Carbon Pricing in Finland: Balancing policy goals

Taxation is considered to have a significant impact on energy production and demand, and because of this, it has been used as one key tool in the Finnish energy and climate policy.² Although it is possible to create a somewhat economically ideal environmental tax, in practice, there have been several exceptions from political reasons in Finland during the early decades of environmental taxation (Vehmas 2005). One major problem in the Finnish energy policy was and is the high energy consumption of the Finnish industry (Teir 1999, p. 303).

It is not possible to discuss the Finnish energy policies without mentioning the EU, as both emission trading and carbon pricing in Finland are currently based or heavily adjusted based on EU regulation (Paukku 2021a). However, carbon taxation started in Finland before the EU membership, as Finland was one of the first countries, alongside the Netherlands, Sweden, Norway and Denmark, to adopt cross-cutting carbon taxes instead of taxes for individual fuels (Rabe 2018, p. 98). Finland was actually the first country to implement carbon tax. In Finland, these changes were implemented by law by changing the fuel tax law temporarily (1119/1989).³ This was the first phase of energy taxation changes during the years 1989-1990 (Sairinen 2012, p. 426). Before this, these fuels had been outside fuel taxation.⁴ This change was stated to be based on environmental viewpoints, especially reductions in carbon dioxide emissions.⁵ On the other hand, the legislator knew that those new taxes that would be implemented would not have major environmental effects due to the low elasticity of energy demand, and the effect of taxes was estimated to slow down energy consumption and carbon emissions by 1%.⁶ In addition to that, no systematic follow-up of those taxes was carried out (Vehmas 2005). However, there are some studies suggesting that even these taxes led to major carbon reductions in the long term (Tamminen et al. 2018, p. 27). These taxes had a major budgetary effect as their revenue was 700 million Finnish marks, which was about 1% of all tax revenue and 40% of budget deficits.⁷

The second phase of Finnish environmental taxation was between 1991 and 1994, when economic difficulties arising from the collapse of the Soviet Union led to the need to increase taxes, and carbon taxes were seen to be a suitable tool for that (Sairinen 2012, p. 428). In 1992 energy-intensive users got their first tax-subsidy, which only covered a small number of companies until 2012 (Tamminen et al. 2018, p. 9). Finnish energy taxation was changed again in the year 1994 when Finland abolished the electricity tax on other energy sources than nuclear and hydro and implemented a new primary energy sources tax, which was based 60% on the carbon intensity of the fuel and 40% of the energy content of the fuel and increased all carbon taxation.⁸ This reform was stated to promote environmental viewpoints as taxing fuels was seen to reduce carbon emissions more than taxing the end results, namely electricity or heat.⁹ However, electricity from hydro and nuclear power was included in the taxation due to fiscal reasons.¹⁰ Nuclear power also had extra tax due to political discussion about building more nuclear power, which was a hot topic at the time of tax reform and caused some political crises due to some parties wanting to promote domestic energy sources (Sairinen 2012, p. 428). It is generally approved that Finnish energy taxes increased GDP due to decreasing import fuels (Barker et al. 2009, 187).

For imported electricity, the tax was set to correspond to the average tax burden on electricity in the Finnish markets.¹¹ The electricity tax was abolished in 1986, and it was returned in 1993 (Linnakangas and Juanto 2016). This carbon tax component was even classified as an “environmental policy tax”.¹² Energy contents were included in the taxation based on fiscal reasons. Otherwise, the tax changes would have led to unbearable tax revenue losses in the deepest modern recession in Finland in the ’90s.¹³

When changing the structure of the taxation, the legislator directly mentioned that environmental viewpoints have recently been viewed besides fiscal goals of energy taxation and that in addition to fiscal goals of energy taxation, they might have some effect on reducing the growth of energy consumption and emissions.¹⁴ A decade later, this viewpoint still persisted as environmental taxes were still seen as mainly fiscal, and their secondary role was to promote environmental goals.¹⁵ In the 1990s, fuel taxes were about 10% of all tax revenue.¹⁶ There were trade policy goals: domestic fuels, mainly wood and peat, were given significant tax advantages in order to promote their usage despite their emissions.¹⁷

However, the next phase of energy taxation began when Finland joined the European union (Sairinen 2012, p. 429). Previous changes did not last long due to Finland joining the European Union. There was a major excise tax reform in 1994 that was conducted in order to prepare the Finnish EU membership, and the new fuel tax law entered into force at the end of 1994.¹⁸ At that time and after that, political tensions prevented changing harmonized EU energy taxation in a way that would take into account environmental viewpoints, for example, the carbon intensity of the fuel (Rocchi et al. 2014). At the same time, Finland opened electricity markets and became part of the Nordic energy market, which rase some competitiveness issues (Sairinen 2012, p. 430). Some Finnish coal-fired plants were closed due to taxation and competition from other Nordic countries with lower energy taxation (Vehmas et al. 1999).

