Green taxes and just transition

By KATRI KULMUNI, Finnish Vice-Prime Minister and Minister of Finance,


Right now, we are all concerned with the COVID-19 pandemic. Our decision-making is focused on coping with this acute stage of crisis and building bridges to reach the other side.

However, many important issues are waiting for solutions, and we must return to them once we have overcome this crisis. One of these issues is combating climate change in a manner that is just and equal.

As we are well aware, in addition to purely fiscal objectives, taxes and taxation systems can have other aims as well, such as promoting certain activities, directing consumption or reducing harm. In fact, taxation is often an attractive way for politicians to achieve different objectives.

Finland introduced the energy tax model ten years ago to respond to the problems caused by emissions. In this model, taxation is based on both the energy content of the product and its carbon dioxide emissions.

The objective of the energy content component is to promote energy efficiency and preserve energy and natural resources, whereas the carbon dioxide component aims to take into account the life cycle emissions.

In addition, local emissions that are harmful to health are included in taxation.

In my view, calling Finland’s energy tax structure among the most modern in the world is not an exaggeration.

In addition to energy taxation, also our car registration tax and annual vehicle tax are based on carbon dioxide emissions of the vehicle. For example, the car tax payable in connection with registration of a vehicle is 2.7 % for electric cars and 50 % for the most polluting cars.

Although Finland’s energy tax system is a pioneer in many respects, the debate on climate change is putting further pressure on the system.

We have therefore decided to abolish the system of energy tax refund to industry and, correspondingly, to lower the electricity tax on industry to the EU minimum level. This will benefit climate, because electricity is mainly emission-free, whereas the energy tax refund also applies to fossil fuels.

Finland has taxed carbon dioxide extensively as part of its tax system for a decade now. This experience shows that taxing carbon dioxide alone is not enough to combat climate change.

One of the main reasons for this is the unfeasibility of sudden and substantial tax raises. Such a measure would put both citizens and businesses in a very difficult situation.

For example, high taxes on transport fuels leads to unequal treatment of those citizens who do not have access to public transport and for whom car is indispensable. Moreover, a sudden tax increase would cause substantial additional expenses for transportation.

If there is no alternative, an environmental protection tax only serves as a measure of fiscal policy, in fact.

While clean technologies reduces emissions taxes serve more a fiscal purpose.

For me, regional and social equality is a key principle in the fight against climate change. For this combat to be effective, I believe that the means must be broadly seen to be just and equal. This is the only way for us to gain legitimacy from citizens to act in this matter.

At the same time, we can prevent the growth of populist forces. One of Finland’s main contribution globally to solve the climate issue will be the export of high technology and Finnish forest expertise, in particular. We must be effective, but also attentive.

In addition to the equality problems that the environmental protection taxes cause, they also pose a challenge for public finances. This is because collecting such taxes gradually eats away at the tax base.

Thus, from the viewpoint of public finances, environmental protection taxes are considered more medium-term and transitional instruments rather than long-term stable tax revenue accumulators.

Tax shift, which will first focus on environmental protection taxes and subsequently on other tax bases, is particularly important for the predictability of business activities. When companies invest in renewable energy and clean alternatives, they must be able to rely on the continuity of the taxation system.

In order to ensure the predictability of business activities and investments, a comprehensive debate on how the tax system should be developed beyond the environmental protection taxes is therefore necessary.

We have started to prepare for a debate about the long-term shift in the focus of taxation by drawing up different road maps. At the moment, we are working on a so-called road map for sustainable taxation, which will include various tax measures.

The roadmap consists of energy taxation reform, a road map for transport taxation beyond the current government period, promotion of circular economy through taxation, and a report on how emissions by different products could be defined for tax purposes. Our work is only just beginning, so we will have more to tell in a few years’ time.

One problem Finland has faced is the amount of faith we put in the effectiveness of a single measure. Various kinds and types of taxes are examined individually in different projects, but their effects are not assessed as a whole.

In order for taxation to have a more significant impact, it is essential to consider taxes as a part of the big picture.

In fact, one of the most important effects of taxation is not necessarily its mechanical functioning but its political signal effect. As a part of a whole, taxation can achieve significant results.

As decision makers we must make meaningful decisions to combat climate change. However, they must be made in close cooperation with businesses and citizens. Tax shift is a continuous development that must be based on a fair and predictable transition.