Location: Sweden

On the Debate Around the Swedish “Reduktionsplikt”

Posted on September 7, 2026 | Policy Brief

The Reduktionsplikt (engl. reduction duty) requires Swedish fuel suppliers to reduce the greenhouse gas emissions of their petrol and diesel, in practice mostly by blending in biofuels. It has become a much-contested policy of the 2026 election, and the debate is almost entirely about the policy’s impact on the pump price.

We argue this focus is too narrow. So long as compliance runs through blending, any price effect is simply what follows from mixing two products with different prices: the mandate level scales it, but its size depends on the gap between biofuel and fossil diesel, which is largely determined by broader market conditions rather than by the mandate level alone. What deserves attention is where that gap is heading, and whether the mandate’s cost is reasonable relative to the emissions it avoids — a question Sweden must answer if it is to choose efficiently between policies to reach its 2030 emissions goals.

The Policy and the Debate

Fuel prices have become one of the most politically charged issues ahead of Sweden’s election this autumn. Several political parties are competing to offer the largest reductions at the pump, while proposals that could raise petrol or diesel prices meet immediate resistance (SVT Nyheter, 2026). The issue has become even more salient following the recent energy shock linked to disruptions in oil flows through the Strait of Hormuz. In response to rising energy prices, Sweden reduced fuel taxation from the beginning of July until the end of November to shield households and businesses (Skatteverket, 2026). This again illustrates how central the pump price has become to both economic policy and the election campaign.

At the same time, Sweden remains far from reaching its climate target for domestic transport. The country has committed to reducing transport emissions by 70 percent by 2030 relative to 2010 (Regeringen, 2017), but emissions have so far fallen by only around one fifth and electrification of the vehicle fleet has progressed more slowly than anticipated (Klimatpolitiska rådet, 2024). Fuel policy therefore sits on a fault line between keeping driving affordable and meeting a binding climate commitment.

No policy captures this tension more sharply than the Reduktionsplikt, which was introduced in July 2018 as a central part of the policy package intended to reach the climate target. It requires fuel suppliers to reduce the average lifecycle greenhouse-gas intensity of petrol and diesel, primarily by blending renewable biofuels such as HVO, FAME, and ethanol into fossil fuels. The policy can therefore reduce emissions from the existing vehicle fleet without waiting for all drivers to switch to electric vehicles.

In this brief, we focus on the diesel mandate. Historically, it has been significantly higher than for petrol, as diesel allows much more fuel blending. The diesel mandate was introduced at 19.3 percent in 2018 and incrementally increased to 30.5 percent in 2022–2023, before being reduced to 6 percent in January 2024 following a political backlash over high fuel prices. In July 2025, it was raised again to 10 percent.

A government inquiry on policy measures for phasing out fossil fuels, chaired by the head of environmental economics research at Konjunkturinstitutet, Svante Mandell, has now proposed increasing the mandate to 21 percent in 2028 and 25 percent in 2030. Together with higher fuel taxation, the package has been estimated to raise pump prices by around three kronor per litre (Mandell, 2026). Mandell argues that stronger measures are needed because the current policy mix is unlikely to deliver Sweden’s climate commitments. Representatives of the governing parties and their parliamentary allies have rejected the proposal, arguing that it would impose excessive costs on households and businesses. The governing parties instead want to emphasize electrification and lower fuel costs.

What the Pump-price Debate Misses

The political focus on pump prices is understandable, but incomplete. The debate tends to treat the price effect of the Reduktionsplikt as if it were determined primarily by the mandate level itself: a higher Reduktionsplikt necessarily means substantially higher fuel prices.

In reality, the effect depends crucially on the price difference between renewable and fossil diesel at the time. When biofuels are priced close to fossil diesel, a higher renewable share can reduce emissions with little effect on the final blended fuel price. When renewable fuels become more expensive, the same mandate can instead raise blended diesel prices sharply.

In this way, the price effect of Reduktionplikt depends on the interaction between the required renewable share and the circumstances affecting the renewable-to-fossil price gap, including biofuel supply, international biofuel demand, feedstock availability, exchange rates and international energy-market conditions. This makes a narrow focus on the current pump-price effect short-sighted. Whether a higher mandate will be costly in the future depends on how the biofuel market develops, not simply on the mandate level.

Moreover, the extent of the price increase should not be assessed in isolation. A higher price is a cost, but in return the mandate delivers something of value: lower emissions. To judge the policy fairly, the cost paid at the pump must be weighed against the climate benefit it facilitates and weighed in a way that lets the mandate be compared with other ways of cutting the same emissions.

Mandate Effect and Market Conditions

In a recent paper (Larsson and Oberhammer, 2026), we address the above points. We first estimate how much higher Swedish diesel prices were because of the mandate from 2018 through 2023. Since there is no common price for all types of biofuels, we cannot observe it directly. Instead, we use Denmark as a counterfactual, since Sweden and Denmark participate in the same north-western European fuel market and are exposed to similar oil-price and supply shocks, but Denmark maintained a much lower and more stable biofuel obligation. The resulting Swedish–Danish price premium is therefore our estimate of the mandate’s price effect: it measures the cost of the extra biofuel Sweden blends, which is simply the extra mandate share times how much more (or less) biofuel costs than fossil diesel.

As expected, before 2018, we observe that Swedish and Danish diesel prices excluding taxes moved closely together.

Figure 1. Swedish and Danish diesel prices without tax

Source: Authors’ rendering of price data from Circle K Denmark (2026) and Circle K Sweden (2026) using the daily SEK/DKK exchange rate reported by Sveriges Riksbank (2026).

From 2018 onward, the comparison lets us estimate the price premium at each mandate level. During the early period, with mandate levels of 19.3 and 20 percent and relatively low prices, we find no increase in price at all. We first detect a price premium during the 21 percent level. It starts at 0.17 SEK per litre and then rises to 0.99 SEK per litre during 26 percent policy and 2.05 SEK per litre during 30.5 percent. When the mandate was cut in 2024, the gap fell sharply and even turned negative — mostly a currency effect, with the remainder following from Denmark’s mandate now being above Sweden’s.

Figure 2. Price gap between Swedish and Danish diesel prices without tax

Source: Authors’ rendering of price data from Circle K Denmark (2026) and Circle K Sweden (2026) using the daily SEK/DKK exchange rate reported by Sveriges Riksbank (2026).

The immediate takeaway is that a high mandate per se does not generate the same price effect in every period. Because the premium is the extra blend share multiplied by the biofuel–fossil price difference, its size depends on that price difference as much as on the mandate level. The early years make this concrete: Sweden was meeting an obligation of around 20 percent yet showed no premium over Denmark, which means biofuel and fossil diesel must have been priced at similar levels then. The large premiums emerge only in 2022–2023, when biofuel became expensive across the EU during the energy crisis (Lundberg et al. 2023). Denmark, blending far less, was largely insulated from that cost — which is why the Swedish–Danish gap widens exactly as biofuel prices climb.

Climate Benefits Vs. Price Costs

With the price effect established, we can weigh what the policy achieved against what it cost. We estimate that the Reduktionsplikt reduced emissions by around 14 million tonnes of CO₂e from 2018 until the end of 2023. On average, 94 percent of that came from substituting fossil diesel with biofuel and only 6 percent from reduced consumption during the high-price period. The split reflects how the policy works: it cleans the fuel rather than pricing people out of using it. It also reflects how little diesel demand responds to price in the short run. We estimate that a 10 percent rise at the pump cuts diesel use by only about 2 percent, since the households and firms that depend on diesel for commuting, freight, farming and construction have few immediate alternatives.

By comparing the extra amount paid due to the policy with the emissions avoided, you get the cost of avoiding each tonne of CO₂e. This single figure lets the mandate be judged on the same terms as fuel taxes or electric-vehicle subsidies. Sweden’s carbon tax offers a natural benchmark. At around 1,510 kronor per tonne of CO₂e (Government Offices of Sweden, n.d.), it is the price the country has explicitly placed on fossil carbon, and in effect society’s own valuation of what avoiding a tonne of emissions is worth.

Against that yardstick, the mandate was a very cheap way to cut carbon in its early years, when it reduced emissions with little or no effect on the diesel price. It became expensive only later, at the height of the energy crisis, when compliance costs ran well above the climate benefit. However, averaged across the whole period, including those expensive years, the cost of avoiding a tonne came out at roughly 1,574 kronor. That is close to the carbon tax itself. So, despite the unfavorable market developments, the mandate has been a reasonable exchange overall for the emissions it bought.

Reasonable compared to what, though? If the transport target is to be met, one direct alternative is higher fuel and carbon taxation. Such a policy would have to work through consumption reduction — the channel that delivered only the abovementioned 6 percent of the mandate’s reductions. Konjunkturinstitutet estimates that reaching the target through fuel taxation alone, with the mandate held at its current floor, would require pump prices of around 42 kronor per litre for both petrol and diesel (Carlén and Hill, 2023) — well above anything reached even when a record mandate coincided with expensive biofuel.

However, the mandate’s advantage over taxation rests on biofuels being available at a price not too far above fossil diesel, and that condition held comfortably in some years and barely at all in others. This is the point currently missing from the debate: both the price effect and the cost per tonne of emissions avoided depend crucially on conditions in the biofuel market, not on the mandate level alone. When biofuel markets tighten, compliance costs rise quickly.

One reason for caution is scale. Even Sweden’s historically high mandate could only address part of the transport transition. If many countries raise their blending requirements at once, they will be competing for a limited pool of sustainable biofuels. Supply may well expand in response, but whether it expands quickly enough to keep pace is genuinely uncertain. That uncertainty is what deserves attention: if biofuel can be supplied in sufficient volume at a price not far above fossil diesel, the Reduktionsplikt remains an efficient way of cutting emissions, and if it cannot, the costs of the energy crisis may return.

Future reforms should therefore focus not only on the formal mandate level, but also on resilience to such shocks, by broadening how suppliers can comply to the obligation. The redesigned low-level mandate of July 2025 already allows suppliers to meet part of their obligation by supplying renewable electricity for road transport rather than liquid biofuel. Such electricity credits reduce dependence on internationally traded biofuels and tie the policy more closely to electrification (Energimyndigheten, 2025).