At this point, Finland made a major environmental tax decision as it decided to keep taxing some fuels with national tax due to environmental reasons, even despite that they were outside the harmonized EU energy taxation (Linnakangas and Juanto 2016). However, the fiscal reasons were also present as fuel taxes were raised due to financial reasons as joining the EU required abolishing some taxes, like sugar and fat tax.¹⁹ This was done by increasing both energy content and carbon taxes in a way that increased fuel tax revenue by almost 20% from previous years in a time when fuel taxes were about 10% of all tax revenue.²⁰ As Finnish energy tax levels exceed the minimum harmonization from the EU, there was no need to increase energy taxes due to the EU (Paukku 2021a). Fiscal reasons were later used when balancing competitiveness and fiscal reasons, as it was stated that the tax level would not be increased in the future if international competitiveness would require not increasing the levels.²¹ It is important to note that based on recent studies, Finnish energy taxes increased competitiveness (Barker et al. 2009, 184). There was also some political pressure from the Green party, which was a significant factor in increasing the tax levels. (Sairinen 2012, p. 429) This is one implication of ad hoc changes in the energy taxation system in Finland (Vehmas 2005).

However, in the year 1994, there was one backlash with possible major consequences for emission reduction goals, as biofuels were included in the fuel taxation in a way that caused their energy contents to be taxed more heavily than their fossil counterparts. (Lampinen 2008) This was based on the idea that biofuels were and would be only used by mixing them with fossil fuels.²² In the ’80s and ’90s, it was assumed that fossil fuel usage could only be lowered by reducing traffic and average car fuel consumption (Lampinen 2008).

At the end of the 90s, Finland was also one of the first countries to adopt the third stage of environmental policy, environmental tax reform changing the focus of the whole tax system (Sairinen 2012, p. 425). In the year 1996, the tax for gasoline was significantly increased by over 10% for fiscal reasons.²³ In 1997 energy tax system was reformed due to concerns related to the international competitiveness of environmental taxes (Linnakangas and Juanto 2016). In this change, the electricity tax was widely brought back in use, and all fuels used for electricity generation were left outside the electricity taxation. In this reform, the carbon tax was increased, and the energy component of the tax was lowered.²⁴ This tax reform was carried out assuming that the Commission would soon propose an energy tax directive that would include a carbon tax.²⁵ This has not happened so far.

In this reform, Finland backed down on environmental taxes due to international competitiveness (Vehmas et al. 1999). It was stated that in most countries that were competing with Finland, the energy taxation level was significantly lower; they either had no carbon-based taxes or those taxes were refunded to the industry.²⁶ Although it was also known that carbon taxes themselves were not higher than in many other Nordic countries, due to their significantly lower carbon intensity of energy production, their effective tax burden was also significantly lower.²⁷

Changing the taxation meant that carbon-intensive fuels got a significant advantage in energy production, which led to the weaker competitiveness of renewable energy sources.²⁸ It was stated that rising carbon taxes failed to increase renewable energy production, as the only commercially available energy was bioenergy, which was too expensive to use commercially, and due to this, the rising tax levels just led to a decrease in investment and increased electricity imports.²⁹

The energy taxation was changed to be based on the user. The industry had a significantly lower electricity tax level than other consumers.³⁰ Now the carbon taxes were retained and doubled in heat production, but the energy tax component of fuels used in heat production was removed. In traffic fuels, the energy tax was also abolished, but the carbon tax was increased in a way that kept the total tax level the same.³¹

It was stated that this reform was likely to increase carbon emissions, but it was unavoidable unless other countries would adopt environmental-based energy taxation in the future.³² Fiscal reasons were heavily present in this reform. Energy tax for other than industry users was increased in order to cover deficits from cuts in income taxes.³³ Some economic literature promotes this kind of action as it benefits the environment and general economic actions.

