Economic Instruments - Charges and taxes

Carbon and Energy Taxes (Finland)

Background
Finland was the first country to introduce a tax on carbon dioxide even though they only contribute 0.3% to the worlds CO2 emissions (Tindale & Holtham, 1996). The tax was introduced to reduce both the growth in energy consumption and harmful environmental impacts (Hiltunen, 2004).

Introduced
Carbon Tax was introduced in 1990.

Tax Rates
Initially the carbon tax rate was 7 marks (1.2euro) for each tonne of carbon dioxide produced.  By 1993, the rate was 14 marks/tonne (2.4 euros) of CO2 and a tax of 15 marks/megawatt hour was placed on electricity (Tindale & Holtham 1996).  The surtax on petrol, diesel oil, natural gas and peat was, however, on a different basis (Hiltunen, 2004). The structure of energy taxation changed in 1995; the new tax was based on the energy content of all sources of primary energy while at the same time an additional tax based on carbon content was imposed on fossil fuels. “Initially CO2 was tax at 75% and energy taxed at 25%.  The tax based on energy and carbon content were in the form of a fuel surtax 40% of which came from the energy component and 60% from the carbon dioxide component.  A basic tax was also imposed on nuclear power, hydropower and imported electricity” (Hiltunen, 2004: 9). 
From 1997, the rates were greatly increased and the CO2 tax was transformed into a general tax on consumption of electricity rather than production (EEA 2005).  The opening of the Nordic electricity market and the development of the electricity exchange was one of the reasons for the tax structure change.  Before 1997, Finnish energy taxes differed from the other Nordic countries, they targeted the production of primary energy, compared to targeting consumption.  This impacted on the competitiveness of Finnish electricity production, and was considered to weaken their position and therefore was considered to be in violation of EU regulations (Hiltunen, 2004).
The electricity tax has different tax classes for industry and households. Households have to pay the full rate of FIM0.033/kWh (about €0.006/kWh), industry and agricultural greenhouses pay FIM0.0145 (about €0.0025) (EEA, 2005). The tax is the same irrespective of the fuel used.  There is a separate tax on heat generation, which is based solely on the carbon content of the fuel. This tax was introduced to compensate for the fact that exempting electricity-generating fuels from the carbon dioxide tax weakened the impact of economic environmental policy instruments (Hiltunen, 2004: 9).

The CO2 tax on fuels is based on the carbon dioxide content of the fuel. Since 2003, the rate has been €18.05 per tonne of carbon dioxide.  For natural gas the rate is 50% lower, while the surcharge on peat is one quarter of the level that it would normally have under the tax code.

Carbon Dioxide tax rate (€ per tonne CO2)

1990    1992    1993    1994    1995    1997    1998    2003    2005
1.19    1.26    2.35    3.72    6.44    11.77    17.16    18.05    18.05
Source: Speck et al., 2006


Energy Tax and CO2 tax levied on fossil fuel consumption
1985    1990    1996    2000    2002    2005
Light Fuel Oil (€cent/l)    CO2 tax            2.30    4.54    4.54    4.78
Excise Tax            0.72    1.83    1.83    1.93
Damage Tax        0.34               
Other Taxes    0.42    0.42    4.42    0.39    0.39    0.39
TOTAL    0.42    0.76    3.44    6.76    6.76    7.10
Heavy Fuel Oil (€cent/l)    CO2 tax            2.69    5.40    5.40    5.68
Excise Tax            0.43           
Damage Tax        0.34               
Other Taxes    0.35    0.36    0.36    0.29    0.29    0.29
TOTAL    0.35    0.69    3.48    5.69    5.69    5.97
Natural Gas (€cent/l)    CO2 tax            0.90    1.70    1.70    1.80
Damage tax        0.20               
Other taxes                0.10    0.10    0.10
TOTAL        0.20    0.90    1.80    1.80    1.90
Coal (€cent/l)    CO2 tax        1.95    4.14    4.14    4.35   
Damage tax        0.27               
Other taxes                0.12    0.12    0.12
TOTAL        0.27    1.95    4.26    4.26    4.47
Peat (€cent/MWh)    Excise tax        0.34    0.59    1.51    1.51    1.59
TOTAL        0.34    0.59    1.51    1.51    1.59
Source: Speck et al., 2006


The general structure of energy taxation in Finland has remained unchanged since 1997. The environmental tax component (i.e. carbon surtax), based on the carbon content of fuels used for heating and transportation is, since January 2008, €20 per tonne of CO2 (€75 per tonne of carbon).