Conclusion

The ongoing policy debate surrounding the Reduktionsplikt is therefore too simplified. A higher mandate does not automatically produce a large fuel-price increase, and even when prices increase, we need to compare the cost of the policy to its environmental benefits.

The policy delivered substantial emissions reductions with little or no diesel-price premium in its early years but became costly in 2022–2023 as high mandate levels coincided with expensive biofuels. Across the full period, however, the cost per tonne of CO₂e avoided was close to Sweden’s carbon tax.

The relevant policy question is therefore not whether the Reduktionsplikt is simply cheap or expensive. It is first whether biofuel supply can be expected to keep pace with demand, since a market that remains tight will produce the same price shocks again. And then, whether Sweden can design a mandate that delivers near-term emissions reductions at a cost comparable to alternative climate measures, while limiting its exposure to those shocks and supporting the longer-term transition toward electrification.

Finally, price and emission effects do not settle every question about the policy. Two broader questions, not captured by the price-and-emissions comparison above, also matter for the policy’s future. First, the mandate may either support electrification by cutting emissions from the existing vehicle fleet while electric alternatives expand, or slow it by reducing the pressure to replace fossil-fuel vehicles. Second, the climate benefit depends on the biofuels used: it is larger for fuels produced from genuine waste and residues than for crop-based feedstocks associated with land-use effects (Searchinger, 2008).

The future of the Reduktionsplikt should therefore be judged not only by its effect on today’s pump price, but by whether it can deliver cost-effective emissions reductions while supporting the longer-term transition away from fossil fuels.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes, or Swedish Energy Agency (Energimyndigheten).

Carbon Tax Fairness Changes as Income Inequality Grows

Posted on June 3, 2026 | News

Cityscape of Stockholm at sunset with traffic, illustrating the gasoline prices impact on urban mobility and fuel consumption.

A new study suggests that carbon tax fairness is not fixed. Instead, it changes as income inequality rises or falls. Researchers found that carbon and gasoline taxes become more regressive over time when income gaps widen, especially for everyday necessities such as transport fuel. The findings could help governments design fairer climate policies by pairing carbon taxes with targeted financial support where needed. The study was conducted by Julius J. Andersson of the Stockholm School of Economics and the Stockholm Institute of Transition Economics, and Giles Atkinson of the London School of Economics and Political Science.

Why Carbon Tax Fairness Matters

Carbon taxes are widely viewed as one of the most effective ways to reduce greenhouse gas emissions. By making fossil fuels more expensive, they encourage households and businesses to switch to cleaner alternatives.

Yet carbon taxes have long faced criticism because they can place a larger financial burden on lower-income households. Fuel, heating, and electricity are basic necessities for many families, meaning poorer households often spend a larger share of their income on these essentials.

Until now, most studies have measured whether carbon taxes are progressive or regressive at a single point in time. The new research argues that this approach misses an important factor: income inequality itself changes over time. As societies become more unequal, the distributional impact of an existing tax can also change, even if the tax rate stays exactly the same.

How Rising Inequality Changes Carbon Tax Fairness

The researchers developed a simple economic model showing that two factors determine how fairly an indirect tax is distributed. The first is the level of income inequality across households. The second is how spending on a taxed product changes as income rises, known as the income elasticity of demand.

When the taxed product is a necessity, such as gasoline in high-income countries, rising income inequality causes the tax burden to become increasingly concentrated among lower-income households. In contrast, taxes on luxury goods become more progressive as inequality grows because wealthier households spend proportionally more on those items.

This means carbon tax fairness is dynamic rather than permanent. A tax introduced during a period of relatively equal incomes may become much less equitable decades later if inequality increases.

Sweden Offers a Natural Test Case

To test their theory, the researchers examined Sweden’s carbon tax on transport fuels between 1999 and 2012. Sweden introduced its carbon tax in 1991 and now has one of the world’s highest carbon tax rates. During the following decades, however, income inequality increased significantly, creating an opportunity to observe whether the tax became more regressive over time.

Using national household expenditure data, the researchers found a strong relationship between rising inequality and increasing regressivity. When tax burdens were measured against annual income, the carbon tax became steadily more regressive as income inequality increased. Statistical analysis showed an exceptionally strong negative correlation between the two measures.

The study also showed that the choice of welfare measure matters. When annual household expenditure was used instead of annual income, the same tax appeared much less regressive, and in several years even progressive. Because spending is more evenly distributed than income, this changes how the burden is measured.

Evidence Extends Beyond Sweden

The researchers also compared previous studies of gasoline taxes across several high-income countries. Countries with higher income inequality consistently showed more regressive gasoline taxes than countries with lower inequality.

The United States, which has comparatively high income inequality, showed some of the most regressive outcomes. Denmark and Sweden, with lower inequality during the study periods, showed much smaller distributional impacts.

This broader comparison suggests that differences between countries may be explained not only by fuel prices or tax rates, but also by differences in how income is distributed.

Key Research Findings

  • Rising income inequality makes carbon and gasoline taxes on essential goods increasingly regressive over time.
  • Sweden’s carbon tax became more regressive between 1999 and 2012 as income inequality increased.
  • Measuring tax burdens using household expenditure instead of annual income makes carbon taxes appear considerably less regressive.
  • Cross-country evidence shows that higher-income inequality is strongly associated with more regressive gasoline taxes across developed economies.
  • The researchers’ theoretical model helps explain why previous studies have reported different results across countries, time periods, and measurement methods.

What the Findings Mean for Climate Policy

The study has important implications for governments planning long-term climate policies.

Carbon taxes remain one of the most efficient tools for reducing emissions. However, policymakers should recognise that carbon tax fairness can change over time even when the tax itself remains unchanged.

As income inequality grows, governments may need to strengthen complementary policies such as lump-sum rebates, carbon dividends, targeted transfers, or reductions in other taxes. These measures could help preserve both fairness and public support for climate action.

The findings also suggest that distributional analyses should be updated regularly rather than treated as permanent assessments made only when a tax is introduced. Monitoring changes in inequality could become just as important as monitoring emissions reductions when evaluating climate policy.

Read the Full Research

Read the complete study, “Tax Progressivity of Carbon and Gasoline Taxes: The Role of Income Inequality,” published in Environmental and Resource Economics (2026), to explore the full theoretical model, Swedish case study, and international comparisons.

Meet the Researchers

  • Assistant Professor Julius Andersson — Stockholm School of Economics; Stockholm Institute of Transition Economics, Sweden.
  • Professor Giles Atkinson — Department of Geography and Environment; Grantham Research Institute for Climate Change and the Environment; Global School of Sustainability, London School of Economics and Political Science, United Kingdom.

Further Reading

Readers interested in the broader implications of this research are encouraged to explore the policy briefs published by the FREE Network.

These publications examine a wide range of topics related to environmental economics, climate policy, carbon pricing, taxation, and public policy, translating academic research into accessible, evidence-based analysis for policymakers and the general public.

How Polarised Is Support for Ukraine Across Europe?

Policy Brief

20260518 How Polarised Is Support for Ukraine Image 01

Russia’s invasion of Ukraine in February 2022 triggered broad public support across Western democracies. Since then, support in the United States has declined and become sharply partisan. In this policy brief, we use Eurobarometer data from 2022 to 2024 to show that while overall support for Ukraine remains high in the European Union, it has declined over time and become more politically polarised. We introduce a polarisation index to compare trends across countries and over time. There is substantial heterogeneity: while support remains close to universal in some countries, such as Sweden, others have seen marked increases in polarisation, with support weakening particularly on the far right. We find that higher inflation is associated with greater polarisation for costly policies, such as sanctions against Russia, but not for humanitarian aid. Finally, we present suggestive evidence that polarisation in support for sanctions may reflect domestic political debate.

From Consensus to Polarisation?

Russia’s invasion of Ukraine in February 2022 prompted widespread public support for Ukraine on both sides of the Atlantic. According to a PEW survey less than one month after the invasion, only 7% of Americans (9% of Republicans and 5% of Democrats) said the US is providing too much support to Ukraine (PEW, 2022). Two years later, overall support dropped significantly and support for Ukraine became politically polarised: with 47% of Republicans but only 13% of Democrats saying that the US is providing too much support (PEW, 2024).

In this brief, we use microdata from Eurobarometer covering over 185,000 respondents to evaluate whether the same trends are present in the EU. We show that support for Ukraine remained relatively high and stable across Europe from 2022 to 2024. This finding is consistent with other surveys that report resilient support among Europeans despite pessimism about the war’s likely outcome (Krastev and Leonard 2024) and personal costs in terms of inflation (Demertzis et al. 2023). Our brief focuses specifically on political cleavages within countries. We show that policies supporting Ukraine have become increasingly polarising in some countries and evaluate potential drivers of that polarisation.

Support for Ukraine Across the Political Spectrum

Figure 1 shows support for economic sanctions against Russia (Panel A) and humanitarian aid for Ukraine (Panel B) in the EU, by respondents’ self-reported left–right political placement in the Eurobarometer (for details on this measure, see also Lehne and Zhuang, 2023b). Support for Ukraine was high across the political spectrum in the immediate aftermath of the invasion, but declined in the latest Eurobarometer data from October 2024. The sharpest declines occur on the far right, especially for economic sanctions against Russia.

Figure 1A. Support for economic sanctions against Russia

Figure 1B. Support for humanitarian aid to Ukraine

Source: Eurobarometer and authors’ calculations.
This chart shows the mean support for each measure in April 2022 (in blue) and October 2024 (in red) in the EU. Based on binary transformations of Eurobarometer questions on support for each measure; dots show means and bars indicate 95% confidence intervals.

A similar pattern holds for military aid to Ukraine, though the average level of support is lower (not shown). Support for humanitarian aid is uniformly higher and less politically polarising; even among respondents on the very far right, more than three-quarters are in favour.

This overall pattern masks large heterogeneity across countries. Figure 2 shows support for sanctions against Russia in four European countries: Sweden, Poland, Greece and France. In Sweden, support for sanctions is close to universal, broadly uniform across the political spectrum, and has changed little in the two years since the start of the war. Similarly, in Poland, support remains very high but declines in 2024 among respondents on the centre-right. Support varies more with political leaning in countries such as France and Greece. While support for sanctions was relatively high in France in 2022, especially in the centre, it has declined markedly on the right. This pattern is repeated across many other European countries, including Austria, Germany, the Netherlands, and Italy. By contrast, in Greece, support for sanctions was comparatively lower to begin with and declined further over time. In Greece, as in Bulgaria, Cyprus, Czech Republic, Latvia and Slovakia, support is particularly weak on the left.

