David Haugh
OECD
Kyongjun Kwak
OECD
Mikhail Vainchtein
Paris School of Economics
OECD Economic Surveys: Finland 2025
Abstract
Finland is currently not on course to meet its ambitious land-use emissions, adaptation, and biodiversity goals. However, a tradition of careful forest management, and high potential to gain from the green industrial transition, provide a foundation for meeting these targets, while boosting energy security and productivity growth. This requires increasing land-use and forestry carbon sinks, better policy recognition of biodiversity, and overcoming financing, regulatory and skills barriers to decarbonising industry. Fiscal constraints mean meeting these goals requires mobilising private funding for financing green industrial projects, carbon sequestration and nature preservation. The transition will be more enduring with greater research-informed planning and policy that balances different interests, including those of the Sámi. Finland has a strong innovation system but scaling up new inventions is proving challenging. Crowding in private sector investment via technology-neutral fiscal supports and improving emissions accounting to better recognise the emissions reduction benefits of new technology would encourage faster commercialisation. Deepening capital markets, raising higher education attainment rates, attracting more foreign investment and a skilled workforce in green industries would help realise Finland’s potential. Working even more closely with Nordic neighbours to attract more EU funding based on comparative advantage in affordable energy can help overcome the obstacles that rising trade barriers, geopolitical challenges and industrial subsidies worldwide pose to Finland’s net-zero transition.
Like most countries, Finland faces the inter-related challenges of reducing greenhouse gas (GHG) emissions, and adapting to a warmer world, while boosting productivity growth. Despite high ambition and progress in reducing gross GHG emissions, Finland is not on target to meet its ambitious net zero GHG emissions target by 2035. This is mainly due to a large recent downward revision in the estimated size of the carbon sink that Finland’s vast forests provide. Relatedly, the climate adaptation challenge is most acute in the natural environment and as is the case globally, Finland’s biodiversity is under threat. Government policy frameworks and actions to lower emissions, adapt to rising temperatures and restore biodiversity are incomplete and constrained by limited fiscal resources.
The green industrial transition – reducing the GHG emissions and resource intensity of industry (Mehmood et al., 2024) – presents Finland with an important opportunity to better meet these challenges, while maintaining its competitive edge in a rapidly evolving global economy. Plentiful cheap low emissions electricity, deep expertise in engineering and industrial process management, regulatory efficiency and a strong innovation system mean Finland has more potential than most countries to green the industrial value chain. Indeed, the green transition is already underway in Finland, notably with a large expansion in low emissions electricity generation including wind and nuclear power and many new green industry proposals and projects in hydrogen, green steel and methane cracking.
However, the transition is constrained by regulatory, planning, skills and financing obstacles, as well as an increasingly difficult international environment of rising security threats, trade barriers and industrial subsidies. Rising land-use claims for green projects and related stakeholder conflict present a further challenge. This is especially the case in the Arctic where a lot of the potential for the green industrial transition lies, but where there are also many competing claims from farming, tourism, mining and reindeer herders, including the indigenous Sámi. This has led to conflict between industry and other stakeholders and project delays.
This chapter discusses policies that will be required to spur the transformation of Finland’s economy to net zero-carbon, while bolstering the country’s capacity to cope with climate change and improve the natural environment and biodiversity. The first section analyses progress in meeting GHG related targets, including those for Land-Use, Land-Use Change and Forestry (LULUCF) and policies to increase the net LULUCF carbon sink, while maintaining incentives to reduce gross emissions. The second section discusses Finland’s potential in the green industrial transition and the barriers that stand in the way. The final section focuses on policies for coping with climate change while preserving Finland’s natural environment and biodiversity in the face of increasing land-use claims.
Finland’s greenhouse gas (GHG) emissions excluding LULUCF are spread across sectors in a similar way to the OECD average (Figure 4.1). The share of industry and agriculture is a bit higher than the OECD average, while residential buildings have a lower share. What sets Finland apart is that 75% of its territory is forest, accounting for 14% of the European Union’s (EU) total wooded land, making it the most forested country in the OECD (Figure 4.2). This provides an opportunity to contribute to net zero emissions targets using forests as a carbon sink but this will require significant policy changes given that forests including soil emissions have become a net emitter of GHG emissions. Given this emissions structure, the overall strategy for meeting GHG targets should be to ensure incentives to reduce gross emissions reduction across all main sectors, while taking better advantage of the strong potential to use forests as a carbon sink through careful forest management, including better forestland soil management, improved accounting for biodiversity value and cutting forest harvesting rates.
Source: OECD Greenhouse gas emissions and Agri-Environmental Database; Statistics Finland.
2022 or latest
Source: OECD, Land Use Database.
Finland’s overall emission target is the nationally set target of net zero GHG emissions by 2035, far more ambitious than the international net zero target by 2050. GHG sectoral emissions targets are organised around the three broad GHG emissions sectors defined by EU directives: LULUCF targets introduced by the EU LULUCF Regulation and ‘Fit for 55’ strategy; the EU Effort Sharing Regulation (ESR) sector targets for emissions in domestic transport (excluding aviation), buildings, agriculture, small industry and waste; and the EU wide cap on emissions for the European Emissions Trading Scheme (ETS) sectors that covers the electricity generation, heat generation, energy intensive and industrial sectors, aviation and maritime sectors. There are also total gross emissions targets set by the National Climate Act (Table 4.1). The National Climate Act 2015 amended in 2022, 2023 and 2024 is the main climate change mitigation framework law that implements these targets in national law.
Note: 1990 Gross Emissions reference value 71 330 million tonnes of CO2 equivalent. ESR sector emissions data is sourced from European Commission (2023a).
Source: Finland Ministry of Environment; OECD Air emissions – Greenhouse gas emissions database.
Excluding LULUCF, Finland reduced emissions by 43% between 1990 and 2023, more than the EU-27 average. Progress was fastest in energy and manufacturing, which are largely covered by the EU ETS. Energy accounted for 35% of total emissions excluding LULUCF in 2013, and emissions fell by 40% between 2013 and 2023, the 8th fastest decline in the OECD. This is due to a large and ongoing increase in the share of renewables in electricity generation, which had already risen from 36 to 53% by 2021 and continues to rise. This helped decrease energy emissions per unit of GDP by 37% between 2013 and 2022, the 7th fastest reduction in the OECD. In manufacturing and construction, which accounted for 13% of emissions in 2013, emissions fell by 40%, the second fastest decline in the OECD. Within the ESR sector, residential buildings and transport emissions declined by 60% and 21% respectively. The reduction in agriculture was only 7%, but as discussed below the national GHG inventory may not fully capture progress in that sector.
Despite these emission reductions, Finland is not on course to meet its 2035 net zero target according to the recent government WEM-P baseline scenario (Prime Minister’s Office, 2024), with net emissions exceeding the target by 16 to 33 million tonnes of CO2 equivalent depending on the scenario for gross emissions and LULUCF post 2023 (Figure 4.3). The main reason for this is changes in LULUCF CO2 emissions. Indeed, across scenarios, the assumptions about economic growth, green technological adoption and transport emissions influence future emissions but these effects are swamped by the impact of the LULUCF assumptions.
Note: WEM stands for with existing measures. More information on underlying assumptions for the WEM-P (baseline) and WEM-L (low emissions) scenarios can be found in Koljonen et al. (2024). Actual data to 2023 and projections from 2024 onwards. Projections are spliced to revised historical emissions data released in January 2025 assuming emissions will fall at the same a rate but from a higher starting point.
Source: Statistics Finland; Koljonen et al. (2024).
The LULUCF CO2 sink averaged 24 million tonnes per annum from 1990 to 2012. However, the sink subsequently declined and from 2018 LULUCF became a net emitter of CO2. Net LULUCF emissions declined slightly between 2022 and 2023 due to lower forest harvesting. The cessation of imports of wood from Russia in 2022 put upward pressure on prices in the wood market creating an incentive to harvest more in Finland. However, this effect appears to be outweighed by the associated negative supply shock affecting forest products markets (e.g., pulp), which pushes up production costs, choking off demand for forest products and resulting in ultimately lower consumption and harvesting of wood in Finland (Figure 4.4, panel B).
Source: Luke, Natural Resources Institute Finland.
The trend increase in LULUCF emissions appears mainly related to an increase in emissions from forest land of 33 million tonnes between 2010 and 2023 due to both less absorption of carbon by trees and more soil emissions from forest land. Between 2010 and 2019 carbon removals from trees fell by 22 million tonnes and from 2019 soil emissions started to increase faster, by rising 7.4 million tonnes between 2019-2023. By contrast, except for croplands, where emissions increased by around 1 million tonnes CO2 equivalent between 2012 and 2023, measured gross emissions from agriculture and other land-use have been broadly stable over the past decade. Forests continue to remove carbon (i.e., their growth is higher than the harvest), but there is a trend decline in carbon removals and it is outweighed by soil emissions so that the sector is a net emitter. This fall in carbon removals is partly due to a trend increase in the forest harvesting rate from 2013 (Figure 4.4, panel A). Total annual roundwood (i.e., raw, unmanufactured timber) removals increased from an average of 56 million cubic metres per annum between 1990 and 2012 to 71 million cubic metres between 2013 and 2023, mainly reflecting increased logging on private land.
Slowing forest growth also explains part of the decline in the forest carbon removal rate. With better forest management (IRENA, 2018), as well draining peatlands between 1950 and 1970, net annual forest growth (net increment) grew by around 75% between 1973 and 2013, peaking at around 108 million cubic metres. However, the net increment improved by only around 4 million cubic metres between 2013 and 2018 and is assumed to have remained constant at 103 million cubic metres per annum since until the next five-yearly estimation. The decrease in forest growth is due to higher harvesting rates, the changing age structure of forests, changes to the estimation methodology and several dry seasons that reduced tree growth.
Another and major reason for not being on track to meet targets relates to improvements to the methodology for measuring LULUCF emissions and removals (Vainchtein and Haugh, 2025). Changes in methodology have increased estimated historical and future net emissions from LULUCF markedly. In 2022, the estimate for the LULUCF sink in 2019 was 14.8 million tonnes of CO2 (Ministry of Economic Affairs and Employment, 2022). By 2024, this sink estimate had decreased to only 3.2 million tonnes in the national inventory, largely reflecting scientific findings that with climate change, peatland soils emit more GHGs than previously thought. In early 2025 new data was released showing further upward revisions to emissions. The 2025 data vintage showed that by 2019 LULUCF had already become a net emitter of 3.3 million tonnes – around 18 million tonnes higher than estimated in 2022.
Additional measures will be required to meet LULUCF and other climate targets and improve the economic sustainability of harvesting in some regions. On current policies, Finland will miss the 2021-25 LULUCF targets set by the EU ‘no debit’ rule. LULUCF emissions of 11.8 million tonnes also exceed Finland’s obligation under the EU “Fit for 55” to create a sink 2.9 million tonnes larger than the average sink value from 2016 to 2018, equivalent to a sink of 3.8 million tonnes by 2030. Current LULUCF emissions also far exceed the sink contribution LULUCF needs to make if Finland is to each the net zero by 2035 target given that it will not be possible to eliminate all gross emissions by then. Indeed, the gap between current LULUCF and what is required to offset gross emissions (projected to be 22 million tonnes in 2035) to meet net zero in 2035 is so large (around 34 million tonnes), that it will likely be impossible to meet the net zero target without cutting forest harvesting rates.
The National Climate Act sets out the main tools and institutions for achieving Finland’s climate targets. These include three (previously four including municipal plans, repealed in 2024) climate policy plans (medium-term, long-term and adaptation), an expert independent Climate Panel, a Sámi Climate Council, and an annual progress monitoring report to Parliament. The Act covers both the ESR and LULUCF sectors. As in other countries, tackling emissions category by category rather than combining all emissions in, for example, a single emission trading scheme or applying a single carbon tax that allow markets to internalise trade-offs between different options, means that there are many policy instruments with different costs per tonne of CO2 reduction. Hence, there is scope to reduce the average economic, environmental and social cost per unit of GHG reduction. An important objective for reaching emissions targets is improving the GHG efficiency of production. Overall Finland’s economy is more GHG efficient than the OECD median, i.e., producing more GDP per tonne of CO2 equivalent than the median (Figure 4.5). While electricity and manufacturing sector GHG efficiency is high, there is room for improvement in construction and transport.
2023 or latest
Note: The box shows the second and third quartile, the vertical line indicates the median and the whiskers show minimum and maximum values.
Source: OECD, Air and climate (database); OECD, National Accounts (database).
4.3.1. Increasing the net carbon sink in the LULUCF sector
As Finland is not on track to meet its separate LULUCF obligations, additional measures targeted at LULUCF will be needed. Cost considerations and technical feasibility (i.e., short-run challenges of compressing all gross emissions to zero) also argue for increasing the LULUCF sink to meet the overall net zero emissions target. Indeed, although there is a wide range of estimates for the cost of some measures, there appears to be several actions that could be taken to reduce emissions at a lower cost than the European ETS unit price or buying international sink units (Table 4.2). In addition, the IBC Carbon report suggests that increasing financing of METSO (discussed below), that makes payments to forest owners, would be cheaper than buying the missing sink units from other EU countries. It will also be key for LULUCF targets, as discussed below, to prioritise limited public subsidies for GHG reduction on reducing soil emissions, which will have faster results than improving tree growth, are cheaper and highly effective especially if they reduce methane soil emissions from peatlands, given the very high warming potential of non-fossil methane (27 times CO2 under the AR6 IPPC GWP-100 international standard, IPPC (2021)).
Finland’s tradition of careful management of forests and achieving increasing forest growth and its strong scientific knowledge of agriculture, soils and forests provide a strong basis for reducing emissions and storing more carbon in this sector in a cost-efficient way. An important contribution to the scientific knowledge base is the Catch the Carbon government programme that was launched in 2020 and came to an end in 2024. It funded over 150 individual research, development and innovation projects. Its aim has been to reduce greenhouse gas emissions in the LULUCF sector and in agriculture, and to enhance carbon sinks and reservoirs. The project results will inform future policy decisions concerning agriculture, forestry and land use changes. However, circumstances will change calling for keeping this programme open especially given that achieving LULUCF targets is key for Finland to reach net zero.
Source: Author compilation.
Regarding the 2021-25 LULUCF obligations, under current rules Finland would need to buy sink units from other countries or compensate through additional measures in the ESR. This need is estimated at up to 100 million tonnes of CO2. The actual deficit and therefore final cost will not be known until 2027 when corrections can be made to the reference LULUCF levels for calculating the deficit.
Finland and 14 other EU countries, including France, Poland and Sweden, as well as the EU at large, are not on track to meet their 2030 LULUCF targets (EC, 2024). As a result, EU sink units supply could be low, and their price high and international sink units cannot be used to meet the EU LULUCF obligations. The first best and likely cheapest option to meet the 2030 target is to reduce LULUCF emissions but that is challenging in a five-year time frame. Hence, given the likely limited supply of sink units, some transfer of LULUCF obligations to the ESR may be necessary. This increases the pressure in ESR. Additional measures in the ESR could put pressure on household and public finances although they will also help decarbonise Finland, making it more competitive in a world where economy-wide border carbon taxation from non-EU countries is likely to become more prevalent.
Increasing carbon removals from forests
Better management of Finland’s forests to increase their carbon removals is one of the main policy levers for getting back on track to meet the country’s LULUCF and net zero emissions targets. The wood stock on Finnish forestry land is 2 550 million cubic metres, the equivalent of around 50 years of gross GHG emissions by Finland at the 2023 rate (Vainchtein and Haugh, 2025).
