and what can be the role of policies in this broad scale process that no one single policy can implement. In general, the major economic transformations, including the increasing share of services in the EU economies, are not leading to a green economy transition. Enabling policies and factors at the crossroads between policies and the real-economy dynamics are required. Among enabling factors are eco-innovation, the open circulation of green knowledge, availability of financial resources for investing in the long-term transition and fiscal reforms, in particular economic instruments, such as carbon pricing schemes. Achieving a green economy requires long-term thinking and actions, the widespread application of a coherent framework that drives profound changes in dominant structures and thinking. Coherent integration of objectives across all policy areas is required, treating economic, social and environmental performance objectives as equal.