Figure 2. Political Polarisation in Support for Sanctions across four European countries

2a. Sweden

2b. Poland

2c. France

2d. Greece

Source: Eurobarometer and authors’ calculations.
This chart shows mean support for sanctions against Russia in April 2022 (in blue) and October 2024 (in red) in (a) Sweden, (b) Poland, (c) France and (d) Greece. Based on binary transformations of Eurobarometer questions on support for each measure; dots show means and bars indicate standard deviations.

A Political Polarisation Index

In order to compare how politicised support for Ukraine is across countries and over time, we  develop a polarisation index (see technical note for details). This measures the extent to which each self-reported ideology group’s support for a policy differs from the country-wide average (in other words, how far the dots in Figure 1 lie from a horizontal line).  The index ranges from 0 (all groups share the same position on sanctions) to 1 (groups hold opposing positions that are perfectly predicted by political ideology). Comparing the same country over time, there are two factors that change the index: (i) within an ideology group, average support for a policy may change, and (ii) the size of ideology groups (and their weight in the index) may change as the distribution of political views in the country evolves.

Comparing across countries, the index does not depend on the left-right gradient of support. While France and Greece show opposite patterns in Figure 2, they score similarly on the sanctions polarisation index in October 2024 (0.16 and 0.15, respectively). For Sweden, Figure 2 shows much greater consensus across the political spectrum, which translates into a significantly lower polarisation score: 0.05.

We find that some policies are associated with greater polarisation than others. There is widespread support in the EU for providing humanitarian aid and welcoming refugees from Ukraine, and polarisation scores are lower for these measures than for financial aid, military aid, sanctions on Russia or Ukraine becoming an EU candidate country. At the same time, looking at the EU as a whole, there has been an upwards trend in polarisation across all measures (Figure 3).

Figure 3. Political Polarisation Indices for different policies supporting Ukraine

Source: Eurobarometer and authors’ calculations.
This chart shows the EU-average political polarisation index for six different policies supporting Ukraine. The EU average is constructed using population weights. Survey waves are unevenly spaced across time. Some policies are not asked about in some waves.

Figure 4 shows which countries are driving the increase in polarisation. It plots the polarisation score for sanctions in April 2022 (shortly after the full-scale invasion) against the corresponding score in October 2024 (the latest wave for which data are available). Austria, the Czech Republic, and Slovakia show the greatest increase in polarisation over this period. Views on sanctions are also increasingly aligned with political cleavages in France, Germany, and Hungary. By contrast, Latvia shows a significant decline in polarisation while in Finland, Ireland, Poland, Portugal, and Sweden polarisation remained at very low levels more than two years into the war.

Figure 4. Political Polarisation Index for Sanctions against Russia 2022 vs 2024

Source: Eurobarometer and authors’ calculations.
This chart shows the political polarisation index for support for sanctions against Russia from the Eurobarometer data in October 2024 on the y-axis against the polarisation index in April 2022 on the x-axis. Includes all EU27 countries.

Drivers of Political Polarisation

In the next section, we show how political polarisation in support for Ukraine is related to the economy and domestic politics.

Polarisation and Price Increases

Figure 5 shows how political polarisation and inflation are related across countries in the EU. Political polarisation in support for sanctions against Russia at the end of 2024 tended to be higher in countries where prices increased faster between 2022 and 2024. As the cost of living increased, the issue of Russian sanctions became a point of contention between voters of different political leanings. Some political parties also started to capitalise on this issue to gain support. In contrast, there has been widespread agreement on the need for humanitarian aid to Ukraine and this was unaffected by the state of the economy.

Figure 5. Political Polarisation and Inflation

Source: Eurobarometer, Eurostat and authors’ calculations.
This chart shows the polarisation index for support for sanctions against Russia (in blue) and humanitarian aid for Ukraine (in red) from the Eurobarometer data in October 2024 against the average annual HICP inflation rate between 2022 and 2024 in percentage points. Includes all EU27 countries.

Polarisation and Elections

In Figure 6, we show how the polarisation index for support for sanctions against Russia (blue) and humanitarian aid for Ukraine (red) evolves around elections. Political polarisation for sanctions increases slightly around election periods, suggesting heightened debate on this issue. In contrast, polarisation in support for humanitarian aid shows little change over the election cycle.

Figure 6. Political Polarisation and Elections

Source: Eurobarometer, PPEG, Manifesto Project and authors’ calculations.
This chart shows the polarisation index for support for sanctions against Russia (blue) and humanitarian aid for Ukraine (red) in the two years before and after national parliamentary elections. Dots show means and bars indicate 95% confidence intervals. This is based on an unbalanced sample of EU countries with a lower house election between April 2022 and October 2024. For each country, only the closest election is used.

A Tale of Three Countries

Political parties play an important role in shaping the political discourse around Russia’s war on Ukraine. They are likely to both influence and be influenced by their voters’ attitudes towards supporting Ukraine.

In this section, we present a case study of three European countries that had elections between 2022 and 2024 and where parties have mentioned Russia in their manifestos according to data from the Manifesto project (see also Lehne and Zhuang, 2023a).

In Sweden, support for Ukraine in the face of Russian aggression has been consistently high along all dimensions and among voters across the political spectrum. In the Swedish elections in September 2022, six out of eight parties (including all three major parties) mentioned Russia in their party manifestos, and all supported sanctions against Russia.

Russia was also mentioned in the party manifestos of many of the parties contesting the French election in June 2022. But in France, the far-right Rassemblement Nationale broke with the other political parties and struck a more conciliatory tone towards Russia. For instance, they stated that they “… will be seeking an alliance with Russia on certain fundamental issues: European security, which cannot exist without Russia; the fight against terrorism, which Russia has fought more consistently than any other power; and convergence in the handling of major regional issues impacting France …” (Manifesto Project). This divergence is mirrored in voter attitudes. Support for sanctions against Russia has declined over time in France, especially amongst voters on the far right of the political spectrum.

In Greece, political support for sanctions against Russia is lower than in many other European countries has been declining over time. Political polarisation in support for Ukraine increased, especially around the elections in May and June 2023. Few of the political parties mentioned Russia directly in their manifestos, and then mostly in conjunction with rising prices and effects on the Greek economy.

Figure 7. Political Polarisation in Support for Ukraine

7a. Sanctions against Russia

7b. Humanitarian Aid for Ukraine

Source: Eurobarometer, Manifesto Project and authors’ calculations.
These charts show political polarisation in support for sanctions against Russia (Panel A) and humanitarian aid for Ukraine (Panel B) in France, Greece and Sweden. Vertical dashed lines show the timing of national parliamentary elections.

Conclusion

Public support for Ukraine remains high in the EU, but there are worrying signs of fragmentation. While some countries continue to exhibit broad consensus in supporting Ukraine across multiple policies, other countries have seen declining support as the debate has become aligned with domestic political cleavages. Sanctions against Russia and military aid to Ukraine have become increasingly contentious, while there is broader agreement on the need for humanitarian aid. In many countries, it is particularly voters on the far-right of the political spectrum who have become less supportive of policies supporting Ukraine.

Our analysis highlights two areas of fragility in the consensus around support for sanctions against Russia. We see some indication that the domestic political debate can drive polarisation in opinions on sanctions against Russia, with the salience of these issues increasing around elections, particularly when parties competing in the elections have different policy platforms.

Another source of fragility is the economic cost of sanctions. Countries that experienced larger increases in prices since 2022 exhibit greater political disagreement over sanctions, suggesting that economic costs can shape the political sustainability of support for Ukraine. Recent increases in energy prices, linked to the war in Iran, may further amplify political polarisation around sanctions against Russia.

Despite these pressures, clear majorities across most EU countries continue to support Ukraine, especially when it comes to humanitarian aid and welcoming refugees. European solidarity has so far proven resilient in the face of growing external pressures.

Technical note:

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Critical Minerals and the New Geopolitics of the Green Transition: Insights from Energy Talk 2026

Posted on April 22, 2026 | Policy Brief

The green transition promises to reduce Europe’s dangerous dependence on fossil fuels often produced in autocratic states, but it may also create new strategic dependencies. Technologies central to decarbonization — such as batteries, wind turbines, electric vehicles, and solar panels — rely on critical minerals whose mining and processing remain highly concentrated.

At the 2026 Energy Talk, “Critical Minerals and the New Geopolitics of the Green Transition”, organised by the Stockholm Institute of Transition Economics (SITE) in collaboration with the FREE Network, leading researchers and industry representatives examined these tensions from three perspectives: the geopolitical significance of Ukraine’s mineral endowment; the regulatory and distributional challenges of Sweden’s mining sector; and the sustainability and competitiveness pressures facing European firms in critical mineral supply chains. This policy brief summarises the main takeaways from the event.

Background

A central promise of the green transition is to reduce Europe’s exposure to geopolitical risk. For decades, dependence on fossil fuels — concentrated in a handful of autocratic or semi-autocratic states — had made European democracies structurally vulnerable to political coercion. Russia’s full-scale invasion of Ukraine in 2022 brought that vulnerability into sharp relief, accelerating a shift toward renewable energy that climate advocacy alone had struggled to achieve. For the first time, the moral case for decarbonisation and the strategic case for energy security pointed in the same direction.

Yet as the transition accelerates, a new question has moved to the centre of European policy debate: are we escaping one dependency only to construct another? The technologies at the heart of decarbonisation — batteries, wind turbines, electric vehicles, solar panels — depend on critical minerals whose deposits are geographically concentrated and whose processing is dominated, to a degree that should give pause, by a single external power. The logic is uncomfortably familiar. The material has changed; the structural problem has not.

At the same time, many of the raw materials needed for the green transition are known to exist in Europe. What is lacking is not geological potential but a clear idea of how to navigate trade-offs between economic and possibly environmental costs in developing capacity in Europe, and potential future strategic vulnerabilities.

This policy brief grows out of the 2026 Energy Talk, Critical Minerals and the New Geopolitics of the Green Transition, organised by the Stockholm Institute of Transition Economics (SITE) in collaboration with the FREE Network. The event brought together leading researchers and industry representatives to examine these tensions from three angles: the geopolitical stakes surrounding Ukraine’s significant but embattled mineral endowment; the regulatory and distributional obstacles that prevent Sweden — despite its considerable deposits — from translating geological wealth into production; and the sustainability and competitiveness pressures bearing down on European firms operating in critical mineral supply chains.