One of the key challenges in designing better forest management policy is balancing environmental, economic and other interests given the importance of the forest industry to the economy and employment. The forest industry accounts for 3.8% of value added and 16% of total exports. The industry directly employs 60 000 people, accounting for 2.2% of employment. The sector, as discussed below, is made up of world-leading biomaterials, engineering and technology companies. Policy also needs to take account of the tradition of forest management in Finland, the dispersed private sector specific ownership, with over 600 000 forest owners or more than 10% of the population, and that almost all farmers are also forest owners too (Vainchtein and Haugh, 2025). These non-industrial private owners own 60% of forest land and carry out 80% of commercial harvesting (Vehola et al., 2022).
Unlike temperate climate countries with fertile soils, where forests grow rapidly and the focus for increasing the LULUCF sink is on afforestation, forests grow very slowly in Finland’s cold climate. Greater afforestation rates cannot quickly re-absorb industrial GHG emissions in the short run to meet 2035 targets. Hence, the focus should be on more efficient management of the existing forest stock, with afforestation only used as an additional measure in marginal pieces of land. As with agriculture discussed below, management of forests on peatlands is likely one of the most cost-effective ways to cut emissions (Vainchtein and Haugh, 2025).
A complicating factor for policy is that carbon removal levels are not under the full control of the government. Fluctuations in international demand vary significantly across forest products depending on developments in downstream markets (e.g., pulp wood demand depends on demand for packaging and log wood and developments in construction). These fluctuations will change the demand levels for logs, wood type and therefore log prices and harvesting rates in Finland, which are in turn the main determinant of the level of carbon removals. As discussed above, international supply shocks such as the end of log imports from Russia can also affect prices and the harvesting rate. Together with emission measurement uncertainty this means that achieving LULUCF targets requires frequent estimation of forest carbon removals and policy adjustments and evaluation of policy effectiveness.
Forests are not eligible for EU ETS credits but financially rewarding forest owners for storing carbon is likely to be effective in increasing the sink and face less political opposition than direct regulation. Experience in New Zealand suggests that providing economic incentives by making forests eligible for New Zealand ETS credits has been highly effective in inducing behavioural change by forest owners (Haugh, 2024). As discussed below, implementing the EU certification framework for Permanent Carbon removals, carbon farming and carbon storage in products (CRCF) would help boost incentives for private landowners to store carbon in trees and soil and be a complement to the current emissions reduction policy framework. It would also provide a possible opportunity to build in some automatic policy adjustment to market-induced fluctuations in harvesting.
The foundation principle of Finland’s forest management policy is sustainability, and indeed the total wood stock has increased over time (Figure 4.6). Policy measures for sustainable management include the Forest Act 1997 and the National Forest Strategy 2025, financing and public forestry extension organisations. However, changes made in 2014 to the Forest Act provided more freedom for forest owners and harvesting rates increased subsequently. A key sustainability requirement of the Forest Act is that a permanent reduction in forested land is not permitted: measures for the establishment of a new seedling stand must be completed within three years of the end of felling.
Source: Luke, Natural Resources Institute Finland.
Finland already has a range of policy measures to enhance sustainability and increase the rate of carbon removals. An important programme is METSO, targeted at increasing biodiversity but with carbon removal benefits as well. Its objective is to establish 96 000 hectares of forest established as permanent or temporary nature reserves by 2025; and protect an additional 82 000 hectares of forest habitats in privately owned forests via fixed-term environmental forest subsidy agreements. The voluntary and subsidy nature of the programme is popular with forest owners. It helps cut harvesting levels while compensating owners for lost log revenue, increase carbon removals and achieve biodiversity goals. However, demand for METSO subsidies exceeds available government funds. The government has also introduced incentives to enhance forest growth rates for example by funding ash fertilisation of peatlands.
One of the government’s main strategies for increasing forest carbon removals is appropriately to strengthen forest growth. To this end a package of forestry measures is being prepared by the Ministry of Agriculture and Forestry, as well as a roadmap for the use of peatland fields and new alternative market-based measures for peatlands. The package has been prepared in consultation with stakeholders and researchers, utilising current scientific data. It will include an assessment of the cost and climate effectiveness of the measures over different time spans. The draft package includes measures that promote forest growth and reduce emissions as well as increase carbon sequestration and storage. Measures include growing trees more densely, extending rotation periods, promoting fertilisation on mineral soils and continuous cover forestry in peatland forests, and avoiding ditch drainage.
An important policy design consideration is that some effective measures for increasing tree growth – including clear felling, heavy earthworks following felling and fertilisation – may be detrimental to biodiversity or, in the case of draining peatlands, boost emissions in the long run. Another is that some strategies entail intertemporal trade-offs, to wit continuous cover forestry (discussed below), which reduces harvesting in the shorter run and promotes biodiversity but has uncertain effects on tree growth in the long run (Vainchtein and Haugh, 2025). To avoid inefficient outcomes, forest carbon removals policy should not be overly targeted at achieving short-term LULUCF goals such as that for 2030 and rather take a longer perspective informed by scientific research. It will be important to fully implement the final package and if necessary impose it on forest owners. As discussed below, the forest growth package should prioritise reducing soil emissions from peatlands because this is cheap, will have relatively fast results and can be highly effective, especially if the emissions prevented are methane.
Reducing land-use related and other agricultural emissions
In 2022, total agriculture emissions amounted to around 16 million tonnes of CO2, equivalent, accounting for 12% of total gross emissions and 33% of total net emissions (including LULUCF). Of this around 9 million tonnes was land-use related, and 6 million tonnes a result of sectoral activities (for example, emissions arising from animal digestion). Agriculture sector emissions were the second largest contributor after the energy sector to gross emissions in 2022.
One of the main contributors to total agricultural emissions is farming on peatland soils. Indeed, around 75% of agricultural GHG emissions in Finland are from soils, and while only around 11% of agricultural land is peat soils, it accounts for over half of total agricultural emissions (Statistics Finland, 2023a). This is because techniques such as ditching to drain the land lowers the water table, leading to more soil decomposition and emissions (Vainchtein and Haugh, 2025). Indeed, emissions are up to 17 times higher for the same crop on peatland rather than mineral soil (Lehtonen et al., 2022).
One of the most cost-efficient ways to reduce LULUCF net emissions is therefore better management of peatland soils used for croplands and livestock. However, producing on peatlands is economically attractive as they are predominant soil in some regions and are relatively fertile and therefore higher yield growing areas for agriculture. This can be countered through policy intervention: in Sweden, for example, payments have been made to landowners to compensate for the loss of production that results from rewetting peatlands to reduce emissions (Vainchtein and Haugh, 2025). Agricultural production on peatlands has also been encouraged for food security and regional development reasons, through national subsidies that mainly support agriculture in northern regions, where peatlands are more common.
Finland has taken measures to control the extra soil emissions associated with economic activities on peatlands, including legally banning first-time digging of ditches to drain new land for peat energy production, and increasing the taxation on peat burning for energy or heat (see below). However, GHG emissions could be cut at low cost by shifting agricultural production to mineral soils, with little effect on national agricultural output and therefore food security, since there is more than enough unexploited agricultural mineral land available nationwide to make up for the loss of production on peatlands (Koljonen et al., 2020).
Model simulations carried out at the Natural Resources Institute suggest that even a low EUR 10 per tonne of CO2 equivalent abatement subsidy would eventually reduce agricultural production on peatlands by 80%. This would reduce agricultural emissions by around 5 million tonnes of CO2 equivalent or around 1/3 of total agricultural emissions in 2020 (Lehtonen, 2022) and around 1/3 of the current gap between the LULUCF sink target in 2035 and current LULUCF emissions. One of the advantages of an abatement subsidy over land-use regulation is that the farmer is not required to transition from peatland to mineral soils production but will be rewarded for any type of CO2 reduction.
Regional considerations loom large as peatland agriculture is concentrated in the mid and north regions where the share of peatland is high, while the share of agricultural peatlands is below 5% in southern Finland (Kekkonen et al., 2019). As a result, the distribution of agricultural emissions is also regionally concentrated (Vainchtein and Haugh, 2025). The aforementioned simulations show that the compensation payment of EUR 10 per tonne would be enough to ensure that in all regions income would be higher than in the baseline with no subsidies. However, the transition challenges and income changes for individual farmers even within the same region are likely to vary significantly depending on their location and the mix of mineral and peatlands soils on their farm and current economic activities. It would therefore be important to complement a CO2 abatement subsidy with interventions for peatlands no longer used for livestock or cropping to promote alternative uses of peatlands, and hence new income sources. This would help encourage a more just climate transition but also maintain agricultural production in mid and northern regions.
Rewetting peatland, by raising the water table and reusing it for paludiculture (i.e., cultivating crops suitable for wetlands such as reed grass), can reduce GHG emissions while still producing incomes for farmers. However, in 2024, an incoming government subsidy programme for rewetting peatlands was cancelled as part of the fiscal consolidation effort. It will be important to allow time for the new pilot rewetting programme introduced in 2024 to be developed and tested, given the high GHG reduction efficiency of rewetting. One of the challenges for developing paludiculture is creating demand for the crops produced. Paludiculture crops can help replace peat in animal bedding and as growing media in glasshouses producing vegetables. The latter appears promising, and the authorities estimate this could provide demand for over 100 000 hectares of paludiculture (i.e., around 40% of current cultivated peatlands).
A pilot programme for accelerating climate efforts over 2024-30, ACE LIFE, includes developing paludiculture value chains among many other objectives including the green industrial transition. However, funding of only EUR 20 million for all projects remains small compared to the potential savings from greater ESR emission reductions and the reduced need to buy international sink credits, the cost of which could run into billions of euros, and the timeline is too slow relative to the targets. The government should foster the scaling up of paludiculture: large glasshouse producers would likely be ready to use alternative growing media, but paludiculture crops are not currently produced at a large enough scale to meet their needs.
A large influence on how and what is produced is the EU CAP rules as EU CAP subsidies to Finnish farmers are amongst the largest in Europe, totalling EUR 1.4 billion in 2019 and accounting for 1/3 of farm gross income. These subsidies should play a greater role in stimulating sustainable agricultural practices that reduce GHG emissions (OECD, 2021a). The CAP rules have contributed to high GHG emissions agriculture by maintaining peatlands in production via subsidies for growing cereals there (Lehtonen et al., 2022, OECD, 2023a). Wetlands suitable for low GHG emissions paludiculture crops are eligible for CAP subsidies under EU-level regulation (European Court of Auditors, 2021) but Finland has decided to not use the CAP subsidies to support this activity. Given the size of these funds, re-directing at least part of the CAP subsidies to paludiculture would provide a boost to the development of this activity.
Developing carbon credit markets
A common constraint on all government programmes to foster climate change mitigation, whether via forest or agriculture initiatives, is limited funds due to the need for fiscal consolidation (Chapter 1). Increasing private payments for environmental services will therefore help expand climate change initiatives even if government subsidies can provide a boost through initial funding for developing new tools and markets like with the METSO programme for forests. Carbon markets can be broadly categorised into Compliance Carbon Markets (CCMs) and Voluntary Carbon Markets (VCMs). In the former, tradeable emission units are used to comply with an obligation or binding commitment, often established by international treaties. In the latter, tradeable emission units are certified, traded and retired voluntarily to increase cost-efficiency or reduce carbon footprint (Wetterberg and Schneider, 2024).
A tradition of private owner discretion over land-use and experience with METSO suggest a VCM is more likely to be politically feasible in Finland in any case. Research suggests that forest owners are overall favorable to climate mitigation strategies provided they also have economic benefits (increasing forest growth, adapting the forest to warmer temperatures, etc.), but against an uncompensated reduction of harvest rates (Verhola et al., 2022). Indeed, other research shows private forest owners demand economic incentives to act to increase nature conservation or increase carbon storage (Karnal, 2017; Karppinen et al., 2018).
Unlike permits markets such as the EU ETS that penalise emissions, VCMs reward emission reductions or removals. They can help crowd in more private funding for decarbonisation and carbon removal initiatives. Internationally, however, VCMs are still under development with over-the-counter, bespoke trading, little standardisation of contracts and multiple certification agencies (Dawes, 2024). Even so, underlying demand for credits has been strong as large firms with net zero strategies are interested in purchasing them and emerging markets announcing plans to sell them. Between 2019 and 2021 the annual value of the global VCM market increased from USD 320 million to USD 2.1 billion but then suffered a sharp reversal with the total annual value traded falling 60% in 2023 due a decline in buyer demand (Ecosystem Marketplace, 2024).
In Finland, firms have been interested in buying domestic units but demand has ultimately been weak. Indeed, the largest trading firm in Finland’s VCM collapsed in September 2024 due to a lack of demand for credits. Previous experience with VCMs internationally and research in Finland (Laturi et al., 2023) indicate many challenges for using VCMs with the land-use sector including establishing whether an activity is genuinely additional and permanent. It also requires avoiding double-counting (e.g., two countries recording the credit in their GHG inventory of emissions avoided or removed or two entities, e.g., both the buyer and the seller claiming the same emissions reduction). Public perceptions that carbon offsets claims made by firms are just green-washing and fraud is also an issue and some companies have been convicted in other jurisdictions for making misleading green claims.
Overcoming these challenges calls for government intervention informed by international frameworks. The Paris Agreement Crediting Mechanism (PACM) provides international guidance. In the European Union, the institutional framework for VCMs has taken a large step forward through the Empowering Consumers Directive that came into force in March 2024 and the EU certification framework for Permanent Carbon removals, carbon farming and carbon storage in products (CRCF) that came into force in December 2024. The proposed European Green Claims Directive would further add to the rules relevant to VCMs in the European Union.
VCMs can be used to help reduce emissions from LULUCF, and given looming unmet LULUCF targets, Finland should among other measures rapidly move to implement the CRCF including establishing the supervision mechanisms that the CRCF requires from Member States under the directive. Finland has a strong basis for implementation in theory. Substantial work (Laine et al., 2023) has already been done in Finland to compile international best practices and adapt then to the Finnish context in order to reduce uncertainty about climate claims and improve the reliability of the market. Implementation of the CRCF will require reallocating some resources as the public administration’s capacity to provide VCM guidance has been reduced.
Research in Finland shows that VCM potential to store or reduce GHG emissions is modest relative to the size of the forest sector but the effects are higher and more stable when the market is credit supplier-driven than demand-driven (Laturi et al., 2024). A supply of voluntary credits could come from efforts to restore drained peatlands, where results may be quicker than boosting tree growth and also reduce emissions significantly if methane emissions are reduced in this way due to their powerful heating effect. The supply of credits could also come, for example, from forest owners practising Continuous Cover Forestry (CCF), where only part of the trees in a forest are felled. CCF is more favourable to biodiversity and useful on peatlands, but it is also sometimes less profitable at market prices than clear felling as the harvesting volume is lower, making some kind of compensation for ecological services necessary to induce some owners to practise it. CCF also has the disadvantage compared with clear felling of reducing subsequent tree growth rates and partial harvesting carries risks of damage to the remaining trees and disease. These trade-offs make a market mechanism useful for identifying the most cost-efficient areas to practise CCF in. In addition to restoring drained peatlands and CCF, there are other strategies to boost carbon storage and a potential source of credit supply, including leaving more deadwood in commercial forests and more protection of old forest. The high dispersion of Finland’s forest ownership with around 600 000 owners, many of them small, often living in cities, is a favourable factor for supply for credits as many urban owners are unlikely to rely on logging their forests as their primary source of income. VCM design should also take into account that there are other environmental benefits from forest management practices that improve carbon removals, including better water quality and bio-diversity benefits, which can provide additional income streams for forest owners, encouraging more participation in the VCM. Demand for credits can come from companies based in Finland especially looking to make emissions reduction contribution claims, for example that they contributed to the restoration of peatlands reducing emissions. One constraint on the VCM’s usefulness is that the offset credits generated in a VCM cannot be used to meet all climate targets and in particular the 2030 climate goals that under the EU Fit for 55 package have to be met by measures which do not require corresponding adjustment in the GHG inventory values.
