EKUVE Consumption taxation based on life cycle emissions

Finland’s climate policy is determined by both its EU commitments and national carbon neutrality target for 2035. Emissions trading is a proven EU-level measure that plays a key role in reducing emissions to the level specified in Finland’s targets. However, emissions trading does not target the emissions made by all sectors. Thus a climate policy that supports national emissions targets also requires other national policy instruments. Taxation and energy taxation in particular represent the most important national instruments that can be used to reduce the emissions caused by both production and consumption. As Finland’s climate policy objectives become stricter, the possibilities and efficiency levels of other taxation measures should also be investigated.

An emissions-based consumption tax on both domestic and imported products could represent one method for compensating the differences in cost levels and competition created by climate policy. Expanding the tax base of consumption taxation with an emissions-based approach has been proposed as one addition to the range of policy instruments, and according to the Government Programme of Sanna Marin’s Government, the assessment of life cycle emissions caused by foodstuffs and other consumer products should be developed further to allow for consumption taxation to focus on climate and environmental impacts.

The aim of the project was to examine the use of consumption taxes based on life cycle emissions as a climate policy instrument from the perspectives of tax incentives and life cycle emissions assessments. The project examined the findings in theoretical and empirical research literature concerning the potential of achieving emission reductions via consumption taxes and, in particular, emissions-based consumption taxes. It also evaluated the applicability of these findings to the Finnish market and tax system.

The project examined the possibilities of developing the assessment of life cycle emissions to increase the climate impact consciousness of consumption taxation. Based on previous research and the assessment of life cycle emissions, the project formulated an evidence-based overview of whether a consumption tax based on life cycle emissions could be introduced in Finland as well as the key development needs concerning the assessment of life cycle emissions. 

The key objective of the project was to investigate the determination of consumption-based emissions for products or product groups so that national consumption tax steering could effectively achieve emissions reductions while taking other climate policy instruments into account. An essential part of the determination process was assessing the level of comprehensiveness and accuracy that could be applied to the emissions. From the perspective of policy instruments, it was important to assess how consumer choices between products related to the choices made by producers in their production technologies.

Based on these, the project presents estimates of the product groups in which the targeting of emissions-based policy instruments via consumption taxes would be justified, how consumption-based emissions should be determined, and what impacts life cycle emissions-based tax measures could have on emission reductions in Finland and worldwide.

The project is funded by: The Government’s analysis, assessment and research activities

Partner: Finnish Environment Institute SYKE

Responsible researcher: Piia Remes, [email protected], 0295 519 404