In the year 1998, there were some minor changes in energy taxation. It was noticed that the previous tax change made several renewable energy production methods have a competitive disadvantage, which was tried to correct by giving them new tax subsidies. It was stated that Finnish sustainable development goals required increased usage of renewable energy production and using less carbon-intensive fuels, like natural gas.³⁴ The main renewable energy production this tax reform promoted was wind power.³⁵ This tax subsidy was financed by increasing carbon taxes and electricity tax, and tax levels were increased even further to significantly increase tax revenue by 670 million Finnish marks.³⁶ This increase in revenue was 2% of all tax revenue in the year 1998.³⁷ There were no clear emission goals in this reform, only a statement that renewable energy competitiveness would increase, which would lower carbon emissions in the long term.³⁸ This reform succeeded at some level as wind power generation sevenfold in three years.³⁹ This year the fuel taxes for leisure and fishing boats were abolished due to EU legislation. Also, subsidizing the fishing industry was abolished.⁴⁰ Also, greenhouses used for farming got a new tax subsidy due to competitiveness reasons.⁴¹

The next environmental tax increase was made in 1999. At this time, the environmental taxes were heavily raised in order to cut down labour taxes due to negotiation results of the state budget, in which some parties threatened to walk away if environmental taxes would not be increased (Sairinen 2012, p. 430-431). This was done by increasing carbon taxes on those fuels which were still within carbon taxation and increasing electricity taxes by the same proportion. Some exceptions to this were peat, which had a small increase in tax level but still kept its tax subsidy, and traffic fuels, which faced no tax increase. In addition to these, wind power and district heating got new tax subsidies.⁴² In this reform, Finland did also present a new tax subsidy to energyintensive industries to increase their competitiveness despite increasing energy taxes.

One significant factor affecting energy policy in Finland is that the economy is quite energy-intensive, which affects the tax burden of fossil fuels (Vehmas et al. 1999). The 1999 change was estimated to increase the production of renewable energy in the long term.⁴³ The next minor change in the year 2002 was only technical due to a currency change. In the year 2000, there was also an extension of tax subsidy for small-scale renewable energy production.⁴⁴

New subsidies for renewable energy production were introduced in 2002. The tax increase was done in order to meet national and EU climate goals.⁴⁵ Another need for change was to include waste incineration and biomass usage for tax subsidies on energy production methods as they were seen as beneficial for climate goals.⁴⁶ In this change, it was clearly stated that carbon pricing was not anymore the primary tool for emission reduction, as tax subsidies replaced them as a primary tool.⁴⁷

The next major reform was made in the year 2005 due to the new energy tax directive⁴⁸ and the new EU emission trading scheme.⁴⁹ When EU ETS entered force, the whole focus of the energy tax system changed (Vehmas 2005). The EU ETS threatened to significantly reduce the usage of high carbon-content fuels, especially peat, which would increase the burning of wood in the short term, which would have had significant negative impacts on the important forest and paper industry in Finland. In order to keep peat competitive despite the EU ETS, all carbon and energy taxes for peat were removed.⁵⁰ The EU ETS had been a common justification to give subsidies to fossil fuels in Finland, as the regulator could say that due to the ETS, the emissions would not rise, even if taxes were cut (Paukku 2021b). It was stated that this tax subsidy would not significantly affect carbon emissions, but it would increase the security of energy supply and the use of nationally produced fuels.⁵¹ However, this estimation proved to be extremely wrong, as the current usage of peat covers 10% of Finnish carbon emissions (Soimakallio et al. 2021). The political importance of peat was notable, as this was the first energy tax change since 1989, when energy tax revenue actually decreased.

As the EU ETS came into force in 2005, a new energy tax reform was needed due to the EU ETS succeeding in its goal: putting a price on carbon emissions.⁵² In the Nordic electricity market, the price was mostly defined by Finnish and Danish coal power plants, which became significantly more expensive due to the ETS. This led to windfall profits for hydro and nuclear power. In this reform, electricity taxes were cut to half in order to maintain industry competitiveness.⁵³ In the year 2006, agriculture received a new energy tax subsidy just to subsidize agriculture.⁵⁴