Regulatory interventions can also play a role in increasing carbon storage in forests
Well-designed regulation based on scientific research can also play an important role in promoting additional carbon removals. Regulations specifying minimum tree diameter requirements before felling or longer forest rotation lengths would reduce harvesting rates and therefore increase carbon storage but the diameter and parameters must be set so as to ensure they are favourable to longer-term tree growth. In this regard, Finland has the advantage of significant experience in designing cost-efficient regulation for forest removals and a substantial scientific research base to build regulations. Although new peatland drainage is now very minimal in Finland, subjecting peatland drainage, whether new or repeated, to stricter permits, as already done in Sweden, could help reduce future emissions risks. For example, permits for new drainage or maintaining the land drained following forest clearing could specify maximum ditch depths, reducing drainage and water pollution.
Regulatory design also needs to take account of the forest type, e.g., extending rotation periods is not suitable for spruce forests in the south where risks of damage increase with the age of the growing stock (Hynynen et al., 2023). New regulation carries the risk of higher harvesting rates in anticipation of more restrictive regulation. Some regulatory measures restricting log supply may lead to a sufficient rise in log prices to compensate the loss in volume. If regulation does impose income losses on the forest owners, a public subsidy or other economic incentives, for example via a carbon market, may be needed to reduce owner opposition to it.
4.3.2. Reducing gross emissions
With LULUCF being a net emitter rather than the large sink it needs to be, it is all the more important that Finland reduces gross emissions to meet its net zero target in 2035. Reducing gross emissions is not only crucial for the environment but also for energy security, as it reduces dependence on imported fossil fuels. It is also necessary for maintaining international cost-competitiveness. Finding the right reduction speed is a balance. A slow reduction in gross emissions would increase the risk that the economy and industrial processes fall behind other countries that decarbonise faster, with exports then facing higher border carbon adjustment or other tariffs. A fast reduction risks higher costs and failures as technology is not yet mature.
Statistics Finland’s GHG emissions data shows around 40% of gross emissions (i.e., excluding LULUCF) are covered by the European ETS (EU ETS) that applies to the energy and large industry sectors and intra-European Economic aviation. The EU ETS has been more successful in reducing emissions in energy than industry as the effective carbon price is lower for industry due to the free allocation allowances to industry to prevent carbon leakage. In addition, energy emissions abatement costs have been lower in the energy sector than industry, where abatement technologies are less mature. The free allowance system is being phased out and replaced gradually from 2026 with a border carbon adjustment mechanism (OECD, 2023a). The remaining 60% of gross emissions are covered by the EU Effort Sharing Regulation (ESR) 2018 that applies to emissions from agriculture, buildings, road transport waste and small industries (European Commission, 2023a). A new and separate permits trading scheme ETS2 has been set up to help meet ESR targets. It will cover buildings, road transport and small industries and is to be operational from 2027.
Finland has made excellent progress in reducing emissions particularly in energy generation, where they fell by 42% between 2013 and 2022. Emissions related to buildings and transport have also declined markedly, but room for further reduction remains. Emissions from ETS-covered large industry processes and product use fell by only 6% over the same period, but as discussed below the green industrial transition provides strong potential to reduce these industrial emissions much further.
Cutting emissions from the residential sector and buildings
Residential sector energy related emissions account for around 1.6% of gross emissions. Like Sweden and Norway, residential energy use per capita is high in Finland due to the cold climate. However, in international comparison, carbon intensity (CO2/capita) is lower than would be expected given this high energy use. Indeed, overall residential emissions fell by more than 40% between 2000 and 2020, the 4th fastest in the OECD, notably driven by the phase-out of oil boilers and shift to district heating and electricity from renewables (Hoeller et al., 2023). Dwelling carbon intensity for space heating fell by over 60% (CO2 per dwelling) between 2000 and 2021 (IEA Energy Efficiency Indicators, 2023).
Almost all buildings are adequately insulated. The EU Building Stock Inventory records that only 4.5% of the population in Finland – versus 14.8% EU-wide – lives in a dwelling with a leaking roof, damp walls or rotten window frames. Energy poverty is low, even among the poorest 20% of households in Finland (Council of Europe Development Bank, 2019). This due to a comprehensive social security system, including the second most generous housing allowance in the OECD (OECD, 2021b), and energy efficiency subsidies. There are also minimum energy requirements for both new buildings, major renovations and a long-term renovation strategy for the least efficient buildings that have included replacing oil boilers. As discussed below further increasing wood use in construction can reduce net emissions by increasing carbon storage and reducing the use of carbon intensive materials, such as steel.
Despite falling markedly, the carbon intensity of dwellings in Finland remains higher than in Sweden and Norway (IEA, 2025), pointing to room for improvement. The main reason for higher carbon intensity of energy use in the residential sector has been higher indirect emissions, i.e., those arising from electricity generation used to heat homes and from district heating systems. Finland has been installing more apartment-complex-scale electrically powered heat pump systems. These can help replace fossil fuel powered district heating and reduce emissions provided the electricity generation is renewable, which will increasingly be the case as the share of renewables rises.
Indeed, the share of the generation of district heating produced by fossil fuels fell from 58% to 22% between 2010 and 2023. Continuing to reduce fossil fuel use in district heating should remain a priority, notably the use of GHG-intensive peat fired district heating, which although it declined to 8% of district heating by 2023 is still encouraged by lower taxes on peat than on other fossil fuels for heating. As recommended in the OECD Economic Survey of Finland 2020, the tax on peat should be raised to that on other fossil fuels. Finland is making progress to replace remaining fossil fuels with ambient and excess heat produced by wastewater, sewage works, data centres and industry. The first geothermal energy powered heating plant began operating at Varisto in 2023 (IEA, 2024a).
However, Finland has up to ten times more potential than currently realised to use ambient and excess heat sources and could also make more use of geothermal sources. It should accelerate these projects (Auvinen et al., 2023). Barriers to investment in this area include technical (heat sources are low and heating needs to be high), planning (ambient and excess heat sources are zoned too far away from district heating plants) and low and uncertain economic returns. Increasing economic incentives will be crucial. Stakeholder research in Finland suggests that a politically binding commitment to a long-term energy taxes and subsidies plan would be a key lever for reducing uncertainty and accelerating investment, with a priority on taxing solid biomass used in heating to level the playing field for these newer energy sources.
Decarbonising transport
Around 21% of Finland’s total gross emissions stem from transport. Total transport emissions declined by 24% from 2005 to 2022, the 4th fastest decline in the OECD. Nevertheless, recent transport emissions policy developments are mixed and contradictory, and projected to slow emissions reduction, increasing the risk that transport emissions targets will not be met. specifically, the reduction of fossil fuel excise taxes, of vehicle taxes on older cars and of the minimum percentage of fuels that must be from biofuel will slow emissions reduction. It is projected that the 2030 targets for road transport emissions will not be met under the new lower blending guidelines (Finnish Climate Change Panel, 2024). A large part of the government’s EUR 4 billion investment envelope is devoted to building a double track railway line from Helsinki to Turku. This has been criticised inter alia for reducing the forest carbon sink as it will necessitate felling a large amount of forest. Indeed, although shorter than for other rail projects, it was still estimated to take 140 years for reduced emissions during operation to offset the reduced carbon sink and extra carbon emissions from construction (Ministry of Finance, 2023). There is also insufficient competition in public procurement (Chapter 1) so cost overruns could be high. The government should carry out a comprehensive review of the efficiency of current transport policy interventions. The review should aim to provide a net emissions impact of current interventions, give a comparison of their cost per tonne of CO2 reduced and provide the total fiscal impact.
The proposed changes to the biofuels mandate risk increasing emissions (Finnish Climate Change Panel, 2024). The review should include widening the energy sources that are eligible under the biofuel blending mandate, while ensuring that the full life cycle of emissions of different fuels is accounted for and considering what transport modes they are most suited for. Traditional biofuels rely on agricultural crops with associated emissions implications from land-use changes and competition with food production (ITF, 2023a). E-fuels require large amounts of renewed electricity to produce hydrogen and combine with captured CO2 and so direct vehicle electrification will be more efficient. However, Finland has significant renewable electricity potential and e-fuels may be the only option for heavy trucks that are difficult to electrify as discussed below. Around three-quarters of transport emissions are from road transport, which accounts for around 36% of ESR emissions or around 21% of gross emissions. Registration of electric vehicles (EVs), including plug-in hybrids, has increased rapidly, averaging 55% of registrations in 2023, and EVs accounted for around 8% of the Finnish passenger car fleet in 2023 (Figure 4.7, Panel A). Passenger transport more generally also appears to be energy efficient (Figure 4.7, Panel B). However, EV vehicle registrations fell to 45% of sales in 2024 and the share of the EV fleet is below Nordic peers. The EV take-up rate is influenced by international market developments, including model variety and prices, which are affected by industrial subsidies in China and EU countervailing duties. The variety of smaller and less expensive models is expected to improve in the short term in Europe, which will be crucial to a wider take-up of EVs (IEA, 2024b), including in Finland.
Source: International Energy Agency.
Further reducing road transport emissions requires continuing domestic policy action to foster the take-up of low emissions passenger vehicles, and to promote public transport, cycling and walking in urban areas. At 12.6 years, the average age of the car fleet is a bit above the EU average in Finland and higher than in Sweden (10.4 years) and Denmark (8.5 years) (European Automobile Manufacturers’ Association, 2023). The emissions reduction of adopting lower emissions vehicles should therefore be somewhat higher on average as older vehicles are generally more polluting. Finland uses a range of tools to achieve these goals including high fossil fuel taxes and the national renewable fuel blending (i.e., biofuel) distribution mandate. Public charging infrastructure for EVs has also been subsidised across the country. Passenger electric vehicle purchase subsidies were used but phased out in 2022 and those for light commercial vehicles will be phased out at the end of 2024 (IEA, 2024a). As elsewhere, fossil-fuel-powered cars are often replaced with similar sized and weight EVs, reducing the emissions reduction benefits. Finland should encourage a wider uptake of EVs, including small, lighter car-like electric vehicles for personal and freight transport in urban areas such as mini-cars and electric cargo bikes, which require less urban space, fewer battery materials, less energy and fewer charging points than EVs that are similar in size and weight to internal combustion engine vehicles (ITF, 2023b). EVs, hybrids and diesel and petrol cars are all subject to weight-based taxes to offset the fall in revenue from fuel taxation. Further incentives with low fiscal costs could include dedicated parking spaces and weight-based standards for parking charges and other taxes and subsidies.
International research suggests that the government can also influence take-up through the provision of public charging infrastructure, especially of the fast-charging type for battery powered EVs, and that this is more effective than directly subsidising EV car purchases (Springel, 2021; Haidar and Rojas, 2022). Currently the ratio of electric vehicles to high-speed public chargers is low in Finland and particularly so in Helsinki, but rapid growth in the EV stock would quickly increase this (Figure 4.8). Recent research in Finland using a household-level microdata set suggests that an important influence on electric car take-up is the provision of high-speed chargers along long-distance routes households regularly take, for example to visit family or holiday cottages (Ferreira et al., 2024).
Electric cars¹ to fast public chargers ratio, 2023
1. Battery electric cars, fuel cell electric cars and plug-in hybrid electric cars. Fast chargers have a power rating of more than 22 kW.
Source: International Energy Agency.
An evaluation of public subsidies for charging infrastructure suggests the cost per tonne of CO2 reduced is EUR 370 EUR, much higher than that of reducing emissions in agriculture. However, this cost is likely to fall as EVs scale up worldwide. In Finland the potential for the government to recoup costs of subsidies appears high as Finland’s low electricity price creates a large margin between cost and the eventual retail price which can be charged.
An important challenge in increasing further high-speed charging is that these stations place a very high demand on local distribution networks, with multiple high-speed charger stations significantly increasing pressure on the grid and distribution lines (IEA, 2024b). With current technology this is particularly the case for high-speed charging needs for electric heavy trucks. The Budget decision to increase funds available to Fingrid for investment in the grid to support green transition investments will help meet these challenges and the rollout of public EV charging infrastructure.
The green industrial transition is well underway in Finland, centred around five key sectors: energy, forestry, manufacturing, construction and transportation. A core input is low-emissions electricity, either as the energy source to produce materials in a low-emissions way, or to directly power industry. Investments in wind, solar and nuclear power, have grown, helping to meet the country’s goals of lowering emissions, improving energy security, and expanding the foundations of the green industrial transition. The share of wind and solar energy in total energy supply rose from 0.7% to 4.1% between 2015 and 2023, and the share of nuclear from 19.6% to 27.6%, according to the International Energy Agency (IEA). As of 2023, renewable sources, including wind, solar and hydro, accounted for 8.1% of total energy supply and 37.6% of electricity production (Figure 4.9). Electricity prices are the second lowest in Europe (Figure 4.10).
2023
Source: International Energy Agency.
Source: Eurostat.
The combination of cheap electricity, advanced grid infrastructure and a skilled workforce in engineering and industrial process management makes Finland an attractive hub for developing and scaling green industrial solutions. Against this backdrop, many green projects have sprung up, with Finnish firms in general more likely to see the green transition as an opportunity than their EU peers. According to the European Investment Bank’s Investment Survey, almost half of Finnish firms view the green transition as an opportunity, the highest share among the 23 surveyed countries (EIB, 2024). According to the Confederation of Finnish Industries, some EUR 294 billion (107% of GDP in 2024) worth of green transition investment projects were planned in Finland by 2035 as of April 2025. Even if these projects are not all realised, the planning and investment decisions already taken across the country point to a momentous ongoing economic transformation, which will also foster regional development, with projects ranging from renewable energy plants to data centres and to circular economy initiatives (Figure 4.11).
Planned (green), Investment decided (yellow), Operations started (navy blue)
Note: The size of circle reflects the amount of investment, which can be found at https://ek.fi/en/green-investments-in-finland/.
Source: Confederation of Finnish Industries.
The pool of chemical and other engineering expertise built up in the forestry sector provides a basis for developing the production of hydrogen, an important input into the wider green industrial transition (Table 4.3). Further investment in green hydrogen (produced with renewable energy) would help lower emissions in energy-intensive activities such as steel production, which accounts for around 4.9% of Finland’s total gross emissions. Finland is already home to innovative green steel initiatives, with hydrogen expected to play a key role in these processes, but as discussed below more coordination is needed across projects including with respect to the renewable electricity that is to power them.
Selected investment projects
Note: Investment projects are subject to changes or delays. Up-to-date information can be found at https://ek.fi/en/green-investments-in-finland.
Source: Confederation of Finnish Industries.
The following sub-sections discuss five main policy priorities for accelerating the green transition in Finland: building a framework of innovation, planning and regulatory policies that accelerates private investments; ensuring Finland retains its comparative advantage in plentiful low-emissions electricity; facilitating the development of low-carbon-emissions industrial production and processes; ensuring there are sufficient skills for the green transition; and reducing financing obstacles and regulatory barriers hindering the transition from innovative ideas to the marketplace, including attracting more EU funding.
