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Sitra: Emissions-based tax package could create jobs, boost spending power

Lower wage and pension taxes could offset higher emissions taxes, the Finnish Innovation Fund Sitra suggests.

Auton rakentajat töissään.
Car manufacturing on Finland's west coast (file photo). Image: Jyrki Lyytikkä / Yle

A report issued on Wednesday by the Finnish Innovation Fund Sitra, a research organisation that also functions as a quasi-official think tank, proposes three types of tax reform the next government could launch with the twin aims of cutting emissions and creating jobs.

A Sitra panel argues that Finland could simultaneously stimulate economic growth, boost employment and reduce greenhouse gas emissions that drive climate change.

This could all be achieved by 2030 through a comprehensive tax overhaul, the report claims. Sitra is an independent body that is directly supervised by the Finnish Parliament, which established it in 1967.

"We need to cut emissions in a hurry. Taxation is an effective way to guide us toward that," says panel chair Saara Tamminen, an international economics expert at the VATT Institute for Economic Research.

If Finland intends to meet its international commitment to help limit the average global temperature rise to 1.5 degrees Celsius above pre-industrial levels, it must slash its emissions by 60 percent from 1990 levels before 2030.

According to Tamminen's working group, sweeping tax reform could bring about annual emissions reductions of some four million tons, or about 10 percent, by 2030. That would be roughly equivalent to eliminating all exhaust fumes from Finland's lorry and buses.

Could climate protection create jobs?

So far, many who have opposed stringent measures to combat climate change in Finland have argued that such moves would lead to a loss of jobs.

In contrast, the Sitra committee's research indicates that tax revisions to lower emissions could actually spawn tens of thousands of new jobs in Finland.

It proposes what it calls a 'sustainable development tax reform' which involves a reduction in taxes on work and most corporate operations but increased taxation on high-polluting activities and items.

This is broadly in line with recommendations from the World Bank, the OECD, the European Commission and other international bodies.

In practice, this means that people would pocket a greater share of wages and pensions, while paying more to fly, drive cars with traditional combustion engines or heat their homes with fossil fuel sources.

Companies could see higher fuel bills and costs for carbon emission credits, but a removal of current environmentally detrimental taxes that deter green initiatives. Tamminen predicts that firms would also benefit from reduced pressure for wage increases and a better labour supply.

Companies in energy-intensive sectors would pay more in environmental taxes, but this could be offset with lower electricity taxes, for instance.

Progressive taxation to hit big consumers

Under all three scenarios laid out by the research team, economic growth and exports would rise faster than under the status quo.

Tamminen says her panel does not specifically recommend any single model, stressing that such choices will be up to political decision-makers.

Last autumn, nearly all of Finland's main political parties agreed to pursue policies aimed at keeping warming to 1.5 degrees – except the nationalist Finns Party, which has the second-largest number of seats in the new Parliament, elected last weekend. Thus any coalition government that does not include the Finns Party would be likely to give serious considerations to Sitra's recommendations.

Making the committee's proposals more politically palatable, all three scenarios are intended to be budget-neutral, requiring no cuts in public services.

Low-income earners would be offered subsidies to make up for higher transportation and living costs. Higher subsidies and lower taxes on wages would be funded by excise taxes on consumer products, calibrated in relation to their lifetime carbon emissions.

Such taxation would be progressive, in other words it would more heavily affect higher-income people who tend to have higher consumption and produce more emissions per capita.

Cross-party agreement necessary

To counterbalance higher petrol and diesel taxes, the automotive tax would be removed from zero emission vehicles, while the additional tax currently levied on non-petrol vehicles would be waived for all diesel, natural gas and all-electric vehicles.

"We do not recommend that environmental taxes be raised to the maximum right away, but rather that they be increased gradually. We should come up with a long-term roadmap that shows consumers and companies how taxation will change," says Tamminen.

This would be a major venture stretching over more than just one four-year legislative term, so should be prepared by government and opposition parties in tandem, the report says – although whether parties across the spectrum would be able to agree on such fundamental, far-reaching changes clearly remains an open question.

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