The next tax raise was done in 2007. Energy taxes were raised by almost 10%. The raise was focused on energy products outside the EU ETS. Biofuels got an energy tax exemption in this raise.⁵⁵ This was the first tax change where it was stated that slowing down climate change was an extremely important policy goal. In the year 2009, the energy tax subsidy for agriculture was increased again to subsidize agriculture due to its low profitability.⁵⁶

The next major reforms were carried out in the year 2010. This reform was based on national and EU climate goals.⁵⁷ In this reform, fuel taxation was changed to be even more carbon-based, as almost all other taxes were abolished in order to make fuel taxation based almost completely on carbon and energy content.⁵⁸ In addition to this, the carbon component of the total tax was increased in order to promote using less carbon-intensive fuels. It was also stated that different renewable energy subsidies were required in order to promote renewable energy production.⁵⁹ It was argued that energy taxes were suitable tools for achieving several environmental policy goals: reducing greenhouse gas emissions, increasing renewable energy production outside ETS, and increasing energy efficiency.⁶⁰ After this tax reform, the carbon taxes for traffic fuels were raised from 20 €/t to 50 €/t, although other taxes were abolished, and the tax level remained almost the same for some fuels.⁶¹ In heating fuels, the carbon taxes were raised from 20 €/t to 30 €/t.⁶² After this, tax levels for different fuels differed, which is an important political decision not based on economic recommendations.

At the same time, biogas and wind power received more subsidies.⁶³ Agriculture was left outside of these tax increases, and agriculture even received more tax subsidies to compensate for rising energy prices.⁶⁴ Peat was also left completely outside carbon taxation in this reform, although its taxes were increased by other means. In this reform, the EU ETS increased carbon pricing in combined heat and electricity production, which received new tax subsidies and a 50% decrease in carbon taxes in order to keep it competitive, which made coal more competitive.⁶⁵ One key policy point here was that the environmental impact of carbon taxes was not assessed in numbers, as it was stated that carbon usage depends too much on the market prices of fossil fuels.⁶⁶ This is one major policy implication that carbon taxes are not treated as Pigouvian taxes but more like consumption taxes that are used to raise the commodity price in order to cut down usage.

In addition to this, feed-in-tariffs for renewable energy production were established due to RES-directive⁶⁷ and national climate goals.⁶⁸ Additionally, small-scale energy production received tax advantages.⁶⁹ One goal of this reform was to promote wind power so that it would have a capacity of 2000 MW in the year 2020.⁷⁰

This was the first reform with clearly and numerically stated environmental goals, but these goals were related to increasing renewable energy production, not cutting down carbon emissions.⁷¹ The trend in the 2010s was that decrease in the carbon intensity of GDP offset the economic growth, which meant that raises in energy taxes or increases in renewable energy production would actually lower emissions. (Parry and Wingender 2021, p. 8) It was stated that carbon emissions would be lowered as renewable energy production would be increased.⁷² This was a common view for energy policy at this time (Sokka et al. 2016). The EU had partially abolished the polluter pays principle a few years earlier and adopted a subsidy policy for renewable energy promotion (Paukku 2020a). The polluter pays principle was heavily present in EU ETS. At this time, the subsidy system was not very expensive, as it was tied to the price of electricity, which was high at the time.⁷³ However, as electricity prices came significantly down a few years later, the subsidy system had to be shutdown.⁷⁴

In 2011 these carbon taxes were increased again in order to cover fiscal deficits and increase biofuel.⁷⁵ In addition to this, tax subsidies for energy-intensive industries were increased.⁷⁶ This tax increase was done in three ways: 1) a 5% total tax increase done by increasing the carbon component of the tax, 2) removing agricultural tax refund from the carbon component of the fuel and 3) moderately increasing taxation of peat. One interesting point was that in the year 2010, the energy taxes were increased in order to compensate for removing the KELA payment paid by employers, and now the tax subsidies were increased in order to compensate for the increase in energy taxation, which effectively meant that the removal of this payment was transferred from companies to private persons.⁷⁷

In 2013, there was another small energy tax increase. The carbon tax component for some heating fuels was increased, and the energy tax component was reduced so that the tax level remained the same, and the carbon price was raised from 30 €/t to 35 €/t.⁷⁸ The change was stated to slightly increase the competitiveness of renewable energy, as peat was not included in a tax increase, and the majority of fuels included in this reform were mostly consumed in the ETS sector.⁷⁹

In 2013, the government planned to implement a new power installation tax. This tax would have been used for renewable energy and nuclear power installations as they got windfall profits from electricity prices increased by the EU ETS, as the prices for electricity were based on the most expensive energy production method.⁸⁰ However, this tax was not ever used due to difficulties with the EU state aid regulation (Linnakangas and Juanto 2016, p. 162).