4.4.1. Policies and regulations to support the green industrial transition
Finland’s aim to decarbonise the economy while maintaining industrial competitiveness rests on three main pillars: modest industrial supports; fostering green innovation; and improving regulation. The government provides a mix of supports. The 2022 Act on Electrification Subsidy for Energy-Intensive Industries provides subsidies for industries to adopt green technologies, particularly by improving energy efficiency, increasing the use of renewable energy and advancing electrification. The Act requires beneficiaries to allocate at least 50% of the subsidy to development activities that contribute to carbon neutrality. The government has also initiated various sectoral policies to further expand low-emissions electricity generation and the grid and stimulate green innovations in manufacturing, transportation and construction, notably under the aegis of its Resolution on Hydrogen.
The government also provides both R&D direct supports and tax credits that are relatively low in international comparison (Figure 4.12). The government has recently reconfirmed the target to raise overall R&D spending to 4% of GDP by 2030, in line with the Act on Government R&D Funding, which came into force in 2023. This law sets the annual level of central government R&D expenditure to raise public sector R&D spending to 1.33% of GDP by 2030. To implement this Act, the government has adopted a comprehensive, multiannual plan in 2024 to guide the use of central government R&D funding, focusing on strengthening cooperation between businesses, higher education institutions and research organisations. This plan, which includes around EUR 1 billion in additional public investments, aims to leverage private sector contributions and improve infrastructure.
1 minus B-Index, by firm size and profit scenario, 2023
Note: The (implied) tax subsidy rate is calculated as 1 minus the B-index, a measure of the before-tax income needed to break even on USD 1 of R&D outlays. For general and country-specific notes on the time-series estimates of implied marginal tax subsidy rates on R&D expenditures (based on the B-index), see rd-tax-stats-bindex-notes. While cross-country comparisons are available until 2023, Finland’s R&D tax support increased in 2024 with the introduction of the extra additional R&D deduction, which further enhances the existing tax incentives.
Source: OECD R&D Tax Incentives Database.
The government has also introduced a fixed-term tax credit to encourage the private sector to carry out large-scale green tech projects. This tax credit, capped at EUR 150 million per company, will cover up to 20% of eligible investment costs for projects that accelerate the clean transition, such as decarbonising industrial processes, energy efficiency measures and investments in hydrogen infrastructure and the battery value chain. The credit, which is expected to be implemented in 2025, will be available for new projects starting from 2028, with eligibility requirements ensuring that investments contribute significantly to reducing dependency on fossil fuels and promoting clean energy technologies. This initiative is welcome as other support has been low and until recently almost all direct in Finland, unlike in many other OECD countries (Figure 4.13).
In addition to the tax credit, Finland also supports significant green-tech investments with direct discretionary government grants. This fixed-term subsidy scheme covers investments that decarbonise current industrial production processes and improve energy efficiency and, in addition, new investment projects in certain sectors that are strategically important for the transition to a climate-neutral economy, such as the battery value chain. A budget of 400 million euros has been reserved for the grants in 2025. The grant scheme covers investments implemented in Finland with eligible costs of at least 30 million euros.
Government policy should generally use a mix of R&D tax incentives and direct grants (Andrews and Criscuolo, 2013; OECD, 2013). Technologically neutral supports such as R&D and other tax credits have the advantage over more direct subsidies of not picking winners. Looking across the industries in Finland suggests specific policy supports to foster decarbonisation should observe three over-riding policy principles: policy support should generally be technologically neutral; regulatory efficiency is needed to obtain the highest return on fiscal supports; and incentivising scaling up of new emissions reduction technologies requires improving emissions accounting methods to better and more flexibly recognise emissions reduction over the whole product lifecycle.
Direct government funding and government tax support for business R&D, % of GDP, 2023
Note: While cross-country comparisons are available until 2021, Finland's combined R&D tax deduction, introduced in 2023, increased R&D tax support (see Figure 4.12), with the extra additional deduction becoming deductible from 2024. In 2024, the Finnish government introduced a EUR 400 million direct grant scheme to support investments to decarbonise industry.
Source: OECD R&D Tax Incentives Database.
The advantage of technological neutrality is especially important in the case of the green industrial transition where the picking winners problem is acute because of the high level of uncertainty about what technologies will ultimately prevail. For example, electric car battery technology is still rapidly evolving, with ongoing research aimed at reducing or substituting critical materials like lithium, cobalt and nickel that are currently essential in their production. This includes developing alternatives such as lithium iron phosphate (LFP) and sodium-ion (Na-ion) batteries to improve supply chain sustainability and resilience (IEA, 2023b). An important exception to the picking winners problem is that of the generation of cheap reliable low-emissions electricity, which is fundamental for the transition. In this regard, recent budget initiatives to directly support improvements to the electricity grid are welcome. Direct subsidies allocated using transparent criteria also still have a place for supporting SMEs, as young firms often do not fully benefit from the tax incentive schemes compared to larger firms, particularly if they lack the upfront funds to initiate innovative projects (Busom et al., 2012; OECD, 2013).
As documented in the previous OECD Economic Survey, Finland has a high-quality innovation system, with a relatively high share of patent applications on environmental technologies (OECD, 2022; OECD, 2017). An important part of the innovation system for the green transition is collaboration between firms and public research organisations, which is mainly supported by Business Finland, the national innovation funding agency. One example is Hycamite, a Finnish company specialised in hydrogen production and carbon capture technologies. Its collaboration with Finnish research institutions has enabled the development of advanced methods for low-cost production of green hydrogen. Such partnerships between industry and research institutions can be a powerful way of accelerating innovation and ultimately the commercialisation of new technologies. However, overly rigid funding obligations such as mandatory collaborations with other companies could hinder innovation. It is crucial for Finland to maintain flexibility, imposing these funding obligations only when there is a clear business case for doing so. To ensure it is funding innovation rather than business as usual, collaboration funding should favour projects developing new product and service lines. Business Finland’s funding already allows for such flexibility, particularly in financial products tailored to micro and SME companies, which are often exempt from networking requirements. Additionally, the government should also conduct systematic impact assessments of support measures to ensure their effectiveness and efficiency. Business Finland conducts multi-year evaluations, with an annual impact report summarising the outcomes. Maintaining and continuously refining these systematic post-evaluation frameworks would help identify the most impactful initiatives and optimise funding allocation.
Finland also has an efficient planning and permitting process that allows electricity-related projects, such as building new power lines, to be approved relatively quickly compared to peer countries. These projects typically take around seven years, comprising five years for environmental studies, permitting and land acquisition, followed by two years for construction, and this timeline is significantly shorter than in Sweden or Germany. Moreover, according to the recent OECD Product Market Regulation (PMR) indicators, the Finnish electricity sector regulation is more competition promoting than the OECD median (Figure 4.14). Nevertheless, there is room for improvement. An important step is the government’s new “one-stop shop” permitting process to streamline approvals for green industrial investments, which aims to increase the speed and predictability of regulatory processes. It is due to start at the beginning of 2026 and the new Finnish Licensing and Supervision Agency will bring together the tasks of a national agency, Valvira (National Supervisory Authority for Welfare and Health), along with most licensing tasks of four regions and most environment-related tasks of 13 centres for economic development. Accelerating regulatory processes and increasing transparency will help keep up the pace of green innovation and ensure that Finland remains competitive in attracting foreign investments.
Source: OECD PMR indicators, 2024, Finland PMR country note.
An important barrier to start-ups and established companies across industrial sectors including agriculture not scaling up innovative carbon capture and other emissions lowering technologies is limited policy recognition in Finland and the EU of the full emissions reduction benefits of these technologies. Emissions accounting is often based on basic rules of thumb and does not fully capture the actual emissions reduction and storage of various technologies, for example, the measurement of actual emissions reduction using rotor sails in shipping. In addition, storage of carbon in a solid form is not recognised and the EU has delayed revisiting this issue until 2026. Sometimes the accounting methods are overly rigid such as in requirements for green hydrogen discussed below. Combined these blunt the reward to innovation and the incentive to invest. As a result, Finland’s start-ups are sometimes choosing to scale up innovative technologies outside the EU, where policy support is more technology neutral and accounts better for actual emissions reduction. To encourage scale-up of innovative emissions reduction technologies in Finland, the government should seek to improve emissions accounting methods so they recognise the emissions reduction benefits for subsidies or other policy support over the whole life cycle of a product or process.
While Finland generates many new innovative technologies, financing also remains a barrier to scaling innovations from pilot projects to full industrial deployment. Public funding for large-scale demonstration projects is still limited, slowing the development of new technologies such as Carbon Capture and Storage (CCS) and hydrogen fuel solutions. Strengthening public-private partnerships and increasing funding for large-scale demonstrations will be key to advancing these green technologies. Public funding should be used to “crowd in” private sector funding. To fully realise its potential in the green transition, Finland must also strengthen international collaborations and attract continued investment in green industries. By expanding partnerships with other countries, particularly in areas like hydrogen production, green steel and carbon capture, Finland can access foreign know-how to accelerate the development of key technologies and gain market access.
4.4.2. Strengthening and modernising the electricity system
Finland’s low electricity prices compared to other European peer countries provide an important comparative advantage in the green transition in industry and economy wide. Finnish electricity prices remained relatively low before and after the energy crisis following the pandemic. Finland has significantly increased low emissions electricity generation and the electricity grid has been strong, facilitating the integration of renewable energy sources such as wind and solar power, which contributes to a more reliable and efficient energy system (IEA, 2023a). However, there are emerging signs of stress on the electricity system due to pressures on the grid and keeping this advantage and therefore maintaining the shift towards a low-carbon economy in Finland hinges on the further modernisation and expansion of its electricity grid.
Finland should continue to expand and modernise the grid
There remains a risk that a shortfall in capacity could hinder the green transition. Despite the optimistic projections, concerns are growing about the possibility of electricity grid inadequacy, which may force the postponement of industrial investments, as the electricity network may not have enough capacity to meet growing demand. For example, delays in grid upgrades are already slowing down the expansion of electric vehicle charging infrastructure in Northern Savonia, particularly for heavy-duty vehicles, which require large amounts of electricity. In Joensuu, investments in green hydrogen production have been postponed due to insufficient grid capacity, and it is expected that grid shortages in certain areas may not be resolved until 2031.
To avoid such bottlenecks, the grid will need to support the specific needs of both a higher share of low emissions generation and far more exceptionally-high-demand commercial and industrial users. Finland has expanded significantly wind power from 3.4% to 18.1% of electricity generation and nuclear power from 33.9% to 42.3% between 2015 and 2023. In 2023, renewable energy, comprising wind and solar power, already accounted for approximately 19% of Finland's electricity production, while low-emissions energy, including nuclear power, accounted for 61.2%. Wind and solar energy are expected to take an even more central role in the energy supply mix, bolstering Finland’s competitiveness in electricity prices. The expansion of low emissions electricity is expected to catalyse greater development of energy-intensive sectors like steel, chemicals and data centres.
Finland's electricity supply is expected to increase significantly in the future, driven by rapid renewable energy deployment and infrastructure investments. According to Fingrid’s forecast, both consumption and production of electricity will rise substantially as ongoing and planned renewable projects are realised. By 2030, renewable energy is projected to account for around half of the total production of 140 TWh, surpassing consumption by 8.5 TWh (Figure 4.15). However, this optimistic scenario hinges on the successful implementation of planned projects and grid enhancements.
Source: Fingrid.
In a welcome move, government support for expanding grid capacity and enhancing infrastructure has been reaffirmed in the Government Programme, with the 2025 Budget proposal allocating approximately EUR 2.22 billion to promote carbon neutrality and the green transition – an increase of EUR 147 million from 2024. This includes an additional EUR 94 million allocated under the Renewable Energy and Energy Efficiency package, specifically aimed at advancing projects in these areas. In its Main Grid Development Plan for 2024-2033, Fingrid has outlined extensive plans to enhance grid capacity through investments amounting to approximately EUR 4 billion over the next decade. These investments aim to strengthen both internal transmission capacity and cross-border connections, particularly with Sweden and Estonia, which will be essential for balancing renewable energy production and consumption. As part of this effort, Fingrid will prioritise critical upgrades to transmission lines in regions with the highest renewable energy potential, such as the north-to-south connections, ensuring that new industrial projects and renewable energy generation can proceed without delays (Box 4.1).
More investments in grid interconnectivity support the development of Finland’s growing renewable energy sector and help ensure energy security during peak periods. Although electricity prices are low, they are among the most volatile in Europe due to the intermittent nature of wind and solar energy. Reducing electricity price volatility is key to encouraging larger industrial low-emissions projects and fostering competitiveness. This necessitates further grid expansion and greater energy storage and dispatchable capacity. Finland could also benefit from enhanced interconnectivity with neighbouring countries to help stabilise energy supply and prices, provided that demand pressures in interconnected markets do not significantly raise domestic electricity prices.
Finland’s geographic position in Northern Europe allows for strong interconnectivity with other Nordic and EU countries, which helps to balance electricity supply and demand. Fingrid has been working to strengthen interconnections with Sweden and Estonia, ensuring stability during fluctuating renewable energy production (Figure 4.16). Ongoing development of cross-border capacity is crucial to sustain the increasing demand for electricity and foster international collaboration in industrial projects.
Source: Fingrid, Main grid development plan 2024-2033.
Smart grids can play a role in reducing the volatility of production and prices. Indeed, modernising the electricity grid, by integrating smart grid technologies and energy storage solutions is essential for enhancing the efficiency and reliability of electricity distribution. Smart grids will play a pivotal role in ensuring that renewable but intermittent energy sources like wind and solar power can be seamlessly integrated (Fingrid, 2023). These technologies use real-time data to optimise energy flow, prevent overloads and enhance the overall flexibility of the electricity system. For instance, smart grid technologies enable the grid to better manage the intermittent nature of renewables, ensuring stability even when renewable production fluctuates. These systems will be crucial for balancing increasing energy demand with sustainable energy sources as Finland advances towards a low-carbon economy.
Energy storage systems, including large-scale battery storage and pumped hydro storage, can also assist in balancing electricity supply and demand and reducing price volatility. These technologies store surplus energy generated during periods of low demand and release it when consumption peaks, addressing the intermittent nature of renewables. Research suggests that since the early 2020s, utility-scale battery energy storage systems grew significantly, with about 200 MWh currently in operation and an additional 400 GWh planned, alongside substantial expansion in thermal energy storage systems. This rapid development has been supported by investment aid and legislation removing barriers like the double taxation of stored electricity (Lieskoski et al., 2024). Several large-scale battery projects are currently in the planning stages, including collaborations with private firms, one of which involves installing solar energy storage systems in office buildings across Finland. By 2026, these systems will provide a combined battery capacity of 60 MWh, helping to stabilise electricity prices and supporting grid flexibility.
Planned and ongoing projects are accelerating the deployment of energy storage solutions. For example, one private firm’s new solar energy storage system, launched in 2024, aims to balance electricity price spikes and support Finland’s growing demand for flexible energy solutions. Another example is the planned pumped storage facility in Kemijärvi, intended to store excess energy during low-demand periods and release it when renewable energy production is insufficient, helping to stabilise the grid during peak consumption. To fully harness the potential of renewable energy, Finland should incentivise private sector investments in smart grid technologies and large-scale energy storage systems until the electricity market is re-designed, as discussed below, to better reward reliability investments. The government could consider further incentives for storage infrastructure projects, which would support the integration of renewables into the grid.
