The Nordic Energy Markets and Environment

Natural resources and political priorities have formed the energy sector through the last century. Especially the development of grid-dependent energies such as electricity, district heat, and natural gas has been driven by central planning and heavily influenced by political priorities and the endowment of domestic energy resources. Large natural resources of geothermal energy and hydropower made it natural to include these resources in the fuel mix in some of the Nordic countries. The widespread use of fossil fuels in power generation in Denmark and Finland implies that the environmental effects in terms of green house gas emissions from electricity supply are much larger in these countries than in the other Nordic countries. The Nordic countries have applied energy-related taxes and subsidies to renewable energy sources for decades in order to impact the use of energy and hence the CO2 emissions as well. Energy taxes and emission trading schemes imply increased prices and a reduction in demand depending on price elasticities, technology improvements, and the availability of cost-efficient emission reductions options. Demand for electricity in the Nordic countries is not very price elastic in the short-run, but the emission level can nevertheless be affected by energy taxes due to an overall long-run increase in energy prices and prices of energy-intensive goods via higher production costs.