Most recent changes – as of 1 January 2008 – include (Environment Finland, 2008):

  • tax rates were raised by 9.8% on average
  • increase in carbon surtax was 13%;
  • biofuel oil used in working machines or heating is exempted
  • exemptions for hobby aviation, pleasure yachting and waste oil were repealed.
Excise tax rates and strategic stockpile fees in Finland (January 2008)

Fuel

Basic tax

Surtax
(*=carbon comp., €20/tonne CO2)

Strategic stockpile fee

Unleaded petrol, euro cents/litre
- reformulated sulphur free
- other grades



57.24
59.89



* 4.78
* 4.78



0.68
0.68

Diesel oil, euro cents/litre
- sulphur free
- other grades


30.67
33.32


* 5.38
* 5.38


0.35
0.35

Light fuel oil, euro cents/litre


2.94


* 5.41


0.35

Heavy fuel oil, euro cents/kg


-


* 6.42

0.28

Jet fuel (kerosene),
euro cents/litre

33.32

* 5.38

0.35

Aviation gasoline,
euro cents/litre

37.54

* 4.78

0.68

Coal, euros/tonne

-

* 49.32

1.18

Peat

-

-

-

Natural gas, euros/MWh

-

*  2.016
(reduced rate)


0.084

Electricity, euro cents/kWh
- rate I  (households,services, agric.)
- rate II (mining, manufacturing)

 

-

-

 

0.87

0.25

 

0.013

0.013

Pine oil (heating),
euro cents/kg  

6.70

-

-

Notes:



Exemptions
Initially there was no tax relief for the Finnish industry which is in sharp contrast to other Nordic countries that granted a tax relief for the manufacturing industries.  In 1997 the system altered due to concerns regarding conflicts with EU legislation. A second factor fuelling the change was a challenge by Outokumpu Oy (mining and metal engineering company) at the European Court of Justice who imported electricity from Sweden. They considered its imports as being discriminated against because Finland customs added an import tax. The import tax happened to be higher than the tax on domestic hydro power, though lower than the taxes on some other domestically produced electricity. But a major reason for the verdict against Finland was that the tax law did not even provide the possibility for proving it was 'green' electricity’ (EEA, 2005).

Coal and natural gas are exempt from taxes when used as raw material or auxiliary material or consumed as immediate inputs in the manufacturing industry (this regulation is also in force in other countries).

Electricity producers that generate electricity using the following are entitled to a subsidy of 0.42cetns/kWh: wind power; wood fuel or peat in a thermal power plant of less than 40 MVA; recycled fuels; biogases; wood chips; waste gas resulting from metallurgic processes or reaction heat resulting from chemical processes; or at a small hydroelectric power plant (less than 1 MVA) For electricity generated with wood chips, the subsidy is 0.69cents/kWh, and for electricity produced with recycled fuels 0.25cents/kWh.
A lower electricity tax class for industry and a partial refund of the energy intensive industry are two additional measures aimed at ensuring the competitiveness of Finnish companies. A company in the energy intensive sector is refunded for electricity and fuel taxes exceeding 3.7% of its value added. An 85% refund can be applied for, for the proportion exceeding 3.7% but only sums above EUR 50,000 are paid. A total of about EUR 14.3million is paid in the form of tax refunds every year, and in 1999 12 companies received them. These refunds accounted for about 8% of all electricity taxes paid by Finnish industry (Hiltunen, 2004: 11).

Allocation of Revenues

Revenues are used to lower personal income tax and indirect labour costs.


Performance
Environmental taxes and fees, as a percentage of all central and local tax revenue, accounted for 6.6% of total tax revenue in 2001.  When municipal water and wastewater charges and waste management fees are included this percentage rises to 7.9% (Hiltunen, 2004). 

Government revenue from environmental taxes and fees, EUROS millions
2001    2002    2003    2004    2005    2006*
Alcoholic beverage surcharge    13    13    20    20       
Soft drinks surtax    1    2    2    2       
Energy Taxes               2652    2756    2900    2901    3010    2979
Oil Waste Tax    3    4    3    3    3    3
Motor Vehicle Tax    922    1023    1207    1235    1200    1300
Oil Pollution control fee    3    6    9    9    9    9
Vehicle Licence Tax    435    446    473    642    536    560
Drinks Packaging Tax                    13    13
Waste tax    31    32    41    42    53    62
Pesticide Fee    2    2    2    2    2    2
Total    4064    4291    4657    4857    4826    4928
Source: Statistics Finland, 2005.

Finnish environmental tax revenue continues to rise and according to the Finnish government, is expected to continue to do so and should account for 12.5% of all government income in 2006, the fourth highest share in the EU (ENDS, 2005).  In 2005, energy taxes accounted for 62% of environmentally related fiscal income (Statistics Finland, 2005).
In 2003 there was an increase in energy consumption and a shortage of hydropower on the Nordic Electricity Markets, which meant that more electricity was generated by burning coal and peat.  This lead to higher greenhouse gas emissions in 2003, some 85.6 million tonnes of carbon dioxide equivalent, some 15 million tonnes more that total emissions in 1990, the benchmark year for the Kyoto Protocol (Statistics Finland, 2005).
An assessment (PMOPS 2000) of the energy taxation concluded that the carbon dioxide emissions would have been 7% higher in 1998 without the tax instrument. According to Hilden et al (2002), the electricity tax and its implementation suggest that it has not given a strong signal to the operators. The main impact relates to the increase of the revenue of the tax. Environmental impacts have been mainly indirect. The main reason for the lack of direct impact relates to the design of the instrument. The tax level has been low; it has been lower for industry than for other electricity users and the system has included exemptions and subsidies, so as not to damage competitiveness (Maatta, 2000). None of the interviewees in Hilden et al's (2002) report thought the electricity tax had any role in promoting innovations or in enhancing the diffusion of energy-efficient solutions. However, their answers may be tactical to avoid extra taxation. However, it is probably true due to the design of the tax and its low level. Finland's Kyoto target is to stabilise emissions at 1990 levels (77m tonnes of carbon dioxide equivalent) by 2008-12. In March 2004, the national statistical office reported that fossil fuel-related emissions alone reached 70m tonnes in 2003 and that the national total could be 90m tonnes.
The Finnish Government plan to spend €895m on the environment in 2006, nearly 8% lower than in 2005.  The largest cuts are in environmental subsidies for agriculture, which should fall from €322m to €265m (ENDS, 2005).
Revenue from energy taxes collected in Finland  (EUR million)
2001    2002    2003    2004    2005*
Total Revenue    2749    2756    2900    2990    3010
Notes: * implies budget proposal
Source: Statistics Finland, 2004.