From Fossil Fuel Dependency to Mineral Dependency: The Geopolitical Stakes

Jesper Roine, Adjunct Professor at Stockholm School of Economics and Deputy Director of SITE, opened by framing critical minerals as a central geopolitical challenge of the green transition. As Roine noted, Russia’s full-scale invasion of Ukraine in 2022 succeeded in making resource dependency an urgent political issue in a way that years of climate advocacy had not. The transition to renewables offers structural relief: unlike fossil fuels, often concentrated in autocratic states, wind and sunlight are globally distributed. Yet the minerals required to build renewable infrastructure are themselves geographically concentrated, and their processing is, to an alarming degree, dominated by a single power. Europe risks replacing one form of dependency with another unless it navigates this landscape carefully.

Jiayi Zhou, Senior Researcher at the Stockholm International Peace Research Institute (SIPRI), provided a broader geopolitical perspective, drawing on two recent SIPRI reports. She argued that critical minerals have undergone a threefold transformation: politicisation, securitisation, and militarisation. What began as industrial policy to reduce dependence on Chinese processing has increasingly shifted toward zero-sum security arguments and, more recently, into direct links with conflict dynamics — in Ukraine, the DRC, and in Trump-era manoeuvres around Greenland and Venezuela. This fragmentation risks slowing the green transition globally and squeezing resource-rich developing countries caught between great powers. One discussed example was the US reportedly considering withholding HIV aid to Zambia unless it expanded access to minerals for American investors — a dynamic Zhou called a race to the bottom.

Ukraine’s Mineral Potential and the Imperative of Industrial Integration

Zhou went on to argue that Ukraine sits at the intersection of these pressures. Russian-occupied territories are estimated to contain 40 to 50 per cent of the assessed value of Ukraine’s critical mineral deposits. Russia’s 2024 Minerals Development Plan explicitly targets integrating those resources into the Russian economy, while the US-Ukraine Reconstruction Investment Fund extends preferential access to American investors amid simultaneous US outreach to Russia on business opportunities. Zhou concluded that the EU is the least equipped among the great powers to compete in a world of militarised resource mercantilism, though it retains normative and standards-based appeal. Ukraine risks becoming a casualty of great-power competition rather than a beneficiary.

Olha Evstigneeva, PhD researcher in climate economics at the Institute for Economics and Forecasting of the National Academy of Sciences of Ukraine, Development Director at the Ukrainian Association of Renewable Energy, and Decarbonisation Expert, spoke from Kyiv. She described Ukraine as undergoing an accelerated and involuntary transition that other countries have yet to fully engage with. The EU’s Carbon Border Adjustment Mechanism already affects roughly 20 per cent of Ukraine’s exports, with around 70 per cent now directed to the EU. “This is no longer about going green,” she noted, but about “controlling value chains, markets, and industrial competitiveness.” Despite losing 30 to 40 gigawatts of generation capacity as a result of the war, Ukraine has continued to advance its climate and EU integration agenda. This includes 61 per cent implementation of EU renewable energy legislation, roughly 85 per cent alignment with its 2030 targets, and the fastest deployment of energy storage in Europe.

On minerals, Evstigneeva urged realism. Ukraine holds significant reserves of lithium, graphite, titanium, manganese, and iron ore, but much of the underlying geological data dates from the 1980s and 1990s and falls short of current investment standards. Confirming a single deposit requires USD 100-300 million and 10-12 years, an especially difficult task under wartime conditions. Ukraine’s lithium is hard-rock spodumene, which requires more energy-intensive processing at a time when the electricity system is severely damaged. The strategic question, she argued, is not whether Ukraine has resources, but whether it will remain a raw material supplier or become part of Europe’s industrial base. She proposed a phased model: extraction and primary processing first, refining and components next, and full battery value-chain integration over time. She also noted that Ukraine’s rapidly expanding drone industry and broader military technology sector are creating domestic demand for many of these same materials. In this sense, critical minerals are no longer just about energy transition but also about technological sovereignty.

Sweden: The Gap Between Mineral Potential and Mining Reality

Sweden holds some of Europe’s most significant mineral deposits, including rare earth elements, iron ore, copper, nickel, and lithium. Alongside Finland, Norway, and Greenland, it has the potential to supply a substantial share of the critical raw materials Europe requires. Yet turning that geological potential into production has proved persistently difficult. The presentations by Maria Sunér, CEO of Svemin, the Swedish Association of Mines, Mineral and Metal Producers, and Daniel Spiro, Professor of Economics at Uppsala University, pointed to a common diagnosis: Sweden has the geology, the institutions, and the technological capactity, but lacks a regulatory and distributional framework that allows mining to work for investors, local communities, and the state alike.

Sunér set Sweden’s mining sector within a broader European context. Europe produces only around 3 per cent of the raw materials it consumes, while accounting for 25 per cent of global production. Sweden alone accounts for 90 per cent of the EU’s iron ore production, yet Europe still imports 70 per cent of its iron ore needs. China, meanwhile, dominates key processing stages, including over 60 per cent of cobalt processing and more than 90 per cent of rare earth refining. The EU’s Critical Raw Materials Act set targets of 10 per cent domestic extraction and 40 per cent domestic processing, but Sunér argued that these are unlikely to be reached under current conditions. Sweden has just 13 active metal mines, and the most recent opened only two years ago, the first in more than a decade. Environmental permitting alone can take seven years, and a full mining project typically takes 15 to 35 years from exploration to production. Four fully permitted mines are currently still seeking final financing. According to Sunér, the main obstacles are the regulatory framework and limited access to capital, particularly for early-stage projects, an area in which Sweden lacks the financing culture found in countries such as Canada or Australia.

Spiro approached the issue from an economic perspective and identified two structural barriers. First, local communities and landowners have little incentive to support extraction. Under Sweden’s current system, landowners receive only 0.15 per cent of the value of minerals extracted from their land, while bearing the environmental costs of hosting a mine. Their main source of leverage, therefore, lies in delaying projects through the regulatory process rather than in negotiated compensation. Second, private investment is discouraged by a hold-up problem: exploration involves high upfront costs and uncertain returns, while a highly profitable discovery may trigger political pressure to revise the tax or royalty regime after the fact. Such uncertainty weakens incentives for long-term investment. The result is a paradox: Sweden has favourable geology, political stability, high human capital, and one of the world’s more generous investor profit-sharing systems, yet private investment remains limited, and firms still argue that conditions are not attractive enough.

To break this deadlock, Spiro outlined three regulatory alternatives. The first is state-led exploration and extraction, with revenues redistributed to local communities. This could help address both the hold-up problem and local opposition, though potentially at the cost of efficiency. The second would require local communities and landowners to conduct exploration themselves, giving them ownership of any discoveries and thereby aligning their interests with project outcomes. The third — Spiro’s preferred approach — adapts elements of the Norwegian model: exploration and investment would be susbsidised by a set percentage, matched by an equivalent excess-profit tax to preserve investment neutrality; a nationally owned company would participare as co-investor to increase transparency and reduce the risk of retroactive rule changes; revenues would be shared with host communities; and projects would be required to carry comprehensive environmental insurance covering long-term liabilities after mine closure.

In the discussion, Sunér challenged some of Spiro’s premises. She noted that Sweden’s environmental code is already among the strictest in the world, and cited polling suggesting that around half of Swedes would accept living near a mine. She also emphasised that 90 to 97 per cent of mine employees at most Swedish sites are local residents. Still, both speakers agreed that the core question remains unresolved: how to ensure that host communities genuinely benefit from large extractive investments. In this respect, mining reflects a broader challenge that Sweden shares with other sectors affected by large-scale industrial projects.

European Firms: Navigating Competitiveness, Sustainability and Geopolitics

Aaron Maltais, Senior Research Fellow at the Stockholm Environment Institute (SEI), presented findings from a 2026 paper in Business Strategy and the Environment, based on interviews with companies downstream in critical mineral supply chains, including utilities, wind and solar firms, battery manufacturers, EV producers, and defence companies. He began with a striking illustration of the material intensity of modern technologies: a single 171-gram smartphone requires around 125 kilograms of mined rock. Scaled to the batteries and clean technologies needed for the green transition, the resulting material demands are staggering.

The firms interviewed were broadly committed to sustainable supply chain management and often saw synergies between sustainability and competitiveness. As one battery-sector respondent put it: “You can’t sell on one end a product for the energy transition and pollute endlessly on the other.” Companies identified human rights, conflict minerals, forced labour, and carbon emissions as key priorities, although the discussion also revealed a tendency to focus more heavily on carbon, partly due to data availability. Corporate practice has also evolved, from reactive controversy management to more systematic risk prioritisation, and from auditing first-tier suppliers to engaging more directly with upstream mining companies. Recycling of critical raw materials was widely viewed as important, but current capacity remains far below what is needed. Europe has roughly one-tenth of the recycling capacity required to meet its 2031 targets, and many planned projects face financing and technical barriers.

EU legislation was broadly welcomed for harmonising standards and reinforcing the credibility of sustainability requirements. At the same time, companies pointed to an overlapping and sometimes contradictory regulatory landscape. For example, pressure to meet EU fleet-emissions targets could lead automakers to relax supply chain sustainability standards to source enough vehicles quickly. Geopolitical dependency was another major concern, particularly where firms saw little real alternative to Chinese suppliers. Firms are responding through vertical integration and longer-term purchase agreements, but these measures do not eliminate underlying structural dependencies. Maltais concluded that the EU needs greater policy coherence across industrial strategy, due diligence legislation, and sustainability objectives, alongside stronger international standards and more credible multi-stakeholder initiatives with genuine civil society participation.

Concluding Remarks

The picture that emerges from the day’s discussions could easily be read as cause for alarm — yet the event pointed toward pragmatism rather than pessimism. The trajectory of Europe’s green transition, while broadly positive, is neither assured nor without risk. Resource endowments are the easier part. Governance, institutions, investment frameworks, distributional fairness, and political will are what determine whether mineral wealth becomes a foundation for resilience — or a new source of vulnerability.