Finally, while renewable energy storage is expanding, there is still a need to provide essential backup capacity to stabilise the grid during periods of high demand. While storage and smart grids and the small-scale nuclear facilities discussed below are developing, under current technology, gas-fired power remains the cheapest lowest-emissions source of on-demand generation to complement electricity supply when renewable energy production is low. Finland is not dependent on Russia for natural gas and has diversified supply options with both an LNG terminal close to Norway, the largest western-aligned producer of gas in Europe, and pipeline gas access from Estonia. Maintaining a balanced approach that combines continued renewable energy expansion with gradual transitions in other sectors will be necessary to ensure reliable energy supplies. This will require policy certainty for investors in gas generation assets to avoid the risk that they prematurely shut down generation. Rapid shutdown of gas generation could drive the electricity price up in a marginal cost-based pricing system where gas is the marginal generator. Hence, in contrast to peat or coal, the government should avoid bans or other sharp policy changes in gas generation and favour a predictable and progressive phase out.
Renewable energy potential is enormous
Wind and solar power potential in Finland is impressive (Figure 4.17). Even if only a small share of this is realised due to environmental, financial and other constraints there will be massive expansion of renewable generation in the coming years. According to estimates of engineers at LUT University, the combined theoretical potential of wind and solar is nearly 200 times current production, 40 times Finland’s current generation and equivalent to around 109% of the EU’s current total electricity generation. Research shows that Finland has high potential for both solar and wind power, with a geographical divide – onshore wind power is more concentrated in the northern regions, while solar power is more viable in the southern and western areas.
Source: Lappeenranta-Lahti University of Technology (LUT).
With its scalability and cost-effectiveness, wind power is becoming a cornerstone of Finland's low-carbon energy mix, playing a crucial role in maintaining competitive electricity prices amidst rising industrial demand. Both onshore and offshore wind projects have rapidly advanced, supported by favourable wind conditions and significant investments. By 2030, Finland's installed wind power capacity is expected to reach approximately 68 TWh, with wind energy projected to account for nearly half of the country's electricity generation, making it one of the highest shares in the OECD.
Onshore wind projects, particularly in Northern Finland, have expanded rapidly due to the availability of land, cost advantages and favourable wind conditions. Meanwhile, offshore wind, though more costly to develop, benefits from stronger and more consistent wind speeds, offering relatively stable electricity generation. The Finnish government has taken steps to incentivise investment in offshore wind through reforms to permitting and land-use processes aimed at expediting project approvals. While Finland does not offer direct financial subsidies for offshore wind, these regulatory reforms are designed to reduce administrative barriers and attract both domestic and international investors, fostering the growth of offshore wind as a key component of Finland’s renewable energy strategy.
Clearer guidance on tax policies and regulations would further encourage investment in wind power. The government-led reform on the tax treatment of wind farms has created uncertainty for investors, potentially delaying some projects as municipalities and investors await clarity on applicable tax rates. Currently, municipalities set real estate tax rates for power plants, including wind farms, up to a legislated cap of 3.1%. However, ongoing discussions regarding real estate tax reform, which may alter the tax treatment of power plants, add further complexity to the situation. The government decided in September 2022 not to submit its March 2022 proposal to Parliament during this government’s term, creating a lack of clarity that may affect the viability of future wind projects. While concerns over regional equality have been raised, particularly in Eastern Finland, where wind power development is limited due to defence-related restrictions near the eastern border, maintaining the current system, where revenues are allocated directly to the respective municipalities hosting wind farms, is essential for preserving local support and incentivising further project expansion. Altering this system could undermine local acceptance, which is crucial for the continued growth of wind power. Regional equality concerns should be dealt with using other redistributive tools that carry less risk of undermining national growth and revenue. The government should move to resolve these issues, as planned in its legislative agenda for 2025, to unlock further investment in wind projects, accelerating Finland’s renewable energy transition. Providing long-term regulatory and tax certainty is vital to attract investors and ensure continued growth in the wind energy sector.
Wind power development in Northern Finland has increasingly sparked land-use conflicts, where the interests of local right holders and stakeholders, including reindeer herders (both indigenous Sámi people and others), the mining industry and the tourism sector, intersect with wind farm projects (Box 4.2). As discussed further below, effective consultation and collaboration with affected communities, establishing a clear framework that balances competing environmental, cultural and economic interests, while securing local support for projects can help ensure environmentally and socially sustainable wind power expansion. Introducing incentives for local communities, such as paying rentals for wind farms, along with transparent communication, can help address these challenges and foster greater acceptance of wind projects.
In Northern Finland, several wind power projects have faced opposition from local right holders, notably the Sámi reindeer herding communities, who argue that wind farms disrupt traditional grazing routes and the natural environment crucial to their livelihood. The situation in Kemijärvi, where a pumped storage power plant is planned, exemplifies the competing interests at play. Local fishermen have voiced concerns over potential environmental impacts, fearing that the power plant would pollute Kemijärvi's fishing waters and disrupt the ecosystem. The construction of the upper basin at Ailangantunturi would alter the landscape, affecting both the fishing industry and reindeer herding.
The municipality of Kemijärvi expects substantial tax revenues from the project but local residents remain divided. The project has triggered an environmental impact assessment, with various stakeholders, including the Lapland district of the Finnish Association for Nature Conservation, raising concerns over potential harm to water quality and the natural environment. Similar challenges have arisen in the Mömmövaara area, where energy companies are planning large wind power projects, sparking debates about balancing energy development with environmental preservation and local economic interests.
Prolonged geopolitical tensions with Russia have further complicated land-use decisions in Northern and Eastern Finland. While Finland's NATO membership, secured in April 2023, has brought some comfort to investors, increased military exercises and security concerns have influenced land allocation, particularly near the eastern border. These factors could delay wind power projects and raised questions about the region’s strategic importance and vulnerability to disruptions, making the planning and approval process for energy projects more complex.
While onshore wind remains the most cost-effective option, continued expansion onshore and exhaustion of the best onshore sites will eventually make offshore wind more attractive due to its ability to harness consistent wind speeds and at least lower social conflict issues. However, the development of offshore wind is hindered by high costs, a lengthy permitting process and policy uncertainties, including uncertainty regarding the property tax treatment of wind projects. To fully unlock offshore wind's potential, the government must enhance support through dedicated funding, public-private partnerships and streamlined regulatory processes. Long-term regulatory clarity, particularly concerning property tax treatment, will be essential for encouraging investment in offshore wind.
While Finland’s solar energy sector is currently smaller than wind power, it holds potential for helping the country meet its renewable energy goals. Solar power is expected to complement wind energy by providing additional electricity generation during daylight hours, particularly in the summer when solar radiation is strongest. Despite Finland’s northern latitude, solar power is becoming an increasingly viable option for renewable energy and Finland’s solar energy capacity is expected to increase substantially in the coming years (Fingrid, 2023). Advances in technology have improved the efficiency of solar panels, making solar energy attractive even in less sunny regions. Finland’s high latitude and angle of the sun mean that panels are often more efficiently placed on the sides of buildings rather than on the roof.
Solar installations in Finland are growing rapidly, supported by the rising demand for decentralised energy solutions and relatively faster permitting processes for solar power projects compared to wind power developments. One innovative project is exploring the potential of repurposing former peat bogs for solar installations. These areas, which contribute to carbon emissions when drained, could be transformed into green energy contributors, illustrating the potential of solar energy to enhance Finland’s renewable portfolio. Further incentives, including pilot projects assessing the environmental impact and economic viability of these installations, could accelerate the adoption of solar power. Additionally, innovative hybrid projects combining wind and solar power with battery storage, such as those being developed by private sector firms like Ilmatar Oy, could optimise energy output by offsetting the intermittency of both energy sources, helping Finland tap into its renewable potential more effectively and positioning solar energy as a key element of the country's energy transition strategy.
Nuclear energy has long been a cornerstone of Finland’s low-emissions and secure energy policy, and a key element of its strategy to achieve carbon neutrality by 2035, supplying a stable and reliable source of low-carbon electricity. As of 2024, nuclear power accounts for approximately 40% of Finland’s electricity generation. The two major nuclear power plants, Olkiluoto and Loviisa, have been providing a steady supply of baseload power to complement intermittent renewable energy sources like wind and solar.
The commissioning of the long-delayed Olkiluoto 3 reactor in 2023, one of the largest reactors in Europe, was a major milestone for Finland’s energy infrastructure. However, occasional maintenance requirements and technical delays have raised concerns about the capacity of Finland’s nuclear infrastructure to meet future electricity demands, particularly as the country increasingly relies on renewable energy sources. There are also concerns about ageing infrastructure, especially at the Soviet-designed Loviisa nuclear plant, suggesting that significant upgrades or replacements may be necessary in the coming decades to maintain reliability. All ageing power plants have valid operating licenses until 2038 (TVO’s Olkiluoto 1 and 2) and 2050 (Fortum’s Loviisa). TVO is already investing EUR 1 billion in prolonging the lifetime of the OL1 and OL2 to 2050 and possibly uprating power output by 80 MW per unit. In Loviisa significant invests are also taking place to enable usage of the plants until 2050. Modernising old facilities and resolving frequent maintenance challenges will be crucial to ensuring that Finland’s nuclear sector continues to provide the necessary baseload power for a low-carbon economy. These operational challenges underscore the complexity of managing large-scale nuclear facilities and ensuring consistent output to meet growing electricity needs.
Additionally, Finland is exploring the potential of Small Modular Reactors (SMRs) as an addition to its energy mix. While Finland’s energy policy prioritises renewable energy, the potential of SMRs has emerged as a flexible solution to meet future electricity and heating demand, particularly for relatively smaller-scale applications such as district heating. SMRs potentially offer several advantages, including safer and more flexible nuclear power production, with lower capital investment and shorter construction times compared to traditional large reactors. Finland is actively exploring partnerships with nuclear technology providers to assess the feasibility of integrating SMRs into its energy mix. These reactors could further support Finland’s long-term energy security, reduce fossil and biofuel usage in heating and help balance the electricity grid as renewable energy sources fluctuate. They should be subject to careful cost-benefit analysis, where the costs should encompass not only the expenses of constructing and operating the reactors but also implicit costs, such as those of nuclear waste storage and the eventual decommissioning of disused power plants.
A reliable electricity supply is key and requires adequate market design
An important pre-requisite for the green industrial transition is retaining a reliable electricity supply at reasonable prices in the face of a rising share of intermittent renewables. Supply reliability is key is because it is technically and economically infeasible for large electricity users such as data centres and hydrogen producers to be constantly shutting down and starting up to balance the electricity system. Indeed, reliability of supply is more important in electricity markets than others because demand is generally more inelastic and storage less available than in other markets (Cramton, 2017). Even with growing smart meters and grids, a significant share of household and services (e.g., hospitals, public transport) demand is inelastic. Expanding dispersed battery storage (e.g., in EVs and households connected to smart grids) as well as industrial scale battery storage will help but is unlikely to meet all the growing demand and supply balancing needs of an increasingly renewables-dominated system.
Investors need to face the right incentives to engage in long-term projects in a mix of more flexible (e.g., bio-combined heat and power, gas and hydro) and steadier (e.g., nuclear) generation. Currently, Finland’s electricity market is “energy only” with spot and forward markets. These are indeed the two crucial elements of an efficient market and the market has been successful in ensuring short-term efficiency, i.e., ensuring the lowest cost generation is used and capacity is not idle. However, the increasing importance of renewables as share of generation with their zero marginal cost means the market price is often very low (on average the second-lowest in Europe) and may not suffice to provide a return that would incentivise long-term investments in any kind of generation that has large, fixed costs, which is particularly the case in Finland that heavily relies on hydro and nuclear electricity. An important challenge is how to reduce wholesale electricity price volatility in an increasingly renewables-based electricity system.
Internationally, one mechanism to improve incentives to invest in reliability generation is scarcity pricing, for example administrative reserve shortage pricing used in Texas in the United States (Hogan, 2017). In this case the Independent System Operator (ISO), as part of its real-time demand-supply matching adjusts the market price to ensure it reflects demand not just for energy but for reserve generation that increases reliability. The reliability demand component is set by the ISO according to a desired safety margin relative to energy demand. An alternative is electricity capacity markets, variations of which have been inter alia employed in Spain, United Kingdom and in the Pennsylvania, New Jersey and Maryland electricity region of the United States (Creti and Fabra, 2003). Capacity markets come in many versions. One involves generators selling an obligation to supply during shortages to retailers that need to demonstrate a reserve margin. Another consists of a long-term contract for the purchase of a quantity of electricity at a fixed price.
Shortage-related spikes in the spot price result in temporarily high profits for reliability generators allowing them to recoup some of their investment costs. However, the main advantage of real-time scarcity pricing appears to be that it stimulates the development of the forward market and hedges for users (Papavasiliou, 2020). Scarcity pricing appears to have worked well in increasing reserve capacity in Texas and can help the ISO detect uncompetitive behaviour in shortage periods (Hogan, 2017). It is permitted by European regulation (European Parliament, 2019; Papavasiloi, 2020). Hence Finland should consider introduce it to counter unreliability of electricity supply.
Capacity markets can also play a complementary role to scarcity pricing, but design is crucial to make them efficient and they should be complementary to well-functioning spot and forward markets (Cramton, 2017). Lump-sum or other simple capacity payments to generators should be avoided due to the incentive for generators to adopt oligopolistic pricing tactics, i.e., restricting reserve capacity to drive the price up (Creti and Fabra, 2003). Nuclear energy will play a significant role in the future as a baseload power supply. This is especially since another main source of low emissions steadier supply, hydro, cannot be expanded much in the face of push-back from community and environment NGOs. The government should develop a capacity market and/or risk sharing mechanism for incentivising the maintenance and construction of new nuclear generation given its very long construction time and high construction costs.
4.4.3. Using low-emissions electricity to facilitate the decarbonisation of industry
At the core of the green industrial transition is eliminating fossil fuels from the economic production process via electrification. Finland’s cheap and plentiful low-emissions electricity and established expertise in industrial process sectors like forestry present many innovation opportunities across energy-intensive activities in manufacturing, services, transportation and construction (Box 4.3). In manufacturing, these include the use of renewable hydrogen to driving the decarbonisation of historically high-emitting industries including steel.
Finland’s forestry companies are exploring how to leverage forest resources to produce higher-value-added goods, such as bio-based textiles, lignin-based battery solutions and sustainable wood products and experimenting with alternatives to traditional peat use in energy and agriculture, such as developing reed canary grass as a bio-based material for insulation and bedding. UPM has made significant advancements in utilising existing process residues to produce renewable diesel and plastic solutions from wood-based biomass. This not only reduces reliance on fossil fuels but also offers a sustainable alternative for transportation and packaging. Stora Enso is focusing on bio-based materials and solutions, producing renewable alternatives to fossil-intensive products. For example, their sustainable wood fibres are used in packaging for food and consumer goods, replacing single-use plastics. Andritz Oy is developing innovative pulp and paper technologies, creating high-quality pulp with reduced environmental impact through energy-efficient processes.
Pulp and paper mills also provide an opportunity to integrate technical carbon sinks into production processes, capturing GHG emissions, although more research and investment is needed to reduce the costs of these technologies. Private firms, such as Andritz Oy, are actively working with these solutions. Once captured, these emissions can then be used by other industrial sectors. Hycamite, for example, uses an innovative methane splitting technology that produces solid carbon fibre and clean hydrogen without releasing CO₂ emissions. This process transforms methane into valuable carbon products like graphite, which can be used in batteries and other high-tech applications. The dual revenue streams from low-carbon hydrogen and high-value carbon products make this technology a promising contributor to Finland’s industrial decarbonisation efforts. However, the emissions reduction potential of this carbon storage technology is not fully recognised in Finland, which reduces the rewards to invest and scale up this technology.
