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Finland is committed to halving the amount of fossil fuel used in road transport by 2030. In a report commissioned by the Ministry of Transport and Communications that will be published today, researchers from the Aalto Economic Institute propose that the most efficient way to reach this target is to create a permit system for fuel sales in Finland. In this kind of system, distributors would be required to purchase sales permits from the state for every litre of fuel sold, and the permit would be tied to the carbon content of the fuel in question. The number of permits would then be decreased gradually so that by 2030, road transport would generate only half of the carbon emissions that it produces today.

Professor Matti Liski, who is the lead author of the report, notes that the permit system would include two significant benefits when compared to other methods: certainty that the target will be met, and the system’s cost-efficiency.

‘This proposal would allow both consumers and businesses to adapt to the change in ways that are most efficient to them. The sales permit approach could also be adjusted over time as new technologies are developed’, says Liski.

Permits would be auctioned at regular intervals to ensure competition

According to the researchers, the simplest way to arrange the sale of the permits would be to auction them off at regular intervals with the state organising the auctions.. Any economic uncertainty that would be caused by fluctuations in the price of fuel could be managed by implementing a state-set maximum and minimum price for every litre of fuel sold under these permits.

‘When putting the permits up for auction, the state would have to ensure that fair competition can still be maintained and this could be achieved by arranging the auctions at regular intervals as one example. It would then help ensure the continuous availability of fuel permits and prevent any single fuel distributor from attaining an overly large share of the market’, explains Oskari Nokso-Koivisto, COO of the Aalto Economic Institute.

The sales permit system would most likely raise fuel prices, which is a particular concern for transport-intensive industries. Adapting to this change could also be challenging in rural areas where many people must rely on their cars for transport, as well as for people with lower incomes. According to the researchers, these distributional effects, i.e. the costs caused by the system, could be compensated but political decision-makers would have to choose the appropriate mechanism with care.

‘The compensation should not be earmarked for fuel purchases as it would lose the incentive for reducing emissions’, notes Matti Liski.  

Further information:

Professor Matti Liski
Aalto University School of Business
tel. +358 40 353 8173
matti.liski@aalto.fi

The Aalto Economic Institute is a unit that was established and is led by the Department of Economics at Aalto University School of Business. The goal of the AEI is to coordinate the Department's collaborative efforts with its external partners. Each AEI project is appointed with the best experts from Aalto and their extensive academic networks.