Speakers

  • Jesper Roine – Adjunct Professor, Stockholm School of Economics; Deputy Director, SITE
  • Jiayi Zhou – Senior Researcher, Stockholm International Peace Research Institute (SIPRI)
  • Olha Evstigneeva – PhD Researcher in Climate Economics, Institute for Economics and Forecasting, National Academy of Sciences of Ukraine; Development Director at the Ukrainian Association of Renewable Energy and Decarbonisation Expert
  • Maria Sunér – CEO, Svemin, the Swedish Association of Mines, Mineral and Metal Producers
  • Daniel Spiro – Professor of Economics, Uppsala University
  • Aaron Maltais – Senior Research Fellow, Stockholm Environment Institute (SEI)
  • Chloé Le Coq – Professor, Paris Panthéon-Assas University; Research Fellow, SITE (Moderator)

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Discrimination in Work Conditions: The Case of Sexual Harassment

Posted on March 9, 2026 | Policy Brief

Blurred silhouettes of office workers behind glass symbolizing discrimination work conditions in a modern workplace environment.

The #MeToo movement put a spotlight on the severe and highly prevalent workplace problem of sexual harassment. New research argues that economists should treat sexual harassment as gender discrimination in work conditions. Both men and women are subject to this discrimination when their gender is in the minority in the workplace. These patterns reinforce segregation in the labor market and, by extension, economic gender inequality. By reducing the prevalence of sexual harassment, we not only reduce individual suffering but also have positive impacts at a societal level.

Introduction

Throughout the world, the sorting of women into lower-paying occupations and workplaces fundamentally determines economic gender inequality (see Penner et al. 2023 for an overview). The academic discussion about causes of this gender segregation typically centers on gender differences in preferences for work conditions. Women who have more responsibilities for children and the household prefer occupations and workplaces with more flexible schedules, work-from-home opportunities, and shorter commutes. To get these good work conditions (so-called work amenities), they accept jobs in occupations and workplaces with lower wages (Goldin 2014, Wiswall and Zafar 2016, Mas and Pallais 2017, Le Barbachon et al. 2019).

There is mounting evidence that the interpersonal work environment also matters greatly for job choices. Workers seem to put a large negative value on negative interpersonal work conditions such as hostility, bullying, and sexual harassment (see, for example, Folke and Ricke 2022, Collis and Van Effenterrre 2025, and Le Page et al. 2025). Unlike traditional amenities related to aspects such as schedule flexibility, training, or bonuses, the social work environment does not form part of the employment contract and is not under direct control of the employer. This implies that even among the most well-intentioned employers, the social work environment could differ across individuals – and, in particular, between men and women.

Gender differences in exposure to negative social behaviors may meet the standard definition of discrimination in empirical economics research. The mistreatment may imply that women and men with the same qualifications doing the same job receive different pay. Women and men may have the exact same job contracts and receive the exact same compensation on paper, but one gender may be exposed to negative treatment that dramatically reduces their total payoff from the job.

Sexual Harassment and Gender Inequality in the Labor Market

Folke and Rickne (2022) study how sexual harassment by colleagues and managers affects gender segregation across workplaces and, by extension, gender inequality in the labor market. The starting point is a general equilibrium model where the total pay of a job is a function of the wage and the gender-specific sexual harassment risk.

The model shows that sexual harassment leads to larger gender inequality in the labor market under three conditions. Sexual harassment risks need to increase in the share of opposite sex co-workers, wages should increase in the share of men in the workplace, and sexual harassment should affect labor market choices. The model explains that sexual harassment creates gender segregation by operating as a wedge in the payoff from jobs in gender-imbalanced workplaces. All else equal, women get a lower total compensation in male-dominated workplaces, and vice versa for men in female-dominated ones. This will create gender segregation as both women and men have smaller incentives to become a workplace gender minority. It will also create a larger gender wage gap by channeling women into lower-paying workplaces and men toward higher-paying ones.

Harassment Risks and Pay Across Workplaces

To empirically assess how harassment risks vary across workplaces, Folke and Rickne (2022) use survey data on self-reported sexual harassment from the Swedish government’s biannual survey on work conditions (N=40,000). This nationally representative survey contains questions on unwanted sexual advances, sexist hostility, and gender harassment from colleagues or managers in the last 12 months. The survey data can be linked to administrative data on the full Swedish workforce, enabling the computation of the share of men in each survey respondent’s occupation and workplace.

The relationship between self-reported harassment and sex ratios is shown in Figure 1. Clearly, both women and men self-report more harassment when they are the gender-minority in their workplace. The higher self-reported rate of harassment among gender minorities is not caused by systematically different demographic traits. Nor is it caused by gender minorities being more likely to have opposite-sex supervisors, or to themselves hold subordinate or supervisory positions, or by them having opposite-sex managers. Folke and Rickne (2025) show that these patterns also hold at the occupation level.

Figure 1. Sexual Harassment Incidence across Workplace Sex Ratios.

Source: Replication of the left-hand side of Figure II in Folke and Rickne (2022). Note: The figure shows binned averages of a binary variable for self-reports of sexual harassment in the last 12 months from colleagues or managers. Each sub-sample of men and women is split into 100 equally sized bins of the X-variable. N=19,975 for women, and 17,482 for men.

To examine how wages relate to sex composition, Folke and Rickne (2022) rely on the empirical framework developed by Abowd et al. (1999). This framework estimates workplace fixed effects in a wage regression that also includes individual fixed effects and a host of occupational and demographic controls. The workplace fixed effects (i.e., the wage premiums) capture how much a workplace pays in wages compared to other workplaces with the same occupation structure and workers’ socio-economic traits. The analysis shows that a 10-percentage-point larger share of men is, on average, associated with a 1-percentage-point higher wage premium.

To summarize the first set of results, male-dominated workplaces pay more. At the same time, both men and women face a higher risk of sexual harassment when they work in an occupation or workplace with more men. The combination of these results suggests that women have an incentive to work in lower-paying jobs, while men have an additional incentive to work in high-paying jobs.

Sexual Harassment and Job Choice

Sexual harassment can affect job choice in two ways: it can deter an individual from taking a job, or make a person leave a job that they have previously chosen. Folke and Rickne (2022) examine both these channels.

To examine if sexual harassment risks deter individuals from taking a job, Folke and Rickne (2022) use a survey experiment sent to ~4,000 employed Swedish citizens. The survey experiment follows the standard economic approach of exposing respondents to a hypothetical job choice experiment where they choose between fictional job offers with randomized wages and work conditions (for prominent examples of this approach, see, for example, Wiswall and Zafar 2017 and Mas and Pallais 2017).

Sexual harassment was incorporated into the experiment by showing respondents vignettes of sexual harassment incidents that took place in fictional workplaces (as in Hulin, Fitzgerald, and Drasgow 1996). These vignettes mimic the types of anecdotes or rumors that a prospective employee might hear about a potential employer. Importantly, the vignettes make it possible to vary the victim’s gender, which allows comparison of job choices among respondents who are exposed to a harassment victim of their own gender and respondents exposed to a victim of the opposite gender.

The experiment showed a large negative valuation of sexual harassment—the equivalent of a 10% lower wage in the full sample. This large valuation makes sexual harassment a relevant work condition for shaping people’s total remuneration from work and is quantitatively similar to the valuations of time/space flexibility in previous research (Wiswall and Zafar 2017; Mas and Pallais 2017; Maestas et al. 2018). While men and women had similar valuations, there was a substantial difference between those who see a victim of their own sex compared to the opposite sex: the negative valuation is equivalent to a 17% lower wage for same-sex victims but just 6% for opposite-sex ones.

Figure 2. Event Study of Workplace Transitions.

Source: Replication of Figure V in Folke and Rickne (2022). Note: The figure shows estimated differences in the proportion of employer-to-employer transitions out of the workplace in the Work Environment Survey between people who self-report sexual harassment in that survey or not. The X-axis denotes the number of years since the survey. Demographics controls from administrative records are four dummies for marital and parental status, four dummies for age categories, two dummies for having secondary or tertiary education, and two dummies for being born in a different European country or outside Europe.

Folke and Rickne (2022) rely on the work-environment survey matched to the administrative data to show that sexual harassment also affects the probability of leaving a workplace. Conditional on a host of controls, women who report sexual harassment are about 5 percentage points more likely to have left their workplace 3 years after having answered the survey than women who did not report sexual harassment. The equivalent gap for men was about 3 percentage points.

Conclusions

The case study of sexual harassment in Sweden highlights this work condition as an important barrier to gender equality in the labor market. It shows a higher prevalence of sexual harassment for workplace gender minorities and how it imposes costs on these minorities relative to their gender majority colleagues. The disincentive created by sexual harassment to become—and remain—a workplace gender minority reinforces gender segregation across workplaces. The gender wage gap also grows as women prefer not enter male-dominated workplaces with higher pay, or leave these workplaces and head to ones with more women and lower monetary compensation.  These macroeconomic impacts add to the “business case” for governments to prevent sexual harassment.

Sexual harassment is just one of many forms of discrimination in work conditions that could reinforce inequalities in the labor market. If we want to reduce gender inequality, it is clearly not enough to focus on gender differences in preferences for work conditions. We also need to pay attention to factors, such as sexual harassment, that lead to men and women facing different work conditions in the same job. Addressing this form of discrimination could not only yield large payoffs for individual well-being but also reduce inequalities in the labor market.