Finland’s renewable energy resources, modern electricity grid and abundant natural resources give the country an edge in hydrogen production. Hydrogen projects, many of which are supported by public-private partnerships, aim to decarbonise industrial processes. Nordic Ren-Gas Oy exemplifies this, as the company focuses on renewable hydrogen and e-methane production for the hard to electrify heavy-duty transport and marine sectors (Box 4.4). However, these types of investments are being hindered by emissions accounting methods. For example, they require hourly correlations in electricity use for hydrogen production, i.e., hydrogen production must be matched with the availability of renewable energy on an hourly basis. This puts a lot of emphasis on ensuring the hydrogen production is genuinely low emissions all the time. It also ignores the intermittency of renewables, which would make averaging over a longer period such as daily or even monthly with offsets more technically feasible.
Power-to-X (P2X) projects are driving Finland’s green transition by using renewable electricity, such as wind power, to produce energy carriers like hydrogen and e-methane. Nordic Ren-Gas Oy is one of the front-runners in this effort, with six hydrogen projects aimed at decarbonising heavy road and marine transportation. The company generates hydrogen through electrolysis, captures CO₂ emissions from flue gases, and produces renewable e-methane via methanation reactors.
This e-methane is distributed to sectors like marine transport, reducing reliance on fossil fuels while leveraging existing infrastructure, such as combined heat and power plants, to lower costs and boost efficiency. The P2X process involves splitting water into hydrogen and oxygen using renewable electricity, then combining the hydrogen with captured CO₂ to produce e-methane. This method repurposes industrial CO₂ emissions and is highly energy-efficient, making it commercially viable for large-scale deployment.
The renewable e-methane produced by the company can reduce CO₂ emissions by up to 90% compared to traditional fossil fuels, depending on the electricity source used in the electrolysis process. By capturing CO₂from flue gases and reusing it in the methanation process, P2X technology contributes to a circular carbon economy, significantly lowering GHG emissions from hard-to-electrify- -and-therefore-decarbonise sectors like heavy road and marine transport. Renewable e-methane also offers a more sustainable and lower-emission alternative to conventional natural gas, providing an immediate solution to reducing the carbon footprint of transportation as renewable infrastructure scales up.
With an additional EUR 45 million in financing from the European Hydrogen Bank for its Lahti project, the company exemplifies efforts to advance Finland’s decarbonisation goals and the development of P2X technology within Europe’s green hydrogen market.
Source: Nordic Ren Gas Oy.
Finland’s Resolution on Hydrogen sets out the ambitious target to produce 10% of Europe’s renewable hydrogen by 2030 and aims to attract investment and create new export opportunities. Hydrogen production, supported by numerous projects and investments, is estimated as potentially generating revenues of EUR 41 to 69 billion (15 to 25% of GDP in 2023) by 2045 (H2 Cluster Finland, 2023). The roadmap includes expanding domestic hydrogen production, accelerating the growth of cleaning hydrogen-using industries (such as steel and chemicals), and promoting the export of hydrogen-related technologies and services.
Public-private collaboration and strategic partnerships, both within Finland and internationally, are key to achieving these goals. The country is actively partnering with international stakeholders, including industry leaders and foreign governments, to accelerate the development of hydrogen production capacity. These collaborations aim to enhance Finland’s expertise in hydrogen technologies and ensure the scalability of hydrogen infrastructure. In addition, the Finnish government has introduced a tax credit to incentivise the development of hydrogen infrastructure such as production facilities. These tax credits would help lower the barriers for private investment but should be designed in way that is as technology neutral as possible and accounts for the actual emissions reduction at a given facility rather than relying on rules of thumb. Such incentives by reducing the risks and signalling government regulatory frameworks will also remain favourable can also help overcome the ‘chicken and egg’ problem hindering downstream investments in hydrogen using industries such as green steel.
Hydrogen produced through renewable electricity is a key input in greening steel production, one of the largest contributors to GHG emissions in Finland and worldwide, with the metal industry responsible for 6.3% of CO2 emissions and 4.9% of Finland’s total gross GHG emissions in 2023. For example, SSAB, a major player in the steel industry, is working to replace coal-based blast furnaces with hydrogen-based technology to produce fossil-free steel. This effort is part of a wider collaboration between Finland and Sweden, where SSAB has already taken strides in green steel production. Finland’s green steel projects, supported by government incentives and private investment, will contribute to both climate goals and industrial competitiveness. However, scaling up green steel production faces a chicken-and-egg problem: finding a reliable and large buyer for example in the auto industry, and a reliable large-scale source of hydrogen. Regarding hydrogen, this would require producers to obtain financing for such an investment. As well as tax credits, there can be a role for government to provide at least seed capital to crowd in private financing for such an investment. Indeed, state owned Finnish Industry Investment, Tesi, provided seed funding for ultra-low CO2 steel manufacturer, Blastr, in mid-2024. Finding a reliable buyer for green steel from Finland is more complicated given the subsidisation of steel production in other countries, even if this is not their comparative advantage. As discussed below, greater funding from the EU may help address this problem.
In the services sector, Finland’s modern electricity grid infrastructure and cool climate helps attract investment in energy-intensive data centres, the demand for which is growing rapidly worldwide with the advent of Artificial Intelligence (AI). An example is the EUR 1 billion data centre established in Hamina. According to Google’s 2024 Environmental Report, Finland was among the best performers worldwide in minimising the emissions associated with Google’s data centre operations. However, there are reportedly concerns about transparency and the lack of confirmed operators of such centres, as seen in major planned projects like those in Lahti. To address this, policies enforcing transparency requirements, such as regular progress updates and disclosures, could enhance trust and accountability.
In waste management, Finland’s recycling company ZenRobotics is harnessing AI and robotics technology to recycle industrial and demolition waste. Its AI-driven systems automate the sorting of mixed waste, improving material recovery and reducing contamination. Machine learning is used to train computer algorithms to recognise categories of waste. Robots sort waste based on the AI algorithm up to four times faster than a typical human, without ever tiring. As well increasing sorting efficiency and reducing emissions the technology improves human health and safety.
Building on its expertise in shipbuilding including icebreakers, Finland is contributing to lowering emissions from maritime transport, including bulk carriers and roll-on roll-off ferries by harnessing a traditional power source, wind, through a new technology, Flettner rotor sails (large spinning columns that generate thrust when wind conditions are favourable) designed by Norsepower Oy. The extra thrust from the wind reduces the demand on fossil fuel powered engines, reducing emissions. However, the incentive to scale this technology up in Europe is blunted by the current policy regime’s accounting methods for measuring emissions reduction. In particular, accounting is input based, i.e., it is based on the installation of rotor sails rather than the percentage of emissions reduction. This method, which caps the reward factor for wind-assisted propulsion systems at 5% of the improvement of the annual average emissions intensity of energy used onboard, when the reduction potential is usually in the range of 3 to 15% and the best installations can reduce emissions by 35%, is too crude to accurately recognise the technology’s actual reduction of emissions (IMO, 2025).
Finnish construction is wood intensive by European standards (Sikkema et al., 2023). Indeed, Finland is a leader in the design and construction of low-carbon buildings made of engineered wood. The Finnish Environment Institute (Syke) has also pioneered measuring the resulting emissions reduction throughout the cycle of a building – the building’s “carbon handprint” – through carbon storage and reducing the use of carbon-intensive materials, such as concrete and steel. In Helsinki, large innovative engineered wood buildings include, for example, the landmark waterfront four storey wooden building housing a hotel and the headquarters of Stora Enso, a five-storey school building, and “Wood City” in the Jätkäsaari district, which includes wooden residential apartment buildings, an eight-storey wooden office building and a three-storey wooden construction carpark.
The government had an action plan for wood construction (2016-2023), administered by the Ministry of the Environment, which aimed to increase the use of wood in construction by strengthening expertise, education and research in the field, and by providing diverse information on wood construction to the public administration, construction industry and the public (Ministry of the Environment, 2025). The programme provided grants for 110 projects. Its success was measured by, inter alia, the number of apartments in wooden apartment buildings and the amount of wood construction by public developers and use of wood in construction (Ministry of Environment, 2020). The share of public developers' wooden frames in building permits grew slightly from 2015 to 2021, but since then the share of wooden frames decreased due to the rise in wood prices (Riihimaeki and Jaakkonenen, 2024). In 2024, some large wooden apartment building projects in Tampere and elsewhere were converted to concrete construction, reportedly due to developer bankruptcy, cheaper construction costs, and a shortage of developers with knowledge of wooden building techniques.
The ETS2, which includes buildings, may help lower the effective cost of wooden construction vis-à-vis carbon-intensive standard methods like concrete. Finland is also advancing its efforts to mitigate the whole-life carbon emissions of residential dwellings. Building on a comprehensive roadmap developed in 2017, the Ministry of the Environment has announced a new decree (Ministry of Environment, 2024a) to mandate climate reports and lists of construction products for new buildings. Expected to come into force on January 1, 2026, this decree aims to harmonise low-carbon assessments by requiring project developers to evaluate the carbon footprint across a building's life cycle and ensure it meets forthcoming limit values during the final inspection phase (OECD, 2025).
4.4.4. Ensuring skills supply for the green transition
The green transition depends critically on sufficient human capital to meet the demands of emerging industries. Recent work by the OECD’s Global Forum on Productivity shows that as industries shift to low-carbon technologies and sustainable practices, demand for skilled labour continues to rise. The demand for skilled labour is already strong in Finland (Filippucci et al., 2025), particularly in sectors like clean energy, green construction and advanced manufacturing. The transition is expected to create new opportunities for employment but also presents challenges related to skilling and re-skilling workers and managing structural shifts in the labour market. Additionally, this transition could potentially exacerbate regional disparities, particularly in areas reliant on emission-intensive industries, which may face job losses or require significant investments in upskilling and infrastructure to adapt.
Green-driven jobs generally require higher skill levels than both emission-intensive and other occupations, but workers in green-driven sectors tend to participate less in training than those in other fields (OECD, 2024a). This highlights the importance of targeted training initiatives to address skill gaps and facilitate job transitions. The incentive to train in these areas is high. Research shows that jobs in green sectors are well-paid in Finland (OECD, 2024a). Although there is no national framework, Finnish higher education institutions are trying to align their curricula with the skills required in green industries, offering programmes focused on renewable technologies, environmental engineering and sustainable business practices. Upskilling initiatives, such as vocational training programmes and partnerships between industry and education providers, are being implemented to start filling skill gaps and ensure that the workforce is better equipped to drive innovation in the green economy. However, expanding places in green transition relevant education faces severe competition for resources from other disciplines as Finland’s higher education system is overall not meeting demand for places. Reforms to increase the total number of places available will be crucial to the green transition and wider economic performance (Chapter 2).
However, further coordination between the education system and industry will be essential to closing skill gaps and ensuring that Finland's workforce is prepared for future demands. A recent collaboration in Espoo and Western Uusimaa illustrates a practical approach to meeting the growing need for data centre expertise. Omnia and Luksia, the Joint Authority for Education in Espoo and Western Uusimaa, will soon launch a training programme for Microsoft data centre experts, to equip students with theoretical and practical skills, such as cloud services and hardware maintenance, effectively aligning education with industry requirements. Additionally, using skills assessment and anticipation (SAA) tools to update curricula and guide training programmes in green sectors could be useful to better align education with emerging industry needs (OECD, 2023b).
In addition to upskilling its domestic workforce, Finland is actively seeking to attract and retain high-skilled foreign workers to address the growing demand for skilled labour in green sectors. The increasing tendency among young people to migrate to urban areas (Adams and Komu, 2022) could pose additional challenges for firms recruiting workers for green industrial sites, which like elsewhere are often located in rural regions (OECD, 2024a). This trend further underscores the necessity of attracting foreign talent. The government has introduced a range of measures aimed at streamlining immigration processes for highly skilled workers, particularly in industries related to renewable energy, digital infrastructure and environmental technologies. Finland’s relatively high quality of life and supportive work environment make it an attractive destination for foreign talent. However, further efforts to integrate foreign workers into the local workforce, including language training and support for professional development, will be crucial for maintaining Finland's competitiveness in the global race for green talent (Chapter 3).
4.4.5. Scaling up green investment financing
Financing difficulties remain one of the main barriers to scaling up green innovation into market products in Finland. Indeed, recent research shows that the innovative start-ups are far less leveraged in Finland than in European peer countries (IMF, 2025). This gap may reflect both a lower appetite for risk as well as barriers to financing, which may limit the growth potential of these firms.
On the demand for credit side, Finland’s insolvency framework is relatively favourable within the OECD, well equipped with preventive measures such as an early warning system. However, there is still room for improvement, particularly in restructuring tools. For example, while creditors benefit from a degree of protection during restructuring, the length of stay on assets in restructuring is indefinite, which can delay proceedings and create uncertainty. Simplifying and accelerating restructuring processes will support better credit risk management and enhance dynamism.
While Finland has made substantial progress in raising public and private funding for renewable energy projects and sustainable infrastructure, there are still challenges in mobilising enough capital to meet the growing demand for green technologies. There is a role for the government in fostering the deepening capital markets and improving access to private capital for Small and Medium-sized Enterprises (SMEs), which is essential for bringing new innovations to the markets.
The government plays a critical role as a catalyst in this process by providing seed funding and co-financing mechanisms, such as proof of concept (PoC) funding by the Research Council of Finland and ecosystem initiatives led by Business Finland, which help bridge the gap between research and commercialisation. These instruments encourage further participation from the private sector. Even a relatively small amount of funding can help crowd in substantial private capital as it signals the government favours this type of investment. It is important though that there always be a private sector partner, especially for scaling up innovation to the market. This is not only to reduce risk for the State but also to subject the project to private sector investment analysis and allow the project to benefit from private sector expertise in scaling up innovation.
The government is taking several measures to improve the efficiency of state support and catalyse more private Finnish and foreign investment. This includes increasing the investment capacity of the state-owned venture capital company Tesi (Finnish Industry Investment). Appropriately, Tesi is also seeking new financing models with private investors to facilitate financing of, e.g., green larger industrial scale investments. Other public venture capital companies (Business Finland Venture Capital, Ilmastorahasto/Climate Fund and Oppiva Invest) will be merged with Tesi during the first half of 2025 to streamline public venture capital activities. The government is also allocating equity funding for projects in the mining and battery industry using a special-purpose company Suomen Malmijalostus (Finnish Minerals Group).
Expanding government guarantees can also help de-risk green investments thereby crowding in private sector funding. This can be done by expanding the role of institutions like Finnvera, Finland’s state-owned financing company, which could help to provide more guarantees for green investments. These guarantees would reduce the perceived risks for private investors and encourage long-term funding for renewable energy, sustainable infrastructure and green technologies.
To finance the green transition, Finland also needs a more dynamic equity funding ladder, from venture capital and private equity through to public listing on the alternate market, Nasdaq Helsinki, to the main regulated market of the Helsinki Stock Exchange. Parts of this ladder such as venture capital appear to be around average (Figure 4.18) and private equity remains under-exploited (IMF, 2025) and recent IPO activity has been far less than in Sweden (PWC, 2024).
Volumes as a share of GDP
Source: OECD, Entrepreneurship Finance Database.
Neighbouring Sweden had more IPOs, many small, than France, Germany, the Netherlands and Spain combined in the decade to March 2024, reflecting a very strong overall capital markets eco-system, with numerous active large investors including pension funds, as well as wide household ownership of shares, supported by a high level of financial education and novel savings instruments (Asgari, 2024).
The number of listed stocks as a percentage of all larger firms and the value of household equity assets as a share of total financial assets suggest that Finland’s capital markets eco-system is relatively strong compared to other EU countries (Figure 4.19). However, Sweden remains ahead of Finland and other EU countries on nearly every indicator of capital markets depth (Asgari, 2024). Finland’s policy framework has improved over time, including, importantly, developing the alternate First North market with more lenient listing rules than the main market, which is governed by rules implementing stricter EU wide regulation (Tuominen, 2023). Nevertheless, there is room to improve the general eco-system and policies for specific stages of the equity pipeline.