In 2014, there was another small tax increase, taxation of carbon component in traffic fuels was increased from 50 €/t to 58 €/t. Electricity tax for consumers was also increased. This was the first reform where it was noticed that an increase in energy taxation hits the lower income brackets heavier. In the same year, new tax subsidies were also given for data centres. This was the first time when the legislator noted that the connection between energy usage and carbon emissions might be broken. This change in paradigm could later challenge the role of electricity taxation as an environmental tax.

Tax levels were increased again in 2015 the tax levels were increased. This increase was done in order to cover the fiscal deficits of the state. In this reform, the energy component of traffic fuels was increased instead of the carbon component in order to “keep the tax base broader”, but it was still argued that there are positive environmental impacts due to an increase in saving energy. In heating fuels, the carbon component was increased from 35 €/t to 44 €/t, but in first-generation biofuels, the carbon tax was still half of the other fuels with the same carbon intensity, and for the second-generation biofuels, it was still absent due to carbon being released anyways in case of materials for these biofuels. In addition to those, the tax on peat was decreased again in order to promote its and wood’s competitiveness against coal in combined heat and electricity generation.⁸¹ This tax cut was even increased later in the same year to promote the competitiveness of peat even more.⁸² Before the year had ended, one more tax cut was decided in order to promote burning peat and renewable biomass.⁸³ In these tax cuts, the tax was cut from 5,9 €/MWh to 1,9 €/MWh. In 2015 there were other changes. The first of them was increasing the power limit of taxable electricity generation from 50 kVA to 100 kVA for small-scale electricity production.⁸⁴ The other change was removing tax subsidies that were given to LPG and taxing it as other fossil fuels.⁸⁵

In 2016 energy taxes were raised again. This time carbon tax for heating fuels rose from 44 €/t to 54 €/t. Other goals were to increase the competitiveness of peat and renewable fuels. ⁸⁶ The energy taxes were raised again in 2017, this time for both traffic fuels and heating fuels, this time by increasing the carbon tax from 58 €/t to 62 €/t and the energy tax by 2%. Heating fuel taxes were increased from 54 €/t to 58 €/t, and energy tax by 7,5%. In this reform, energy taxes were again seen as consumption taxes, as it was stated that tax increases would be reassessed if the market price of oil rose too high.⁸⁷ In 2018, the taxes for heating fuels were raised, the carbon tax was raised from 58 €/t to 62 €/t, which was now the same as in traffic fuels, and energy taxes were raised by 4,5%.⁸⁸ This reform was again stated to increase the competitive position of peat and renewable energy production.⁸⁹ In 2018 there was a small change in the calculation basis of emissions with no tax effect.⁹⁰

Fuel taxes were raised again in 2020 by increasing energy tax by 3% and carbon tax from 62 €/t to 77 €/t. Now it was estimated that due to the bio-obligation in traffic fuels, tax increases would not increase the competitiveness of renewable fuels but only reduce fuel consumption.⁹¹ In 2021 tax subsidies for paraffin diesel were removed, as they were no longer required to achieve environmental goals in particle emissions.⁹² Tax levels were much lower than required to meet 2030 climate goals, which might even need to be 125€/t by 2030 (Parry and Wingender 2021, p. 4).

In 2021 there was a major reform in energy taxation. There were three major changes: 1) increasing energy taxes, 2) decreasing electricity tax to EU minimum and 3) removing subsidies for energy-intensive industries. The goal of this reform was to increase carbon pricing and meet climate goals. However, it was also mentioned that one goal of these changes was to increase tax revenue. It is known that carbon pricing is currently the most effective strategy for achieving climate goals in the EU and Finland (Parry and Wingender 2021, p. 4).

