Nordic Environmental Fiscal Reform

Case studies and application for post-pandemic economic recovery

By Tara Laan, Joachim Roth, Estan Beedell on April 15, 2021
  • The Nordics have successfully decoupled economic growth from GHG emissions, e.g. Sweden’s GDP grew by 125% while GHG emissions fell by 27% between 1990 and 2019.

  • Environmental fiscal reform fostered the Danish wind energy industry, which now employs over 33,000 direct employees and accounts for 7% of Denmark’s exports.

  • Environmental taxes generated between USD 7 billion and USD 13 billion in each Nordic country (except Iceland) in 2018.

Over the coming decade, governments will need to recover from the economic crisis caused by the COVID-19 pandemic while responding to the growing impacts of climate change. Environmental fiscal reform (EFR)—the alignment of taxes, subsidies and spending with positive environmental outcomes—provides a means of addressing both these challenges by raising revenues (for debt reduction and stimulus spending), while creating price signals to deter carbon and other pollution.

Nordic countries have deep experience with EFR, having pioneered the use of carbon taxes as an environmental and economic recovery tool in response to financial crises in the 1990s and 2008. The Nordics also tax energy, transport, air pollution, and waste. While national policies vary, the Nordics have generally used environmental tax revenues to fund reductions in taxes that are a drag on the economy, finance green stimulus to boost productivity, and provide a price signal to encourage energy efficiency while discouraging pollution. Using existing literature, this brief examines the effect of Nordic EFR on five key indicators: economic growth, employment, revenues, air pollution, and carbon emissions. A Nordic case study is provided for each indicator.

This brief also describes how experience from the Nordics can apply to developing and emerging economies, despite differences in country circumstances.

Participating experts