OECD Environmental Performance Reviews: Finland 2021

Executive summary

Finland should turn its ambitious strategies into effective and coherent action

Finland is a leader in environmental policy and sustainable development. It should be commended for its commitments to carbon neutrality by 2035 and to become a circular economy and fossil-free welfare society. However, Finland is not fully on track to meet all its goals. Greenhouse gas (GHG) emissions fell remarkably but need to decline faster. Waste generation, material consumption, intensity of forest use and nutrient pollution have continued to rise. Agriculture and a large forestry sector exert pressures on the country’s biodiversity.

Finland can tap into abundant renewable energy resources, a sound environmental policy framework, its experience with using economic and voluntary instruments and a strong innovative capacity. Nonetheless, targeted policy measures are needed to encourage behavioural changes, boost investment and innovation, and steer the economic recovery from the COVID-19 crisis towards a green and just transition.

GHG emissions fell, but uncertainties remain on the path to carbon neutrality

Finland overachieved its climate mitigation commitments. Reaching the carbon-neutrality target by 2035 requires annual emission reductions more than 2.5 times higher than in the past decade. Carbon removal by forests is essential to achieve the target. However, trade-offs exist between forests’ carbon sink potential and harvesting levels, including for biomass. Lowering energy demand would reduce the need for biomass and make carbon neutrality more likely to achieve. Finland’s climate policy need to focus more on redesigning energy and transport systems to deliver on climate and well-being goals.

A flexible and zero-carbon electricity sector is key to decarbonise the economy

Finland has one of the least carbon-intensive energy and electricity mixes in the OECD. Biomass is the main renewable source. Finland aims to phase out coal by 2029 and to at least halve peat consumption by 2030. It could consider adjusting the coal and peat phase-out dates in view of the carbon-neutrality target. Finland should better assess the proposed measures to support affected communities, and set up mechanisms to ensure broad support for the transition.

Energy efficiency improved, but energy intensity remains comparatively high due to Finland’s cold climate, low population density and relatively energy‑intensive industry. Electricity demand has grown since 2015 and is expected to increase further with digitalisation and electrification of transport and heating. This calls for enhanced co‑ordination across sectors. Finland is a frontrunner in the deployment of smart grids to enhance flexibility of the electricity system. A shift to a more decentralised grid would enable consumers to provide on-site generation, storage and demand response. This, in turn, would reduce the need for investment in plants and network infrastructure.

There is scope to reduce the carbon footprint of buildings and neighbourhoods

Finland provides some targeted financial support for deep energy retrofits of buildings but needs to put more emphasis on whole-building renovations. Mandatory energy saving targets or efforts to industrialise retrofits could significantly reduce costs. Increased use of non-combustion technologies (e.g. large-scale heat pumps and waste heat recovery) would reduce the need for woody biomass to fuel the country’s extensive district heating network.

Some cities (e.g. Helsinki) aspire to become more compact to lower energy, transport and materials demand. Helsinki also applies the green factor method for the built environment, which aims to preserve sufficient green spaces to mitigate flood risk, store carbon and enhance liveability. The green factor method could be strengthened and extended to other municipalities.

Policies to reverse car dependency should be at the core of climate action

Finland’s dispersed settlement pattern implies that road transport is by far the dominant transport mode. Vehicle and fuel taxation, biofuel mandates and support to electric vehicles encouraged the shift to lower‑emitting vehicles and fuels. This helped cut emissions, but road transport remains a major GHG source. The roadmap on fossil-free transport suggests distance driven should not increase in the 2020s, which is welcome.

Finland needs to remove policies that encourage car ownership such as tax-free parking at the workplace; it should enable the introduction of congestion charges in Helsinki and other urban areas facing congestion problems, as well as consider distance-based road pricing for heavy goods vehicles. Finland should also reallocate road space to public transport and active mobility and steer spatial planning to increase accessibility.

Agreements on land use, housing and transport (so-called MAL) between the central government and municipalities of functional urban areas have enhanced co‑ordination of urban and transport systems. Setting up metropolitan transport authorities, as done in Helsinki, would help strengthen integrated planning and co‑ordinate public transport across neighbouring municipalities. Finland should build on its Mobility as a Service experiments to develop multi-modal networks across the country based on enhanced public transport. In addition, further supporting road transport electrification would allow to channel biofuels to aviation and shipping. However, stronger sustainability criteria for biofuels are warranted.

Finland needs to consolidate the good outcomes of air and water management

Air quality is among the best in the OECD, but there is scope to further reduce pollutants’ emissions. Small‑scale wood burning causes about half of pollution from fine particulate matter. The relatively old vehicle fleet and the high share of coal, peat and biomass burning are major sources of nitrogen oxides. Finland should consider regulating the use of studded tyres to reduce emissions from road dust. Limited funding has slowed down implementation of the National Air Pollution Control Programme 2030.

Water quality is generally good, but diffuse nutrient pollution from agriculture exerts pressure on surface water bodies. Some rivers and lakes and most coastal waters fail to achieve good ecological status. Economic incentives to improve nutrient management and recycling would help reduce nutrient losses. The efficiency of urban wastewater treatment is high. However, compliance of independent treatment systems with the required tertiary treatment standards should be better monitored.

