Finland has no known resources of coal, crude oil, or natural gas. As a result, around 39% of Finland’s energy needs are met through imports, which prior to 2022 were mostly from the Russian Federation (hereafter “Russia”). Energy intensity and energy consumption per capita are both very high due to the country’s relatively large heavy industry and its cold climate. The country does boast 9.3 million hectares of peat lands. Peat fuels almost 3% of the country’s electric power production (1.9 TWh in 2021), and 10% of district heating.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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Finland
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
A few large companies dominate Finland’s fossil energy market with ownership ties to the state, and the private sector’s role being relatively small compared to that of other OECD countries. For example, the government has a 50.1% stake in Vapo Oy, one of the world’s largest peat producers. As demand for energy peat in Finland is expected to halve in the next 10-15 years, Vapo decided in December 2019 to discontinue energy peat production in about 90 of its sites. Energy peat now represents less than a quarter of the Vapo Group’s total turnover.
In a similar vein, the state maintains a 46.5% controlling interest in Neste, which dominates the Finnish petroleum market. Over the past decade, Neste has, however, developed from being a regional oil refining company to now engage in renewable and circular solutions. Neste uses at their renewables refineries approximately ten different sustainably produced raw materials, mainly waste and residue based. These currently account for 92% of annual renewable raw material inputs, the target being 100% in 2025.
The Finnish gas market was opened to competition on 1 January 2020. Third parties have equal and non-discriminatory opportunities for network access in the natural gas transmission and distribution networks including interconnectors from Russia and Estonia. The transmission system operator Gasgrid Finland is responsible for selling transmission capacity in the system and shippers and traders are responsible for selling natural gas. Gasgrid Finland is owned by the state. The 1 200 km transmission network is interconnected with the gas networks in Russia and Estonia. However, in May of 2022, Finnish operated Gasum closed the gas network in response to a dispute over payments.1 Finland’s retail electricity market is fully liberalised, and customers are free to choose their supplier. Grid companies have an obligation to connect customers, i.e. access for small independent electricity producers is guaranteed. Monitoring occurs through the Energy Authority (Energiavirasto), which oversees electricity and natural gas markets in Finland.
Energy prices and taxes
The country’s retail and wholesale electricity prices are unregulated. Electricity can be traded through bilateral contracts and via the power exchanges Nord Pool and EPEX SPOT. Finland has a comprehensive set of energy-taxation rules imposed on electricity, coal, natural gas, peat, biofuels such as tall oil, and liquid fuels. Rates are based on a fuel’s energy content, lifetime carbon dioxide emissions, and type of use (e.g. reduced rates for industry and agriculture). A strategic stockpile fee and an oil pollution levy also apply.
Recent developments and trends in support
In 2011, Finland completely reformed its energy taxation structure on both transport and heating fuels, and as a result taxes on different energy sources are now determined based on both their energy content and the level of lifetime carbon dioxide emissions. Following the 2011 reforms, many tax expenditures related to energy have been halted or terminated.
However, peat has been an exception to this rule, and is subjected to a separate energy-tax regime that assigns a smaller energy tax rate on a per-unit-of-energy basis than for other heating fuels. The energy tax levied on peat, which started in 2011, has evolved from EUR 1.9/MWh in 2012 to EUR 5.70/MWh as of 2022. Small-scale heating plants that use peat and generate less than 5000 MWh a year are exempt from the energy tax.
In Finland, most support measures are tax expenditure items geared towards lowering the cost of energy consumption in industry, transport and agriculture sectors. The two largest measures are the Reduced energy tax rate on diesel used for transport (benchmarked against the rate for transport fuels, with passenger car drivers compensating the reduced rate through an additional circulation tax) and the Reduced energy tax rate for light fuel used in mobile machinery (with transport fuel rates as its benchmark). Recently, the government set a target to halt the use of oil heating in all local and central government properties by 2024. In 2022, the single largest expense was targeted assistance to households and a temporary reduction in the VAT rate on electricity from 24% to 10%.
Table 1 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 2.
Table 1. Selected support measures for fossil fuels with a large fiscal cost (in millions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
Reduced Energy Tax Rate for Light Fuel Oil Used in Mobile Machinery |
472.000 |
467.000 |
5.000 |
|
|
Reduced Energy Tax Rate on Diesel Used in Transport |
324.769 |
384.795 |
-60.026 |
|
|
Reduced CO2 Tax for Combined Heat and Power Production |
120.000 |
108.000 |
12.000 |
|
|
Direct transfers |
||||
|
Extra EUR 350 million have been set aside for longer-term energy security, including investments in hydrogen and batteries |
32.142 |
(Started in 2022) |
32.142 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2. Description of selected support measures for fossil fuels
|
Reduced Energy Tax Rate for Light Fuel Oil Used in Mobile Machinery |
This measure relates to the reduced energy tax applied to light fuel used in mobile machinery. Until 1 January 2011, the benchmark against which this tax expenditure was calculated was based on energy content of a fuel. Between 2003 and 2007, the energy tax rate on gasoline amounted to EUR 66.1 per MWh, while the reduced energy tax rate on light fuel oil amounted to EUR 59 per MWh. Between 2008 and 2010, the energy tax rate on light fuel oil was EUR 61.8 per MWh lower than the benchmark for transport fuels, which is the energy tax rate on gasoline (EUR 70.5 per MWh). As of 1 January 2011, the benchmark against which this tax expenditure has been calculated is based on energy content, CO2 emissions and local emissions. As a consequence, the reduced energy tax rate has increased by about 84%. |
|
Reduced Energy Tax Rate on Diesel Used in Transport |
This measure relates to the reduced energy tax rate that is levied on diesel fuel used in transport, which the Government of Finland considers to be tax expenditure. Until 1 January 2011, the benchmark against which this tax expenditure used to be calculated was based on the sole energy content of the fuel. Effective 1 January 2011, the benchmark against which this tax expenditure is calculated is now based on three factors, namely energy content, CO2 emissions, and local emissions of pollutants. The reduced energy tax rate has increased from EUR 0.466 per litre in 2013 to EUR 0.4931 per litre in 2014, and EUR 0.5267 per litre in 2017. The annual propelling-force tax is levied on all vehicles using fuels that are taxed at a lower energy tax rate, i.e. diesel fuel, natural gas and electricity. On average, the propelling-force tax for a diesel-driven vehicle amounts to EUR 420 per annum, which means that, on average, there is no tax expenditure on diesel fuel used in diesel-driven passenger vehicles. |
|
Reduced CO2 Tax for Combined Heat and Power Production |
From 2011, a 50% CO2 tax reduction is applied to all light-fuel-oil-, biofuel-oil-, heavy-fuel-oil-, coal- or natural-gas-fired combined heat and power (CHP) production in Finland. Due to a reduced energy tax, the 2019 estimate for this measure is lower compared to the preceding years. Annual amounts of revenue foregone were allocated to coal, natural gas, light fuel oil and heavy fuel oil by the Ministry of Finance up until 2014 and extrapolated from 2015 onwards. |
|
Extra 350 million euros have been set aside for longer-term energy security, including investments in hydrogen and batteries. |
Extra 350 million euros have been set aside for longer-term energy security, including investments in hydrogen and batteries. In the short time horizon, according to Mika Lintilä, Finland will increase the domestic supply of forest chips (through extra funding and timber terminals) and of peat. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.