References

  • Abowd, J.M., Kramarz, F. and Margolis, D.N., 1999. High wage workers and high wage firms. Econometrica, 67(2), pp.251-333.
  • Folke, O. and Rickne, J., 2022. Sexual harassment and gender inequality in the labor market. The Quarterly Journal of Economics, 137(4), pp.2163-2212.
  • Folke, O., & Rickne, J. (2025). Sexual harassment across occupations: new evidence from Swedish Nationally representative data. European Sociological Review, 41(6), 903-918.
  • Collis, M.R. and Van Effenterre, C., 2025. Workplace Hostility. IZA-Institute of Labor Economics.
  • Goldin, C. (2014). A grand gender convergence: Its last chapter. American Economic Review, 104(4): 1091-1119.
  • Hulin, C.L., Fitzgerald, L.F. and Drasgow, F., 1996. Organizational influences on sexual harassment. Sage Publications, Inc.
  • Le Barbanchon, T., Rathelot, R. and Roulet, A., 2021. Gender differences in job search: Trading off commute against wage. The Quarterly Journal of Economics, 136(1), pp.381-426.
  • Lepage, L.P., Li, X. and Zafar, B., 2025. Anticipated discrimination and major choice (No. w33680). National Bureau of Economic Research
  • Maestas, N., Mullen, K.J., Powell, D., Von Wachter, T. and Wenger, J.B., 2023. The value of working conditions in the United States and implications for the structure of wages. American Economic Review, 113(7), pp.2007-2047.
  • Mas, A, and A Pallais (2017), “Valuing Alternative Work Arrangements”, American Economic Review, 107(12): 3722–3759.
  • Penner, A.M., Petersen, T., Hermansen, A.S., Rainey, A., Boza, I., Elvira, M.M., Godechot, O., Hällsten, M., Henriksen, L.F., Hou, F. and Mrčela, A.K., 2023. Within-job gender pay inequality in 15 countries. Nature human behaviour, 7(2), pp.184-189.
  • Wiswall, M. & Zafar, B. (2017). Preference for the workplace, investment in human capital, and gender. The Quarterly Journal of Economics 133(1): 457-507.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Sweden Supports Ukraine with a Record Aid Pledge

Posted on February 20, 2026 | Videos

Torbjörn Becker speaking on stage during a European Parliament event with EU and Swedish flags in the background.

Sweden supports Ukraine with €10.7 billion in aid, marking the largest pledge to another country in modern Swedish history. Four years after Russia’s full-scale invasion, Swedish political, military, and economic leaders met at Kulturhuset in Stockholm on February 16, 2026. Their message was clear: backing Ukraine strengthens Sweden’s own security and Europe’s stability.

Torbjörn Becker, Director of the Stockholm Institute of Transition Economics (SITE), joined senior officials to discuss how military innovation and economic endurance shape the war and might impact its outcome. As Sweden’s support for Ukraine continues, attention is shifting to both battlefield technology and financial resilience.

Technology Transforming Ukraine’s Front Lines

The war has evolved at a remarkable speed. Sweden’s Minister for Defence, Pål Jonson, described a battlefield defined by drones, satellites, and electronic warfare. As a result, troops can no longer hide easily. Innovation cycles that once took years now unfold within months.

Vice Admiral Eva Skoog Haslum warned that the front lines remain extremely dangerous. She described parts of the battlefield as “kill zones,” where constant surveillance and precision strikes limit movement. Meanwhile, Ukraine has weakened Russia’s naval presence in the Black Sea by using smaller, flexible systems instead of traditional large warships.

Swedish military equipment has played a significant role. The CV90 combat vehicle and Archer artillery system have performed effectively in combat. Designed for harsh northern conditions and to counter Russian systems, they have proven highly relevant in Ukraine.

Economic Pressure and Long-Term Advantage

Although military developments matter, economic endurance may decide the war. Becker emphasized that while Russia’s economy is much larger than Ukraine’s, the combined economic power of the EU and the United States far outweighs Russia.

“Russia’s economy is roughly ten times the size of Ukraine’s. But compared to the EU and the United States together, it is closer to 1 to 20. If political support holds, the resources are there to sustain Ukraine over time,” Becker explained.

Russia depends heavily on oil revenues. Therefore, when oil prices fall or sanctions tighten, state income drops. At the same time, Russia relies increasingly on China for advanced technology components. According to Becker, this dependence creates long-term vulnerability.

Interest rates in Russia have climbed to around 20–25 percent. Such high rates strain banks and businesses. Over time, financial instability could weaken Russia’s ability to finance the war.

Planning for Ukraine’s Economic Recovery

Ukraine also faces serious fiscal challenges. The country spends more than half of its state budget on defense. Public debt now exceeds 100 percent of GDP. As a result, debt restructuring will likely be necessary.

Becker pointed to roughly USD 300 billion in frozen Russian central bank reserves held abroad. Using these funds could provide a stronger financial foundation for rebuilding Ukraine. “The main obstacle is not technical or legal,” Becker said. “It is about political coordination and will.”

As Sweden’s support for Ukraine continues, European leaders are rethinking both defense strategy and economic resilience. The lessons learned from this war will likely shape European security policy for years to come.

Key Conclusions on Sweden’s Support for Ukraine

  • Russia’s war economy faces mounting pressure from high interest rates and shrinking reserves.
  • Western economic strength gives Ukraine a structural long-term advantage.
  • Oil revenues remain central to Russia’s fiscal stability.
  • Frozen Russian central bank assets could help fund Ukraine’s reconstruction.

Further Reading on Sanctions Against Russia and Economic Pressure

Energy exports remain the backbone of Russia’s economy and a tool of geopolitical leverage. Sanctions targeting this sector aim to reduce state revenue and limit Moscow’s influence abroad.

Visit the Sanctions Portal Evidence Base to explore research on energy sanctions against Russia. You can also review the Timeline of Western Sanctions and Russian Countermeasures to see how both sides have adapted since the full-scale invasion.

Explore SITE’s research articles, policy briefs, datasets, reports, and additional publications on the SITE website, and subscribe to the newsletter to stay informed about important updates.

Income Polarization and Climate Policy Backlash

Posted on February 2, 2026 | Policy Brief

20231201 The Impact of Rising Gasoline Prices Image 03

A recurring challenge for climate policy is political backlash. Over the last decade, we have seen prominent examples like the repeal of the carbon tax in Australia in 2014, the ‘Yellow Vests’ protest against the French carbon tax between 2018 and 2020, and the rollback of climate policy in the transport sector in Sweden between 2022 and 2024. A common argument put forward to explain this backlash is distributional concerns – that carbon and fuel taxes are regressive, disproportionately burdening low-income households. Yet, these prominent episodes often look like middle-class revolts. Studies find that the Yellow Vests supporters in France had ‘modest incomes’, but few came from the poorest deciles of the income distribution. Similarly, a study of Swedish fuel tax protesters found that they had relatively high incomes. This brief proposes a complementary explanation to regressivity: when the income distribution becomes more polarized – with stronger growth at both tails relative to the middle – the tax burden can shift toward the middle. A simple three-agent example illustrates how polarization can ‘squeeze’ the middle class, potentially undermining the durability of climate policy even when the poorest are compensated.

Climate Policy Backlash: Why “Not Just the Poor”?

Fuel and carbon taxes have repeatedly triggered political controversy and, in some cases, reversals. In France, the planned 2018 increase in the carbon tax became a focal point of the Yellow Vests protests. In Australia, the economy-wide carbon pricing introduced in 2012 was repealed just two years later. And in Sweden, the current government has reduced transport fuel taxes and the biofuel mandate to lower pump prices.

These episodes are often interpreted through the lens of tax progressivity (Douanne and Fabre 2022; Ewald et al. 2022): if energy and transport fuels are necessities, the tax-to-income burden can be higher for low-income households, with implications for policy stability. But the political patterns are frequently more complex. In France, many protesters were working or middle-class rather than poor (Dormagen et al. 2022). In Sweden, fuel tax protesters had, on average, relatively high incomes (Ewald et al. 2022), and households in the bottom third of the income distribution have no transport fuel expenditure at all, which weakens a simple “regressivity” narrative.

Figure 1. Share of Swedish households with zero transport fuel expenditure, by income decile.

Source: Household expenditure survey data 1999-2012 from Statistics Sweden.

This motivates the question: what if the distributional conflict that matters politically is not only bottom-versus-top, but, more importantly, concerns what happens to the middle class?

This brief introduces a three-agent model to show that under income polarization, the relative tax burden may shift to the middle. Traditional tax progressivity indices may fail to capture this shift as they weight different parts of the income distribution. At the same time, such a change is likely to have large implications for the political action and ultimately, the environmental policy design.

A Simple Model of Tax Burden Shifts

Consider an economy with three types of households: low-income (L), middle-income (M), and high-income (H). When a good like gasoline is taxed at a constant rate, each household’s tax burden depends on how much of their budget they spend on the taxed good; their ‘budget share.’

As incomes grow over time, these budget shares change. The direction of change depends on whether the taxed good is a necessity or a luxury. For necessities — goods where spending doesn’t keep pace with income growth — the budget share falls as income rises. For luxuries, the opposite occurs. The speed at which budget shares change over time is thus governed by two factors: how responsive spending is to income changes (the income elasticity), and each household’s income growth rate.

To track how tax burdens shift between different income groups, we can examine the relative changes in their budget shares. With three income groups, we need to make three comparisons: poor versus rich, poor versus middle, and middle versus rich. If the budget share falls faster for the relatively richer household in all three comparisons, the tax becomes more regressive. If it falls faster for the relatively poorer in all three comparisons, the tax becomes more progressive.

However, a third pattern is possible: the burden can shift in a ‘polarized’ way, where the middle class loses ground relative to both the poor and the rich. In this case, whether the tax is progressive or regressive is ambiguous – it depends on which comparison we prioritize in our social welfare function.

Polarization Squeezes the Middle

We use the example of income polarization to illustrate how this middle-squeeze can occur. Following Esteban and Ray (1994) and Wolfson (1994), we define income polarization as a situation where the middle group’s income grows more slowly than both the bottom and top groups. Under polarization, the middle class shrinks as a share of total income, while both the poor and rich expand their shares. Such income polarization has been well documented in the US and Europe (e.g., Goos et al. 2009; Autor 2022).

Table 1 shows a stylized numerical example of income polarization. Low- and high-income households have higher income growth compared to the middle, whose income share shrinks. Furthermore, gasoline is a necessity (in high-income countries), and we assume uniform income elasticities so that the budget share declines as income grows for all three income groups.

Table 1: Example of income polarization

What happens to relative tax burdens under these conditions? Because low-income households have the fastest income growth, their gasoline budget share falls the quickest. The middle class, with much slower income growth, sees its budget share fall more slowly. This means the middle class shoulders more of the tax burden relative to the poor.

Similarly, high-income households also experience faster income growth than the middle class, so their budget share also falls faster. Again, the middle class ends up shouldering more relative to the rich. The middle is thus ‘squeezed’ from both directions.

Importantly, when we compare the poor directly to the rich, the tax burden shifts in a progressive direction — the poor’s relative burden falls compared to the rich. Yet this ‘traditional’ progressive pattern masks the fact that the middle class is bearing an increasing share of the burden compared to everyone else.