Swift action is required to make Finland a circular economy leader

Finland needs to prioritise waste prevention and recycling, as well as promote new business models, to achieve the ambitious targets of the Strategic Programme to Promote a Circular Economy to 2035. Municipal waste is expected to continue to increase. The ban on landfilling of organic waste and a higher landfill tax have contributed to diverting waste from landfills. While all municipalities use pay-as-you-throw schemes, only a few differentiate charges to encourage separate collection. Waste recovery has grown but remains below 50% of treated municipal waste (the 2020 target). Both the circularity rate and the material productivity are among the lowest in Europe. The 2021 revision of the Waste Act aims to strengthen collaboration among service providers to improve efficiency of waste management.

Finland should do more to halt biodiversity loss

Finland has strengthened its biodiversity policy framework, but the status of biodiversity has not improved significantly. Lack of resources is among the causes. In response, in 2020 the budget for biodiversity protection was increased to a record-high level. The forestry sector is a driver of wood habitats degradation. The emphasis on bioenergy for climate mitigation will increase forestry activity and may add pressures. Financial compensations to private owners for protecting part of their land have helped restore some ecosystems. However, nature management on private lands needs to be strengthened, especially in commercial forests. Finland met the 2020 Aichi target on protected terrestrial and marine areas. Nonetheless, an expansion of protected land is warranted in southern regions, where pressures on land use are higher.

Environmental governance is based on transparency and collaboration with private operators, but a few regulatory gaps remain

High environmental awareness and easy access to high quality environmental information spur extensive public participation. Environmental impact assessment (EIA) and strategic environmental assessment (SEA) are well established and closely co-ordinated in land-use planning. However, Finland should expand the application of EIA to better cover forestry projects and ensure that SEA is adequately applied to local spatial plans.

Finland’s regulatory culture is based on voluntary compliance and promotion of green business practices. A comprehensive set of compliance promotion measures is in place. Compliance monitoring and enforcement rely primarily on honest reporting of infringements by operators. Non-compliance is low. However, Finland should improve co‑ordination between permitting and compliance monitoring authorities to allow more efficient use of human and financial resources.

The recovery plan is geared towards a carbon-neutral and circular economy

In response to the COVID-19 crisis, the government provided sizeable funding for investment in sustainable transport, clean energy infrastructure and energy efficiency, biodiversity protection, and research and development (R&D). Sustainable recovery criteria guided budget allocations. The green transition pillar of the Sustainable Growth Programme 2021-26 absorbs over half of the Recovery and Resilience Facility. The actual contribution of the programme to the green transition will depend on the design of the relevant measures and on the balance of resource allocation in the next annual state budgets. The scope of the programme may be too broad and not commensurate to available resources, which may hamper its effectiveness. Finland could reinforce its sustainable budgeting procedures. This will help better anchor the Sustainable Development Goals in decision making and resource allocations.

Finland’s businesses are innovative and active in green markets

Finland is among the green innovation leaders in the OECD. The country has often pioneered the implementation of EU environmental policies, which has given its companies a first-mover advantage. National expenditure on R&D is high and the government plans to increase it further. Most R&D spending occurs in the business sector. However, public spending on environment- and climate-related R&D is relatively low. It should be increased and better support small and medium-sized enterprises. There is scope to improve collaboration between the basic research institutions and the business sector to bring innovative cleaner technology and products closer to the market.

The green industry is large and growing. Finland’s businesses are active in investing in environmental management and in providing environmental goods and services. The accelerated deployment of new technology for a carbon-neutral and circular economy is projected to generate employment. Finland has expanded its environmental education system and made environmental competence a requirement for every profession. It needs to continue investing in up-skilling and re-skilling its labour force to support the green transition.

Green taxation can help Finland achieve its ambitious environmental goals

The government announced a “tax reform for sustainable development”. Finland’s carbon tax, the first in the world, is uniquely based on lifecycle GHG emissions. The rates of the carbon and energy taxes are high by international standards. Nonetheless, there is scope to reinforce carbon pricing. Emissions from road transport face high carbon prices, but less than half of emissions in other sectors are priced. This is partly due to the prevalence of biomass use, which is untaxed. Finland could better assess the potential net effect of taxing biomass on GHG emissions. It should also consider progressively increasing the effective carbon price to reach a target level by 2030. This would provide a credible trajectory of carbon prices to investors. In addition, a mix of vehicle taxation and road pricing would contribute to decarbonising transport, while offsetting the likely decline in fuel tax revenue due to vehicle electrification.

Finland should address misalignment in the energy tax structure and reduce support to fossil fuels. Diesel faces a lower energy tax than petrol. Tax reductions and exemptions to certain energy sources or sectors (such as agriculture and mining) weaken incentives to save energy or switch to cleaner fuels. The tax rate on peat nearly doubled in 2021. However, peat continues to benefit from a beneficial tax regime, which should be removed.