One major change was that it was finally, after 25 years of tax subsidies, taxation was increased in order to cut down the usage of peat.⁹³ However, peat still retained a major tax advantage. This reform aimed to achieve climate goals, and the most effective reform was estimated to be removing subsidies for energy-intensive industries. This reform was stated to increase the electrification of the industries and, due to that, reduce the usage of fossil fuels. This reform was later adjusted by creating a tax floor to peat taxation in order to prevent its price from dropping too low if the EU ETS price dropped under 21,20 €/t. However, as the EU ETS and the tax increase would hit the peat industry hard, another tax subsidy was given to peat by making the usage of peat tax-free in small installations under 10 000 MWh during the years 2022– 2026 and usage in under 8000 MWh installations tax-free in years 2027–2029. The goal of this reform was to split the usage of peat before 2030.⁹⁴

In Finland, energy taxation has, in recent years, focused on sectors outside the EU ETS, especially the traffic sector has been a focal point of taxation (Niskakangas 2011, p. 50). Taxing traffic fuels has a limited environmental impact as their demand is quite inelastic, and it has been stated that taxation is not an effective way to decrease carbon emissions in traffic (Paukku 2020c). It has also been recognized in policymaking that taxing traffic fuels is not likely to significantly reduce their usage due to a lack of feasible alternatives.⁹⁵ This is also controversial to the idea that emissions should be reduced where they can be reduced in the most cost-effective way (Paukku 2021b). In the Finnish tax policy, this is stated to be due to that emission reduction costs in traffic are higher than in other sectors, and because of this, carbon taxes should be higher.⁹⁶ It could also be argued that taxing traffic is important for national budgets and exceeding the costs that traffic causes (Niskakangas 2011, p. 125).

During this century, traffic taxation has focused even more on fuel taxes than taxes related to owning and using a car.⁹⁷ This had been stated to be an ineffective way to change fuel usage as it is often more effective to tax buying or owning a car based on the carbon intensity of car usage than taxing the usage of fuel (Paukku 2020c). However, from an administrative viewpoint, taxing fuel usage is a quite cost-effective way to reduce emissions from traffic, and it does not hit the lower-income brackets harder (Palanne and Sahari 2018, p. 3-5).

It is also known that as fuel taxes are consumption taxes, their revenue is relatively easy to adjust based on the fiscal needs of the state, and due to this, it has often been quickly adjusted based on the fiscal situation (Juanto et al. 2018, p. 3-5). The energy taxes were increased several times based on fiscal reasons, to cover deficits or to cut other taxes.⁹⁸ Energy taxes were sometimes used directly to cover tax cuts from other sectors as a rise in energy taxes.⁹⁹ It was also stated that fuel taxes had an environmental component, meaning carbon tax, and a fiscal component, meaning energy tax.¹⁰⁰

One interesting point in the Finnish carbon taxation has been the taxation of fuels used in district heating. One significant factor in the Finnish energy policy is the great need for heating due to the cold climate (Teir 1999, p. 303). There has been a long-term policy goal to subsidize this to keep it competitive when compared to local heating solutions.¹⁰¹ These subsidies grew over time via changes in tax systems.¹⁰² One reasoning for this was that district heating is more environmentally friendly as it combines electricity and heat production and thus reduces the loss of energy.¹⁰³ Later, when the EU ETS increased carbon pricing, the carbon taxes for combined heat and electricity production were cut by 50% to keep these sources of energy competitive.¹⁰⁴ This tax advantage was later assessed in 2016, but the tax subsidies were kept in order to promote district heating due to its assessed positive environmental impacts.¹⁰⁵ In 2019, the taxation of these fuels was changed in order to promote carbon steering. In this change, all energy taxes were removed, but the previously halved carbon tax was now carried out fully.¹⁰⁶ In 2021, another tax subsidy was removed from district heating, as the previously used calculation rule for fuel usage, which gave district heating tax advantages, was removed.¹⁰⁷

Another interesting point has been the tax advantages given to peat. Currently, peat usage is responsible for 10% of Finnish carbon emissions, and it is as harmful as using coal (Soimakallio et al. 2021, p. 3). Just 15 years ago, the tax advantages were reasoned with a claim that using peat would not significantly affect carbon emissions.¹⁰⁸ Trade and regional policy goals had led to promoting using peat due to lower tax levels.¹⁰⁹ Another goal has been to prevent burning wood in order to secure material supply for the paper and wood industries.¹¹⁰ In addition to this, all subsidies for several wood product side streams were removed.¹¹¹ The same reasoning was used in the 2010s when pressure for increasing carbon taxation for peat increased.¹¹²

