Climate policy in Nordics: how to maximise global impact?

The Nordic region accounts for less than 0.5 percent of global CO2 emissions. The figure shows that even if all Nordic countries - that is, Sweden, Denmark, Iceland, Finland and Norway - succeed in becoming carbon neutral, it would have a very limited direct impact on global emissions.

To maximise the global impact of Nordic climate policy, Norwegian economists Mads Greaker, Rolf Golombek and Michael Hoel recommend a shift of focus from national emissions reductions to international emissions trading and clean technology development.

Domestic reductions right path?

Their conclusions have just been published in Nordic Economic Policy Review 2019, which evaluates the cost-effectiveness and global impact of Nordic climate policy 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 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 Golombek and 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. 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.

"The marginal abatement costs are high in the Nordic countries," says Lars Calmfors, co-editor of NEPR 2019 and professor emeritus at the Institute for International Economic Studies (IIES) at Stockholm University.

"It's costly for us to achieve further emissions reductions, so it may be more cost-effective to trade with other countries so that we finance their emission cuts".

EU focusses on 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 percent compared to 1990 levels.

Companies in the sectors covered by the EU Emissions Trading System (ETS), including power production, energy intensive industry and commercial aviation, must reduce emissions by 43 percent by 2030, compared to 2005 levels.

"The EU issues less and less permits every year to ensure that by 2030, these companies will have reduced their emissions by 43 percent," says Greaker.

"The individual states 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 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 percent from 2005 levels by 2030.

These emissions are regulated by the EU Effort Sharing Regulation (ESR), which sets differentiated targets for the countries according to their GDP.

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 percent.

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 could trade emissions with countries with less demanding targets, such as Poland, Croatia and Hungary, which have a reduction target of 7 percent, or Bulgaria, which is not expected to cut emissions at all by 2030.

"In our view, rather than focusing on large emission cuts at home, Nordic countries should use the opportunity to buy permits from other European countries with lower targets," says Greaker.

Climate technology for export

"Our primary focus, however, should be to develop technologies that lower the cost of reducing emissions, also for other countries," says Greaker.

Some of the Nordic technologies mentioned in the report are offshore wind, battery production to drive the 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.

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. It's an area in which we should work much more closely together".