The political implication is clear: when taxing a necessity under income polarization, the middle class can become relative losers even when the tax appears progressive in traditional comparisons between top and bottom. In this case, climate policy backlash would come from working and middle-class groups rather than the absolute poorest, and compensating mainly the poor may be insufficient for political durability.

What This Suggests for Climate policy design

The mechanism illustrated above does not deny that tax progressivity matters. Rather, it highlights an additional vulnerability: in a polarized economy, a carbon tax on necessities may face backlash when the middle class is squeezed. Three practical implications for climate policy design follow from this.

First, protecting the bottom is essential, but may not be sufficient for political durability if the middle becomes the relative ‘loser.’ The traditional focus in the economics literature on the political economy of climate policy and its potential distributional effects is on measures like revenue recycling (‘carbon dividends’) – especially to the poor – to counter regressivity. This compensation may be insufficient for policy stability, however, and targeted measures toward the middle class may be needed (such as a reduction in middle-income tax rates).

Second, backlash may potentially be lower when there are credible substitutes, thereby reducing the budget share of the taxed goods over time. If, for instance, the middle-class are relatively more dependent on private transport, compensatory policies aimed at making electric vehicles more affordable may reduce both the objective burden and the intensity of climate policy aversion.

Third, summary indices of tax progressivity — like the Kakwani (1977) and Suits (1977) indices — may obscure ‘middle-squeeze’ patterns. A useful complement to these summary measures would thus be to report incidence separately for bottom–middle and middle–top comparisons, and to track how polarization changes these margins over time.

References

  • Andersson, J. J., & Atkinson, G. (2025). The Progressivity of Gasoline Taxation: The Role of Income Inequality. Working Paper.
  • Autor, D. (2022).  The labor market impacts of technological change: From unbridled enthusiasm to qualified optimism to vast uncertainty. National Bureau of Economic Research.
  • Dormagen, J-Y., & Michel, L., & Reungoat, E. (2022).  United in diversity: Understanding what unites and what divides the Yellow Vests. French Politics, 20(3), 444–478.
  • Douenne, T., & Fabre, A. (2022).  Yellow vests, pessimistic beliefs, and carbon tax aversion. American Economic Journal: Economic Policy, 14(1): 81–110.
  • Esteban, J.-M., & Ray, D. (1994).  On the measurement of polarization. Econometrica, 62(4), 819–851.
  • Ewald, J., & Sterner, T., & Sterner, E. (2022).  Understanding the resistance to carbon taxes: Drivers and barriers among the general public and fuel-tax protesters. Resource and Energy Economics, 70.
  • Goos, M., & Manning, A., & Salomons, A. (2009).  Job polarization in Europe. American Economic Review, 99(2): 58-63.
  • Kakwani, N. C. (1977).  Measurement of tax progressivity: An international comparison. Economic Journal, 87(345), 71–80.
  • Suits, D. B. (1977).  Measurement of tax progressivity. American Economic Review, 67(4), 747–752.
  • Wolfson, M. C. (1994).  When inequalities diverge. American Economic Review, 84(2), 353–358.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Maria Perrotta Berlin, Anna Anisimova, and Kata Fredheim on Displaced Ukrainians’ Integration in Sweden

Posted on October 31, 2025 | News

Aerial evening view of Stockholm, Sweden, illuminated along the waterfront — symbolizing urban development and the welcoming environment for Displaced Ukrainians Integration Sweden initiatives.

A recent article from the Directorate-General for Migration and Home Affairs highlights several studies on migrants’ social norms and integration. Among them is a FREE Network policy brief by Maria Perrotta Berlin, Anna Anisimova, and Kata Fredheim, offering insights into Sweden’s approach to receiving and integrating displaced Ukrainians.

In their brief, the authors examine how Sweden’s implementation of the EU Temporary Protection Directive has created uncertainty for displaced Ukrainians. This uncertainty has hindered both their integration and participation in the labor market.

While Sweden shows strong political and public support for Ukraine, limited rights and unclear long-term status pose challenges. Refugees face fewer benefits and opportunities than in neighboring Nordic countries or Poland, making Sweden a less attractive destination.

Many Ukrainians arriving in Sweden are highly educated and employable. Yet, barriers such as limited access to language training, housing, and stable residence permits slow their economic inclusion. Civil society and private sector initiatives, including mentorship and job-matching programs, have helped fill some gaps. However, these efforts remain insufficient without stronger institutional support.

To read the full policy brief on migrant integration in Sweden, visit the FREE Network website. For more expert analysis from SITE, explore the SITE website.

AI in the Energy Transition – Insights from Energy Talk 2025

Posted on June 2, 2025 | Policy Brief

Wind turbines on rolling hills under clear sky, symbolizing AI Energy Transition to sustainable power.

As flexibility needs and energy security concerns grow, artificial intelligence (AI) is playing an increasingly central role in managing, optimizing, and securing energy systems. At the 2025 Energy Talk: AI and the Future of Energy, organized by the Stockholm Institute for Transition Economics (SITE) in collaboration with Energiforsk, several key experts and innovators showcased how AI is shaping the energy system, from household-level optimization to national infrastructure forecasting and regulation. The discussions highlighted AI’s potential to enhance efficiency, resilience, and user responsiveness, while also raising critical issues around data governance, cybersecurity, and value distribution. This policy brief summarizes the main takeaways from the event.

AI as an Actor in Energy Networks

AI is now embedded in everything from electricity generation forecasts to district heating systems and real-time price optimization. As Chloé Le Coq, Research Fellow at SITE and Professor at Paris Panthéon-Assas University, noted in her opening remarks, this marks not just a technological upgrade but a systemic shift in how energy systems operate. Where systems were once reactive, AI opens the door to adaptive, self-learning networks that can respond dynamically to demand and supply. Examples shared at the 2025 Energy Talk showed how this transformation is already underway across Europe.

In the Baltic region, AI is contributing to a broader transformation of the energy system. Dzintars Jaunziems, Advisor for Energy and Climate Policy at Latvijas Banka and Assistant Professor at Riga Technical University, explained that the region has undergone several major transitions over the past three decades by building liberalized market economies and opening energy markets. More recently, the Baltics have halted energy imports from Russia, fully disconnected from the BRELL grid, and completed synchronization with the EU electricity network.

Against this backdrop, AI is now supporting the Baltics’ transition from fossil fuels to renewables. In grid operations, AI is used to assess overhead lines and remotely monitor systems in real-time. It also optimizes transmission capacity and supports renewable energy forecasting, particularly for solar generation. In district heating, digital twin technologies are being introduced, while in the mobility sector, AI helps manage electric vehicle (EV) charging and route planning. The region has one of the highest smart meter penetration rates in Europe, although full-scale utilization is still pending.

In Ukraine, AI plays a crucial role in managing the energy system—both in daily operations and in maintaining resilience during wartime. Andrii Starzhynskyi, co-founder and CEO of a-Gnostics, presented several examples of how AI is already deeply embedded in the sector. Since 2018, machine learning has been used to forecast electricity consumption and generation with over 98 percent accuracy. This fully automated system also enables predictive maintenance by detecting failures in critical equipment such as transformers. One example is an app that analyses the sound of machines to detect faults early and prevent breakdowns.

AI also supports automated decision-making around electricity flows—for instance, whether to buy, sell, or store solar-generated electricity. At a-Gnostics, multiple AI models—primarily based on time series data—are used to manage and coordinate forecasts across different applications. According to Starzhynskyi, these solutions are already used daily by customers in sectors such as mining, agritech, energy production, and energy trading.

AI is also being used at the household level to enhance energy system efficiency. Björn Berg, CEO of Ngenic, presented how their system integrates AI in real time to control and optimize heat pumps, using live data rather than historical averages. Reported benefits include over 20 percent energy savings, fewer boiler starts, and reduced system losses. Berg noted that if optimization were scaled to one million heat pumps, the aggregate impact could exceed the output of Sweden’s three nuclear reactors—highlighting the potential of household-level AI integration at scale. At the same time, he pointed to current forecasting limitations, referencing a recent two-gigawatt prediction error as a reminder that learning models still need improvement.

Infrastructure, Governance, and Cybersecurity

The shift in how energy systems operate today also adds complexity. As energy systems become more decentralized, with growing integration of intermittent sources, and data volumes expand rapidly, new governance challenges emerge. Key questions include: Who owns the data and the algorithms? How can we ensure fairness, accountability, and cybersecurity?

Filip Kjellgren, Strategic Initiative Developer Energy at AI Sweden, shared how interactive visualization tools are making future energy needs more accessible to individuals. Traditional methods, such as static bar charts, often fail to engage. In contrast, tools like the so-called Behovskartan allow users to explore different demand scenarios and, visualize, and test assumptions such as reduced fossil fuel use. Kjellgren emphasized that while solar and wind installations are expanding rapidly due to falling costs, public resistance to local infrastructure remains strong—often stronger than for other infrastructure projects. In this context, AI-driven visualizations can help bridge the gap between energy system planning and public acceptance, improving both actual and perceived fairness and facilitating green transition.

Figure 1. Behovskartan

Source: Printscreen from behovskartan.se

Similarly, Michael Karlsson, Programme Coordinator Heat & Power at Energiforsk, introduced the organization’s newly launched AI cluster—an initiative designed to disseminate research and applied insights about AI in the energy sector through webinars, seminars, and other outreach activities. He also highlighted the limited involvement of energy economists in AI projects and called for greater interdisciplinary collaboration to close that gap and broaden the field.

These highlighted initiatives set the stage for a panel discussion focused on the broader policy and structural questions facing AI in energy systems. As AI becomes embedded in critical infrastructure, concerns have been raised about the controls over data and algorithms that drive energy decisions. Speakers warned against relying on proprietary “black-box” models, calling instead for open-source alternatives and domestic oversight. The discussion also highlighted the importance of building national capabilities to avoid overdependence on international actors with limited public accountability and at times questionable agendas. Legal frameworks were seen as lagging technological development—particularly regarding new forms of data, such as sound recordings from equipment, which are not clearly covered in existing regulations.