Shares and other equity, as a share of total financial assets, 2022
Source: OECD Household financial assets indicator.
Access to venture capital and private equity is a key part of the ladder, especially in the green transition where the commercialisation skills that venture capitalists bring along with funding are key due to the novelty and uncertainty surrounding low-emissions technologies. Finland could enhance its support for venture capital investment in green start-ups and SMEs by establishing dedicated green venture capital funds or offering tax incentives to venture capitalists focused on clean technologies. Sweden’s experience with venture capital in green industries may also provide a useful model that Finland could adapt and scale. Sweden’s venture capital market has become the largest in the Nordic region, driven by a combination of strong government support, an entrepreneurial business culture and significant international investor interest. Government-backed initiatives such as Almi Invest and Industrifonden play a pivotal role, funding early-stage companies and co-investing with business angels and institutional investors. This model has enabled Sweden to produce 37 unicorns, rank ninth globally, and attract substantial impact investing, including landmark projects like Stegra (formerly known as H2 Green Steel).
Another important source of capital is foreign direct investment (FDI) not least because it can bring know-how and foreign market access. This will be crucial for expanding the country’s role in the global green economy as FDI can open new markets in the investors’ home market or in other countries where they have a presence. Finland is actively participating as both an investor and a receiver of green capital (OECD, 2024b). Finland’s stable political environment, modern infrastructure and access to renewable energy make it an attractive destination for green investments. Finland’s barriers to FDI are very low. However, more proactive measures are needed to sell Finland’s comparative advantage in green industries and make investments attractive. This could include targeted investment promotion campaigns and facilitating faster permit processes for large-scale green projects, such as wind farms and hydrogen farms.
Finland’s efforts to advance green innovation have been bolstered the EU Recovery and Resilience Facility (RRF), particularly in the areas of clean energy and digitalisation. Significant funding has been directed towards enhancing green infrastructure, such as hydrogen and renewable energy projects. For example, according to the Ministry of Economic Affairs and Employment, the government granted EUR 72.6 million in investment aid to 13 clean energy projects in 2024. This includes EUR 44.5 million for 12 projects under the national Recovery and Resilience Plan (RRP), and an additional EUR 28 million for a large demonstration project by Nordic Ren-Gas Oy, focused on renewable hydrogen methanation in Lahti (which also benefited from a EUR 45 million grant provided in May 2024 by the European Hydrogen Bank). The supported investments aim to reduce carbon dioxide emissions by more than 170 000 tonnes per year and are expected to create 416 temporary jobs during construction, with 23 new permanent jobs generated once operational. EUR 31.1 million was allocated to seven new energy technology projects, including biogas and solar energy production, while EUR 13.4 million was directed to five energy infrastructure and electrification projects.
A widely expressed concern in the Finnish private sector is that realising Finland’s potential in the green transition is being hampered by large subsidies programmes in other countries that Finland cannot emulate. Indeed, recent research suggests that there is insufficient alignment of industrial policies with comparative advantage across the EU (OECD, forthcoming; IMF, 2024). Finland and Sweden’s (OECD, 2023c) strong comparative advantage in the green industrial transition, notably cheap and plentiful low-emissions electricity and the potential to produce key inputs such as green steel for EU-wide value chains provide a case for increasing EU support. To help level the industrial policy playing field, Finland in concert with other Nordic countries should put even more effort into attracting financing for the transition from EU innovation funds and other funding sources. This is not only in the interest of Finland but will also increase the cost competitiveness of car and other manufacturing in Germany and central Europe and the entire EU.
Despite mitigation efforts, higher concentrations of long-lived GHG gases in the atmosphere mean that higher global temperatures are now inevitable. Finland, like all countries, faces the challenge of adapting to the consequences of a hotter world. The country’s specific challenges are shaped by its unique combination of geography, latitude, flora, fauna, the way its cities are built and importantly the specific way climate change is affecting weather patterns in high northern latitudes (Figure 4.20). Thermal summer (in Finland the period of the year when mean temperature is above 10°C), spring and autumn are becoming longer and warmer (Ruosteenoja et al., 2023). During May to August 2024 Finland had the highest number of “hot days”, i.e., over 25°C on record since records began in 1961. Nationwide, the average temperature in 2024 was 1.1 degrees warmer than the average from 1991-2020 and in northern Lapland it was 1.7 degrees warmer than average (Finnish Meteorological Institute, 2024a).
Note: The figure shows inverted country rankings in each category, so that in e.g., coastal flooding, the Netherlands is the most exposed of the 35 countries for which there are data. The non-Nordic country included is the country with the most exposure in the category. For cropland exposure to extreme precipitation, there is no data available for Sweden.
Source: Maes et al. (2022).
The thermal winter (period where the mean temperature is below 0°C) is shortening, especially in south-western Finland. As a result, the snow cover period in winter has become shorter with later start dates and earlier end dates. The snow season has also become more fragmented meaning that snow falls and then melts several times during the winter, causing difficulties for some native plants and animals including reindeer as discussed below. Earlier snowmelt may also lead to drier soil conditions later in the spring (Blöschl et al., 2017), affecting crop and pasture growth.
Wintertime precipitation has increased, mainly as rainfall, especially in southern Finland (Luomaranta et al., 2019), which has increased wintertime flooding. However, unlike lower latitudes, where storms and cyclones are becoming more severe and frequently cause large property damage and loss of life, there has been no increase in Finland in thunderstorms in summer or windstorms (cyclones that cause strong, long-lasting winds) or associated windspeeds in autumn and winter (Laurila et al., 2021). Even so, the damage caused by windstorms, especially in forests, is likely to increase due to the shortening soil frost period.
These specific climate-related weather and environmental changes combined with Finland’s mix of flora, fauna, landscape and high latitude shape its adaptation challenges (Figure 4.20). Finland’s exposure to climate-related extreme weather natural hazards is considered negligible (cropland exposure drought) to low (heat stress) in many categories. OECD research shows Finland’s main exposures are to river and coastal flooding in urban areas, as well as extreme precipitation on cropland (Maes et al., 2022). However, negative impacts, e.g., crop losses and heat-related mortality occur at lower levels of hazard intensity.
Wildfire risk to forests is lowered by a century-long history of development of efficient wood supply for the pulp and paper industry. A comprehensive forest road network, typically small forest holdings, and a vast number of water bodies provide natural fire breaks. Aerial interception, a strong network of voluntary fire brigades and strong extinguishing capacity protect forests. In addition, risk management and adaptation measures to flooding due to snow-melt run-offs have been introduced. However, climate change related trends in precipitation and snow patterns, and temperature increase still present significant adaptation challenges to nature and livelihoods dependent on natural resources, e.g., reindeer herding, which is integral to the Sámi indigenous livelihoods (Box 4.5), and other nature-based livelihoods, as well as forestry and tourism. This is especially the case in the Arctic as temperatures are rising four times faster on average globally there (Rantanen et al., 2022). Sweden has experienced wildfires in recent times and Finland will need to remain vigilant and reinforce resilience against wildfire across the country as climate change advances. The West and South of Finland also face challenges, including more intense rainfall and therefore higher flooding risks (Dyrrdal et al., 2023). Climate in protected areas of Finland has already changed significantly between 1960 and 2020 (Aalto et al., 2023).
The Sámi are the Indigenous People who inhabit northern parts of Finland, Norway, Sweden and Russia. There are about 10 000 Sámi living in Finland. They are represented nationally by the democratically elected member of the Sámi Parliament headed by a president. Traditional Sámi livelihoods (hunting, gathering, fishing, handicraft, reindeer herding and their modern forms of practice) are particularly exposed to climate change due to the location of their homeland in the Finnish Arctic, where temperatures are rising much faster than the global average. Higher temperatures have made winter grazing for reindeer difficult by creating ice layers in the snow due to more frequent temperature fluctuations. Forestry, industry such as mining, and expansion of renewable electricity projects also impinge on the Sámi way of life, breaking up reindeer herding areas and reducing biodiversity. The Sámi often oppose the expansion of these activities in their homeland. They see high-quality nature and cultural tourism as a better way to assure the livelihoods of the Sámi, protect the environment and mitigate climate change, as well as maintain a strong presence of people in remote areas of northern Finland close to Russia, thereby contributing to national security.
4.5.1. Pushing further ahead on adaptation
Finland in 2005 was the first OECD country to develop a national adaptation strategy and has put in place an advanced and comprehensive national policy framework in this area that also considers transboundary impacts including on supply chains. It is part of the overall climate policy framework set out in the Climate Act 2022. The current National Adaptation Plan to 2030 was adopted in late 2022. Adaptation is integrated into the usual planning and official duties of the administration through several national administration branch-specific plans (e.g., Ministry of Agriculture and Forestry) and sector-specific regulation as well as adaptation plans at regional and municipal level. Planning and policy decisions related to climate are also supported by the Finnish Climate Change Panel composed of scientists and experts that provide scientifically-based advice and recommendations to policymakers.
There is a well-developed monitoring and evaluation process for the adaptation plan (Leitner, 2021) and it continues to improve. Evaluations of the previous National Adaptation Plan (NAP 2022) found that adaptation awareness has risen and that larger cities with over 50 000 inhabitants incorporate adaptation measures in planning and are better prepared for extreme conditions. There is also more information available, for example the flood centre (vesi.fi) to assist adaptation (Hildén et al., 2022). Nevertheless, in 2023 only 24% of municipalities had adaptation objectives. There is a need to build further local adaptation expertise, so that adaptation action is more permanently embedded in planning decisions (Hildén et al., 2022). Indeed, a key part of effective adaptation is quantifying local climate risks (Gamper et al., 2024) and while there is a lot of general climate data available, local, sector-specific information and expertise about climate risks is still limited (Hildén et al., 2022). There is also a need to clarify for the private sector which part of the administration is responsible for adaptation by sector and to increase the set of concrete adaptation goals (Ministry of Agriculture and Forestry, 2020).
Up-to-date adaptation indicators are available but their use in monitoring and evaluation is patchy. A key action of the current plan (NAP 2023-2030) is to set up and implement a national monitoring system for climate change adaptation by 2026 when the plan will have its mid-term review. Given the tight fiscal situation, resources remain a constraint on implementing the plan and obtaining EU funding through for example the EU LIFE, the EU’s funding programme for the environment and climate action will be crucial to advancing measures that are not covered by the usual responsibilities of the national, regional and municipal authorities. The section below examines the adaptation challenges for the natural and urban environments.
4.5.2. Protecting the natural environment
The larger part of Finland’s adaptation challenge lies in the natural environment domain. Reversing biodiversity loss and helping nature to recover are tightly bound with climate adaptation and mitigation challenges. Marine and terrestrial ecosystems are natural carbon sinks and investing in nature can also help protect people from floods, drought, storms and other climate-related hazards (OECD, 2021c). Climate change is the single fastest growing threat to biodiversity (OECD, 2024c). The past and future of Finland are particularly tied to biodiversity given the importance of forests to the economy and society. Indeed, biodiversity is directly linked to the wellbeing and livelihoods of the Finnish people and traditional livelihoods of the Sámi people who both have a close relationship with nature and enjoy many nature-related recreational and economic activities.
The sustainability of activities such as tourism depends on maintaining in the face of climate change the natural beauty, flora and fauna and environmental quality (e.g., clean water) that travellers come to Finland to appreciate. Croplands are amongst the most exposed to extreme precipitation in the OECD. However, private insurance for crop damage owing to weather events is limited. There is no public insurance since the end of the national scheme in 2016 and no public subsidy for crop insurance premiums. The forestry industry relies on ensuring tree species and forest ecosystems are adapted to warmer, wetter weather and new pests, such as bark beetle, which risk becoming established with the barrier of extreme cold declining. In a sign of things to potentially come, mountain birch trees in the Arctic are already threatened due to a warming climate enhancing the overwintering ability of two main defoliator insect species for mountain birch, the autumnal and winter moths, combined with the overgrazing of birch saplings by reindeer (Rieksta et al., 2020).
In Finland, as in other countries, biodiversity is at risk from land-use changes. The main drivers of habitat and biodiversity loss are forestry activities, ditching of peatlands, field clearing for agriculture, mining, construction and urban sprawl (Kontula et al., 2019; OECD, 2021a). Around 12% of the animal and plant species that have been assessed in the International Union for Conservation of Nature’s red-list process that measures species extinction status are considered threatened (Hyvärinen et al., 2019), with around 34% of bird and moss species classified as threatened (Figure 4.21). The Red-list habitat assessment of 388 habitat types found around half are considered as threatened, with a higher share (59%) in the north than in the south (32%) (Kontula et al., 2019).
Climate change is accelerating these land-use pressures on nature globally (OECD, 2021a). This is especially the case in the Arctic, where the rapidity of climate change makes it even more challenging for nature to cope. Changing climatic conditions are affecting reindeer health and grazing environments (Rasmus et al., 2023). As snow arrives later in the season, lichen – the main winter food of reindeer – may freeze before it is covered by the protective layer of snow making it less nourishing or even cause the occurrence of mycotoxins in reindeer winter pastures (Kumpula et al., 2024). The rain on snow and periods of melting and refreezing means that there are hard ice layers that prevent reindeer from breaking through to feed on lichen below. This has led to starvation and the Sámi and other reindeer herders have in recent years had to feed them with crops. Warmer temperatures also mean the snow is wetter, making it harder for reindeer to escape predators (Åhman et al., 2022).
Threatened species as a share of known species, 2019 or latest available year
Source: OECD Green Growth database.
As the climate changes, habitats suitable for species shift and many species follow this shift, resulting in a northward or north-eastward shift in species distribution. However, for species adapted to the Arctic conditions of Lapland the situation is even more precarious as they are unable to move further north. In northern Finland, the most heavily affected habitat types are those that occur in the coldest areas, such as snow bed vegetation and palsa (peat mound) mires for which the suitable climate space is projected to disappear leading to the loss of these habitats.
Land use and climate change combined can be very challenging for species in peatlands and forests (Heikkinen et al., 2021). For example, as noted above logging on peatlands, predominantly in the north, rather than mineral soils, is associated with higher leaching of nitrogen, phosphorus and organic carbon that causes eutrophication of water bodies. Climate change will exacerbate this by causing greater rainfall and more leaching of nutrients and longer warmer periods that increase the risk of algal blooms.
Halting and reversing biodiversity loss will be challenging especially in the face of fast-growing land-use demands and warmer temperatures. Finland’s main targets for biodiversity were set in the National Biodiversity Strategy and Action Plan (NBSAP), which targeted the halt of biodiversity loss by 2020. The assessment of the previous 2012-20 NBSAP found that the mainstreaming of biodiversity into policymaking frameworks had progressed well but that actions were not effective enough to halt the loss of biodiversity and meet the target (Auvinen et al., 2020).
This seems to be because, as elsewhere, despite environmental considerations being increasingly included in policy frameworks, when they appear to conflict with economic development, the two goals are often treated as mutually exclusive. This appears to be the case, for example in the government’s draft decision to adopt a narrow definition of old forests for protection under the EU Biodiversity Strategy obligations but also in the refusal of the State-owned forests enterprise, Metsähallitus, to publish research into the biodiversity consequences of wind turbines.