Breakdown of Energy Tax Revenue, 2001 (EUR million)
2001
Motor petrol    1337
Diesel oil    663
Light fuel oil    182
Heavy Fuel oil    52
Coal    61
Peat    15
Natural Gas    11
Electricity    397
Total    2749
Source: Statistics Finland, 2002.

 

According to the preliminary estimate by Statistics Finland (2009), greenhouse gas emissions in Finland amounted to 70.1 million tonnes of carbon dioxide equivalent (t CO2 eq.) in 2008. Emissions were over 10 per cent lower than in the previous year and approximately 1.2 per cent below the Kyoto Protocol commitment level. Emissions from the energy sector decreased most (-21%) from 2007. Emissions from transport were also lower than in the previous year for the first time in the 2000s (-4%). Compared to 2007, emissions also decreased in the waste sector (-7%), whereas emissions from industrial processes (+5%) and agriculture grew slightly. In Finland, the Land Use, Land-Use Change and Forestry (LULUCF) sector acts as net sink (removals from atmosphere exceed emissions). In 2008, the net removals of the sector amounted to 35.4 Mt of carbon dioxide equivalent, which was approximately 15 per cent more than in the year before.

 

Finland's greenhouse gas emissions exclusive of land use, land-use change and forestry sector (Statistics Finland, 2009)

 

 


Total CO2 Mtonnes
1990 70.34
1991 68.16
1992 66.75
1993 68.81
1994 74.25
1995 70.79
1996 76.78
1997 75.25
1998 71.69
1999 71.05
2000 69.09
2001 74.35
2002 76.47
2003 84.25
2004 80.21
2005 68.43
2006 79.65
2007 78.07
2008 70.14

 


References


ENDS, 2005, Environmental Daily, Issue 1943, Sept 19 2005.

 

Environment Finland, 2008. http://www.environment.fi/default.asp?contentid=147208&lan=en

European Environmental Institute, 2005, Market Based Instruments for Environmental Policy, Technical Report 8/05, Denmark.

Hildén, Mikael, Jukka Lepola, Per Mickwitz, Aard Mulders, Marika Palosaari, Jukka Similä, Stefan Sjöblom and Evert Vedung, 2002. Evaluation of environmental policy instruments - a case study of the Finnish pulp & paper and chemical industries, Monographs of the Boreal Environment Research No. 21: 134.

Hiltunen, Marjukka, 2004, Economic Environmental Policy Instruments in Finland, The Finnish Environmental Institute, Helsinki.  Available at:
www.ymparisto.fi/download.asp?contentid=20705&lan=en

Maatta, K., 2000. Energiaveropolitiika (Energy tax policies), Kauppakaari, Helsinki

PMOPS, 2000. Environmental and energy taxation in Finland - working group report. Prime Ministers Office Publication Series 2000/3, Helsinki

Speck, S., Skou Andersen, M., Nielsen, H.O., Ryelund, A., and Smith, C., 2006, The Use of Economic Instruments in Nordic and Baltic Environmental Policy 2001-2005, TemaNord 2006:525, Nordic Council of Ministers, Denmark.

Statistics Finland. 2009. http://www.tilastokeskus.fi/til/khki/2008/khki_2008_2009-12-04_tie_001_en.html

Statistics Finland and Ministry of the Environment, 2005, Finland’s Natural Resources and the Environment 2005 Review.  Available at: www.stat.fi/ajk/tiedotteet/v2005/tiedot_046_2005-09-16_en.html

Statistics Finland, 2004, Statistical news 2004:198. Available at:
www.stat.fi/ajk/tiedotteet/v2004/198ympe.html

Statistics Finland, 2004. http://www.stat.fi/tk/tp_tied/tiedotteet/v2004/034enes.html

Tindale S. and G. Holtham, 1996, Green Tax Reform, Pollution Payments and Labour Tax Cuts, Institute For Public Policy Research, London.

Posted by admin on 12/06/08

0 Votes

0 Comments

Add Comment