The competitiveness of peat-generated heat and electricity has been improved in several reforms.¹¹³ During the 90s, the tax level of peat was only 1/6^th of the tax that other fuels with similar carbon intensity had.¹¹⁴ At the beginning of the century, the tax level was raised to ¼^th of the fuels with the same carbon intensity.¹¹⁵ Only in the 2010s was it recognized and stated that peat is as harmful to the climate as fossil fuels, and it should be taxed similarly to fossil fuels.¹¹⁶

Later the tax advantages given to peat were stated to be due to it being a domestic fuel and mainly used for CHP.¹¹⁷ Later advantages given to peat were reasoned with it being a nationally produced fuel, which increased the security of the energy supply.¹¹⁸ This reasoning was reused in the 2010s.¹¹⁹ The EU energy tax directive did not require taxing the usage of peat for heat production.¹²⁰ Subsidies for peat were increased even higher in the year 2006 when all energy taxes for peat were abolished in order to protect it from the EU ETS putting a price on carbon.¹²¹ Finland has an earlier history of focusing energy taxes on fuels and sectors that were not facing international competition, but peat was the exception in this protectionist policy (Vehmas et al. 1999).

Later on, in 2010, giving tax advantages for peat were reasoned by encouraging investments for district heating that could burn biomass, which could later make an easy transition to renewable energy usage.¹²² In 2011 taxes for peat were increased in order to promote burning wood and decrease carbon emissions. It was stated that peat needed some tax advantages due to its significance to regional economies.¹²³ In 2014 the energy tax for peat was cut down as its usage decreased while using coal increased. It was even stated that burning more peat would reduce carbon emissions as more renewable biomass would be burned with it instead of burning coal.¹²⁴ These tax advantages were increased even more in the same year in order to promote the. ¹²⁵ Later on, the carbon taxes for other heating fuels were increased in order to promote the competitiveness of peat and renewable fuels.¹²⁶

In 2017, the same reasoning to decrease the usage of coal was used again in order to not increase the taxation of peat.¹²⁷ In 2019, these taxes were increased as tax increases on other fuels made it possible to raise taxes and keep peat competitive.¹²⁸ In 2019, one goal of the government program was to cut the use of peat in energy production down by 50% before 2030.¹²⁹ It was speculated whether these additional policies to reduce the usage of peat and coal were necessary due to the effectiveness of the EU ETS (Paukku 2021b). In 2021, the energy tax on peat was raised in order to reduce the usage of peat, and future tax increases were conditional on whether the burning of wood would increase, as the supply for paper and wood industries needed to be ensured.¹³⁰

Finland had suffered from decreased energy production due to increased carbon taxation.¹³¹ This has later been taken into account, and there have been several production subsidy systems for renewable energy, which has led to increased renewable energy production in the 2010s (Paukku 2021a). The first major energy subsidies were granted in 1997 for small-scale energy production, meaning bioenergy and the first wind power installations in Finland for all 20 of them.¹³² The subsidies were significantly increased in the year 2003.¹³³ However, this system has started to turn from production subsidies to investment subsidies for new energy technologies.¹³⁴ Operating subsidies have been necessary to promote several energy technologies in Finland, especially wind power (Paukku and Similä 2020). In the 2010s, the feed-in-tariff system was established in order to increase renewable energy production and meet 20-20-20-goals.¹³⁵

The EU ETS led to several tax subsidies in Finland as major cost rises for the industry were to be avoided. The first subsidy was tax exemptions given to peat.¹³⁶ The second was significantly cutting down electricity taxes when electricity costs were rising in the Nordic energy markets due to the EU ETS.¹³⁷ In 2011, tax advantages for energy-intensive industries were significantly increased due to the EU ETS making electricity more expensive.¹³⁸ In 2012, it was clearly stated that states should avoid overlapping actions with the EU ETS.¹³⁹ In the next year, energy taxation was focused more on the ETS sector than other sectors.¹⁴⁰ The EU ETS has been fiscally quite effective in Finland as it is estimated to provide a revenue of 450 M€ in the year 2022, which is 0,8% of all budgetary income in Finland.¹⁴¹ On the other hand, fuel taxes are still significantly higher¹⁴², as shown in Table 1 above.

It has to be noted that a portion of the carbon tax is actually lower as biofuels without carbon taxes are counted into the total estimated revenue, thus making the carbon tax revenue actually lower. However, as the portion of these biofuels is still relatively low, some estimated carbon tax revenue can be made.