The process to prepare the updated NBSAP, following the agreement of the CBD Kunming-Montreal Global Biodiversity Framework in 2022, is underway. The draft NBSAP for 2025-30 seeks to halt biodiversity loss by 2030. Most actions to meet that objective have still not been initiated. Experience shows legislating climate mitigation goals has created the pressure to act. Finland should enshrine biodiversity goals in legislation to put biodiversity and climate adaptation and mitigation on a level footing with economic development and other policy objectives and provide appropriate indicators against which progress can be monitored. This would help create a genuine joint planning process and acknowledge the goals’ fundamental importance to Finland’s future adaptation and help establish policy certainty. It would also allow reconciling forestry industry objectives with other uses of natural resources, such as recreation or reindeer herding, for instance. These biodiversity goals should be accompanied by a set of specific and costed actions.
This will also help the NBSAP meet the EU restoration law obligations that came into force in August 2024 as part of the EU biodiversity strategy. Finland has two years to design a plan to meet the law’s obligation to restore 20% of the EU’s land and sea areas as close as possible to their original state. In Finland this will involve further work to protect forests, wetlands and waterways. The law is controversial in Finland in part due to concerns about costs of implementation. The Ministry of the Environment has estimated meeting these obligations would cost between EUR 750 and 780 million per annum but around EUR 570 million of the necessary public spending is already occurring (Ministry of Environment, 2024b). Denmark’s cross-party green tripartite agreement (Ministry of Green Tripartite, 2024) on restoring forest land and coastal waters while meeting agricultural production goals suggests a way forward for complying with the EU restoration law obligations in Finland. Furthermore, as discussed below, nature markets could play an important role in generating private sector funding for these initiatives.
Policy to mitigate adverse biodiversity impacts can be classified into a hierarchy: avoid, minimise, restore and offset. An important tool for avoiding biodiversity loss is protecting land from economic exploitation purposes entirely, as is frequently done Finland. The share of Finland’s terrestrial area that is strictly protected (strict nature reserve, wilderness, or national park) is 9.5%, the 7th highest in the OECD (Figure 4.22). Protected areas have contributed to a threefold increase in protected forests since 1970s and approximately 13% of forestland is protected. As discussed above METSO is one of the key successful policy programmes for increasing protected forests and meeting biodiversity goals. The Ministry of Environment also runs the Helmi programme introduced in 2021 for restoring nature (Vainchtein and Haugh, 2025).
Share of protected land (strict nature reserve, wilderness area and national park)
Source: OECD, Protected Areas (database).
Ensuring biodiversity is not further compromised by land-use and climate change requires balancing diverse and sometimes competing local, municipal, national and international stakeholder and indigenous right holder interests. Finland’s Arctic area, a major part of its northernmost region, Lapland, is the epicentre of this challenge, where biodiversity is under the most pressure from climate change, and where there are multiple and increasing land-use claims arising from national green industrial transition and GHG emissions reductions goals. It is also the homeland of the Sámi people and traditional livelihoods such as reindeer herding, and Finnish farmers, forest owners and reindeer herders, and is a rapidly growing tourist destination. Its strategic importance for defence has increased and military operations are rising following Finland becoming a frontline member state of NATO in 2023. The task of protecting the Arctic environment is further complicated by the end of Arctic environmental and scientific cooperation with Russia due to its illegal war of aggression against Ukraine.
Where another policy objective such as increasing renewable energy means land-use change is inevitable, the effects on biodiversity can be minimised indirectly. Some activities such as mining may be difficult to shift due to the geographical concentration of mineral resources. Some imperfect options are then to not mine, mine in another country where the biodiversity loss would be lower or require offsets instead. To minimise or offset biodiversity losses requires careful evidence-based planning where environmental, social and economic sustainability are joint objectives (OECD, 2024c). This holistic planning process is critical to balancing different stakeholder and right holder interests, achieving decisions considered just by society, and maintaining vibrant biodiversity, achieving climate and economic development goals. The Regional Council of Lapland and the Arctic Centre at the University of Lapland in Rovaniemi, capital of Lapland, have large interdisciplinary projects that aim to support this comprehensive planning process. They include the Regional Council’s New North project (2020-23) that aimed inter alia to develop a negotiation tool to take account of different perspectives and the Arctic Centre’s Rebound project (2023-29) seeking to foster policy and planning decisions that are environmentally and socially sustainable and just.
The New North and Rebound projects examine effects of economic development in the Arctic at a local community level, where they are strongest. Applying expert and practitioner knowledge of the Arctic natural environment and using data from sources including local and regional statistics and company reports they find: many economic activities in the Arctic put too little weight on biodiversity; macroeconomic indicators such as the Human Development Index do not always measure local welfare well; and compensation mechanisms (e.g., payments to forest owners who lose forestry income due to wind turbine construction and for preserving nature) are not always considered sufficient by the recipients. They also generate a matrix of activity (e.g., forestry, tourism, reindeer herding) trade-offs and synergies (Zivokinovic et al., 2024). The interests of some of these stakeholders and nature may align. For example, the Sámi goal to preserve the environment in their homeland in Finland’s northernmost areas and create high-value tourism activities aligns with broader tourism sector and biodiversity interests. However, there is also potential for conflict. Reindeer herding activities can conflict with farming due to crop damage by roaming reindeer and harm biodiversity due to reindeer overgrazing of tree species (Forbes, 2020). Forestry and renewable energy projects may conflict with reindeer herding due to associated tree logging and roads breaking up roaming lands of reindeer. Mining activities can conflict with Sámi interests and rights as Indigenous People, the tourism sector and harm biodiversity due to pollution.
In 2023, the government also appointed a Sámi Climate Council, for a four-year term. It is composed of 12 members representing different fields (meteorology, ecology, environmental economics and Sámi traditional knowledge including field observations). The mission of the Council is to develop a knowledge base to support climate policy preparation from the perspective of promoting the Sámi culture. Landowner or custodian preferences can play an important role in finding a just and efficient solution. Some landowners (e.g., local municipalities) need revenue to meet infrastructure demands related to development and may regard rentals paid by wind turbine owners as fair compensation, while others such as the Sámi would rather forgo these revenues to protect nature and their traditional way of life.
The Arctic Centre and Sámi Climate Council work provides a strong base for better planning, but the institutional planning framework needs strengthening. Local and national planners should have the necessary resources to make evidence-based land zoning decisions in the Arctic. Following the government’s decision to disband the Arctic Council to the Prime Minister, the Arctic Centre of the University of Lapland and the Sámi Climate Council are the only organisations in Finland with a comprehensive approach to analysing the Arctic’s cultural, environmental, economic and social needs. Their work would be usefully complemented by assigning a national policy agency or body with the task of championing their work in the national and local Arctic policymaking process. An alternative would be to fund the Arctic Centre and Council to provide an expert advisory group service to central government planning and local governments.
In the case of land-use planning in the Arctic, five expert planners in the planning department of the Regional Council of Lapland are responsible for regional land-use planning in all of Lapland, an area of 100 000 km (30% of Finland’s territory). Their task is rapidly becoming more challenging as the number of complex large-scale energy, industrial and mining development proposals and foreign tourist numbers grows. While the municipality does receive analytical assistance from central government, there is a risk that the existing support level is overtaken by the speed of change in the north associated with the government’s own climate and development goals and tourism market developments. Data provided by the tourism promotion agency Visit Rovaniemi shows total foreigner overnight stays in Lapland grew 22% in 2023 and accounted for 30% of total foreigner overnights stays in Finland in 2023, up from around 20% pre-pandemic. To this end, the government should increase local planning resources for the Arctic and re-prioritise existing government data and analytical support resources more towards the Arctic, where development and adaptation challenges are of national significance.
One of the major new land-use change challenges in the Arctic relates to the rapid expansion of renewable power infrastructure, which could affect biodiversity through higher species mortality (e.g., from collision or electrocution); habitat loss and degradation (e.g., due to large-scale forest clearing for overhead electricity transmission lines or wind turbines (Gaultier et al., 2023); or habitat fragmentation and hindering species movement (OECD, 2024c). It is already leading to the clashing of stakeholder interests in the Arctic (Box 4.2). The type of electricity generation technologies and where they are deployed have significant implications for biodiversity, making it important to consider biodiversity early in the planning process to reduce the risks to nature posed by these projects (OECD, 2024c).
Including biodiversity data in energy planning models can serve to identify renewable electricity projects that balance cost, carbon emissions and biodiversity protection (OECD, 2024c). For example, zoning land for renewable energy taking biodiversity into account can steer renewable electricity projects away from areas where they pose high risk to biodiversity (e.g., migratory routes), towards low-risk areas. In this regard, it is important to continue the publication of studies of the effects of wind power on bats as well as birds, both onshore and offshore, as they provide data multiple objectives modelling exercise needs. An example of low-risk siting of renewables is to optimise the use of rooftops and other existing infrastructure for solar panels. Another strategy is to use converted lands such as brownfields and abandoned agricultural areas.
As with climate change mitigation, regulation e.g., requirements for environmental impact assessments, monitoring and data-sharing can play a role in meeting biodiversity goals (OECD, 2024c). Direct limits on land use can also reduce biodiversity losses. Regulatory limits or best practice requirements on the operation of heavy machinery can be especially important for reducing biodiversity loss from large-scale industrial activities such as logging or mining.
Beyond regulation, there is a need to increase incentives for biodiversity-positive actions, which can also contribute to climate adaptation. Economic incentives include taxes, fees, tradable permits, payments for ecosystem services and biodiversity offsets and credits (OECD, 2024e). Biodiversity offsetting is used in several OECD countries and are measurable conservation outcomes that result from actions designed to compensate for significant, residual biodiversity loss that arises through development projects (OECD, 2016). Finland introduced a voluntary biodiversity offset system in the Nature Conservation Act 2023 and the Ministry of the Environment decree on Voluntary Ecological Compensation. Offsetting is viewed in Finland as useful for business and conservation although establishing a common stakeholder view of offsetting will be needed to make the system work effectively (Lehtiniemi et al., 2023). Expanding incentives beyond voluntary offsets could further mobilise private investment in biodiversity to complement successful but fiscally constrained biodiversity-positive public subsidy programmes like METSO. There appears to be a strong potential supply of ecosystem services as the excess demand for subsidy payments in the METSO scheme testifies. On the demand side, credible sustainability claims can have a high value (Taylor et al., 2024) in the market where companies and consumers are demanding that what they buy is sustainable. However, generally voluntary schemes have suffered from a lack of demand for ecosystem credits. Therefore, the policy framework would likely benefit from legally binding biodiversity objectives as discussed above.
4.5.3. Making urban areas more resilient
Urban adaptation challenges are relatively small by international standards and in comparison, with those in the natural environment in Finland. While rising, heat stress is still low by international comparison (Costa et al., 2025). The most exposed area is the capital region where a greater number of hot days will need to be considered in building design. The country is yet to experience cloudburst events that have become more common, causing devastating flooding in central Europe, Spain, New Zealand and elsewhere, although actuaries see this as a matter of when rather than if. However, insurance claims data show the shortening of autumn due to climate change is increasing accidents. For example, more people are failing to change to winter tyres before winter suddenly arrives, causing more car accidents. It is important for Finland to adapt in anticipation rather than reactively, which is more expensive.
The principal urban climate change adaptation challenge in Finland is protecting against more flooding events associated with more rainfall as warmer air holds more moisture. However, in the past 40 years flooding has been low: the last major flood was in 2007, and insurance claims are still modest. Urban flooding risks are mainly concentrated in the capital and western and southeastern coastal areas, as well as in Rovaniemi and other towns in Lapland, which were quickly re-built following World War II destruction, often in flood-prone areas. Finland has a long tradition of adaptation to floods and creating run-off areas for spring snowmelt. There is also publicly available information on flooding at the urban area level provided by Waterinfo Finland. However, there is still room for bolstering the role of insurance and planning in urban adaptation.
Insurance claims confirm that economic damage to urban areas arising from extreme weather events is low. Insurance claims related to flooding are in the order of EUR 5 million or less, far lower than for other urban claims, which are also low (Figure 4.23). Moreover, insurance claims related to extreme weather more widely, including urban flooding and weather damage to forests are modest and combined range between EUR 5 and 30 million annually. Broader economic loss studies from extreme rainfall have not been carried out but the costliest events for the insurance industry are related to climate change related heavier, wetter snow breaking tree branches. By contrast in New Zealand, with a similar sized population and economy, extreme weather events insurance claims averaged around EUR 130 million per year between 2013 and 2022 and spiked to EUR 1.8 billion in 2023 because of a cyclone and other major storms.
Low flooding claims are not due to low coverage. Close to 90% of households have comprehensive home insurance that covers flood damage for exceptional flooding and close to 100% of residential buildings are insured. Households, however, do not know whether they are covered for a flood ex-ante as an exceptional flood is defined as one occurring only once every 50 years or less and this is only determined after the fact by the Flood Map Service. Premiums, except for one company which sets premiums based on locational risks, are only mildly risk based.
The availability and price of insurance influences household and firm decisions that affect vulnerability to climate change-related hazards. In this vein, the role of insurance in adaptation could be strengthened by requiring premiums to be related more to site-based flooding and other risks. Risk assessment capacity and risk management expertise of the insurance sector could be shared with the government to support risk reduction and adaptation decisions by households, businesses and the government (OECD, 2023d). In particular, the government should set up a national, regularly updated, confidential anonymised individual insurance claims database. This could be used by the government and municipalities to help monitor whether adaptation planning is reducing vulnerability, to determine which government policies are the most effective and in land-use planning decisions.
1. For 1995-2009 only flooding claims. From 2010 there are also claims from heavy rains and high sea levels.
Source: Finance Finland and Finnish Environment Institute.
The Land Use and Building Act 1999 provides the overall framework for urban planning. It includes national land-use guidelines as well as regional, master and local detailed plans. The primary purpose of the national guidelines is to ensure that nationally significant matters are considered in county and municipal statutory land-use planning and in central administration activities. The guidelines require preparing for extreme weather events and floods and the impacts of climate change, including requiring new construction to be carried out outside flood risk areas or otherwise ensure flood risk management.
The guidelines also appropriately include a requirement that there are enough parks or other areas suitable for local recreation in or around the area to be zoned as urban. This is important for resilience because public green spaces with trees and open ground provide a natural absorber of rainfall reducing the need for larger storm water systems. However, experience in New Zealand suggests that general requirements may not be sufficient to stop a decline in the share of green spaces in urban areas, especially in cities where there is strong population growth and urban land values are rising fast (OECD, 2024d). The national authorities should monitor new developments and consider imposing minimum green space requirements if the share of impervious surfaces, which increase the risk of surface flooding, in new developments appears to be increasing.
In Finland, the increase in land value resulting from a new plan can be used to cover the costs incurred by the municipality in implementing it, including the costs of infrastructure needed to cope with extreme weather events. It is usual to conclude land-use agreements where the landowner participates in the costs incurred by the municipality based on the benefits that the land-use plan is estimated to generate for the landowner. However, if the municipality and the landowner are unable to conclude a land-use agreement, the municipality may collect development compensation from the landowner up to 60% of the estimated increase in the land value. Despite access to these tools, infrastructure and other investments in adaptation vary significantly across municipalities.
The Land Use and Building Act is currently being revised with the aim of increasing climate resilience. Three general requirements in legislation or the national guidelines that would help improve adaptation are: maintaining high quality data on local risks; ensuring urban planners’ knowledge of and expertise in managing local risks; and demonstrating adaptive weights in planning and building permitting decisions based on emerging risks in line with scientific evidence. For example, more weight may be warranted on mitigation of and protection against coastal erosion from storm surge, especially in the high value coastal areas of Helsinki and the capital region. The past summer was exceptionally hot by Finnish standards, and it will be important to ensure old buildings are retrofitted and new buildings are equipped to deal with longer periods of hotter weather in the future.
References
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