Cybersecurity and system resilience emerged as recurring themes. AI can help detect anomalies, anticipate grid stress, and support decentralized energy configurations. One example illustrates how AI can detect abnormal behavior in connected devices—so-called Internet of Things (IoT) components—by analyzing how equipment behaves in real-time, rather than relying solely on code-level protections. Several participants stressed the need to build resilience into infrastructure design. In the case of cyber-attacks or physical disruption—like those experienced by Ukraine—systems should be capable of switching to “island mode”, operating autonomously during crisis. Others pointed to privacy-preserving data architectures, where AI models are deployed to the data, avoiding the need to centralize sensitive information—an approach already used in sectors like healthcare and finance.

The panel also raised the question of fairness: Who benefits from AI in the energy sector? While large industrial users are already reaping the rewards, such as a farm that significantly lowered its electricity costs using AI-based forecasting, it remains unclear whether smaller consumers are seeing comparable gains. In regulated systems, efficiency improvements may translate into lower tariffs; however, several speakers noted that public acceptance of AI will depend on whether consumers can clearly perceive and share the benefits. Ultimately, the long-term legitimacy of AI will depend on how these gains are distributed in practice.

Concluding Remarks

The 2025 Energy Talk AI and the Future of Energy made clear that AI is no longer a future consideration—it is already transforming how energy is produced, distributed, and consumed. From national-level forecasting to household-level optimization and strategic planning, AI is increasingly present in every part of the energy system. Yet, as participants emphasized, its rapid deployment has outpaced both regulation and public awareness. Successfully integrating AI into the energy system requires a broader policy dialogue—one that goes beyond the technical regulation to address economic and social matters. The Energy Talk brought these intersecting areas into focus and highlighted the need for broader conversations on AI in energy.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Complementary but Different: The Politics of Green Industrial Policy and Carbon Pricing

Posted on April 28, 2025 | Policy Brief

Sweden, historically a global leader in carbon pricing, has recently made a significant shift in its climate policy towards green industrial policy. It has moved away from environmental taxation – reflected in reduced transport fuel tax rates and increased emissions from the transport sector – towards a state-driven energy policy centered on nuclear power. To support the planned construction of ten new nuclear reactors, the Swedish government has proposed loan guarantees and state loans of up to $40 billion (Persson, 2022). By lowering transport fuel tax rates while simultaneously offering state support for nuclear energy, Sweden is treating carbon pricing and green industrial policy as substitutes rather than complements. This policy brief challenges that approach, arguing that carbon pricing and green industrial policy should be seen as complementary climate policy instruments. However, their political economies differ significantly, making industrial policy more politically feasible. Yet, the two key challenges with green industrial policy are how to finance it and how to “pick winners” – choosing which technologies and companies to support. We use the recent bankruptcy of Swedish battery manufacturer Northvolt as a case study to illustrate these challenges.

Two Climate Policy Instruments

Over the past decade, climate policymaking has undergone a significant shift. Governments in Europe, USA, and China have increasingly adopted green industrial policy as a central strategy to reduce carbon emissions, moving beyond the traditional focus on carbon pricing.

Green industrial policy serves both environmental and economic purposes. It mobilizes government efforts toward decarbonization while fostering the development of zero-carbon technologies and domestic firms to drive employment, innovation, and growth in green sectors (Rodrik, 2014). Common policy tools include subsidies, loan guarantees and state loans. Sweden’s emphasis on loan guarantees and state loans to support nuclear energy is not unusual, as these are among the most widely used industrial policy instruments in rich countries (Juhasz, Lane, and Rodrik, 2023). A historical parallel can be found in France, which relied on state loans and loan guarantees in the 1970s and 1980s to support its nuclear energy expansion (Andersson and Finnegan, 2024).

Carbon pricing, on the other hand, focuses solely on emissions by putting a price on the negative externality of carbon emissions. By equalizing the private and social cost of releasing carbon, carbon pricing leaves it to the market – firms and households – to decide how to most effectively reduce emissions. While carbon pricing is a form of government intervention to correct a market failure, it is technology neutral, and the state is not actively steering the economy toward specific pathways of decarbonization in the same way that green industrial policy does.

Complements Rather Than Substitutes

At its core, decarbonization requires shifting the cost advantage from fossil fuels to the zero-carbon alternatives of wind, solar, and nuclear. The key factor is the relative price between the two energy categories. This shift can be achieved by increasing the cost of fossil fuels through carbon pricing or by lowering the cost of zero-carbon energy via industrial policy.

The cost of energy production – particularly electricity – can be divided into three main components: capital investment costs, operation and maintenance, and fuel costs (IEA, 2005; 2020). While operation and maintenance costs are typically a minor share of the (levelized) cost of electricity for all energy sources, there are large differences in investment and fuel costs between fossil fuels and zero-carbon alternatives. The cost of fossil fuels is sensitive to fuel prices, which often account for more than half (coal), to around 80 percent (natural gas), of total costs in most regions. Wind and solar, on the other hand, have zero fuel costs but are highly dependent on capital investment costs, making them particularly sensitive to interest rates. Nuclear energy, though requiring some fuel costs, is also predominantly capital-intensive (IEA, 2015).

Because of these differences in cost structure between the energy categories, carbon pricing and industrial policy work as complements rather than substitutes. Carbon pricing raises the variable fuel costs of fossil fuel-based energy, making it less competitive, while industrial policy can reduce the fixed capital costs of zero-carbon technologies, improving their affordability. A well-balanced climate strategy may employ both approaches to achieve decarbonization. A revenue-neutral model could even use carbon pricing revenues to fund industrial policy, balancing cost burdens and investment incentives.

Figure 1 illustrates how the two policy instruments of carbon pricing and industrial policy are complements when it comes to climate policy as they both shift the relative price in favor of zero-carbon energy sources.

Figure 1. Decarbonization and relative prices

Source: Authors’ illustration.

Differences in Their Political Economy

Despite their complementarity, the political economy of carbon pricing and green industrial policy differs significantly, making the latter more politically feasible.

First, carbon pricing and green industrial policy differ in how they distribute costs and benefits across time and geography. Carbon taxes impose short-term, localized, and visible costs on consumers and producers while generating long-term, globally dispersed benefits. Because the costs and benefits are unevenly distributed over time and space, the households that bear the costs are likely not the same as those that receive the benefits. In contrast, green industrial policy can create immediate and visible local benefits for households and businesses, while spreading the costs more broadly. These costs can be distributed nationally using general taxation, internationally through global climate funds, or shifted into the future via deficit spending.

Second, carbon pricing generates a first-mover disadvantage, as the implementing country will incur higher energy prices for producers and consumers and thus potential deindustrialization and unemployment as firms relocate to countries with less stringent climate policy and lower energy costs. Green industrial policy inverts this narrative by incentivizing low-carbon firms to relocate to countries offering substantial state support. As a result, the first country that adopts generous green subsidies will put political pressure on other countries to do the same for fear of job loss and diminished competitiveness. This dynamic has been in play over the last couple of years with European leaders fearing the impact on European competitiveness of the Inflation Reduction Act in the U.S. – the largest climate bill ever implemented in that country – and green industrial policy in China. In this sense, subsidies offer a first-mover advantage, encouraging early adoption.

Combined, these two important political economy factors make green industrial policy more politically feasible by increasing public and political support compared to carbon pricing.

The first-mover advantage of green industrial policy also has important implications for global climate policy. The advantage, coupled with increasing opportunity costs of non-adoption (loss of competitiveness), can result in an equilibrium where the largest economies, such as the U.S., China, and the EU, all adopt similar green industrial policies. The first country that adopts green industrial policy pressures other nations to follow suit, fearing job losses, diminished competitiveness, and market-share erosion, creating a domino effect that results in a global implicit carbon price. This outcome is an equilibrium since none of the “players”, observing the choices made by others, have an incentive to withdraw their state support and subsidies for the green sector.

In contrast, a globally imposed carbon price using taxes, such as through international agreements like the Paris Agreement, does not constitute an equilibrium. Countries under such an agreement continuously face incentives to defect by repealing their carbon taxes to gain competitive advantages and free-ride on the ambitions of others. To transform such an agreement into a stable equilibrium, there must be credible punishment mechanisms – such as border carbon adjustments that penalize imports from defecting countries – to reduce incentives for free-riding (Nordhaus, 2015). Yet, such a global agreement with credible punishments has remained elusive, reflecting the complexities of international cooperation.

Two Key Challenges

While politically more feasible compared to carbon pricing, governments face two key challenges with industrial policy: how to finance it and how to select the right technologies and companies to support. These challenges are not just theoretical – they have real-world consequences. The recent failure of the Swedish battery manufacturer Northvolt highlights the potential risks governments face when using industrial policy.

Founded in 2015, Northvolt aimed to supply batteries for electric vehicles and energy storage, positioning itself as Europe’s main competitor to dominant Chinese manufacturers. With a rapid expansion of factories, the company struggled with production delays, mounting losses, and an inability to secure additional capital investments, ultimately leading to its bankruptcy. The Swedish government has provided some economic support but was unwilling to match the kind of large-scale state subsidies that China provides to its battery industry (Ekström och Mikaelsson, 2024). Likely, the level of financial support required for Northvolt to compete globally would need to come from the EU level, rather than national funding alone (Milne et al., 2025). The Northvolt case emphasizes one of the main challenges for green industrial policy: financing. Unlike carbon pricing, which generates revenue, industrial policy requires substantial government funding. High fiscal costs may limit its feasibility outside of large economies like China, the U.S., and the EU.

Furthermore, even if Sweden had provided stronger financial support – similar to its proposed subsidies for nuclear energy – Northvolt may still have failed due to technological competition. Experts suggest that Chinese competitors will be reluctant to acquire Northvolt’s Swedish factory, as Chinese investors believe it’s not correctly constructed for battery manufacturing (Nordensson, 2025). This underscores the second risk of industrial policy: governments may invest in technologies and companies that ultimately fail to compete.

Conclusion

Carbon pricing and green industrial policy are complementary tools for climate mitigation, but their distinct political economies make industrial policy more politically feasible. However, with green industrial policy, governments are faced with the risks of “picking winners” and how to finance the policy.

Sweden faces these two risks with its nuclear energy strategy. For instance, the levelized cost of nuclear energy has risen over time (Bilicic and Scroggins, 2023). Today, nuclear is the most expensive source for new grid capacity, while wind and solar are the cheapest. By 2045, when Sweden’s planned ten new reactors are expected to be operational, renewables may be so cheap that nuclear power struggles to compete, leading to financial losses and high electricity prices (SVT, 2024). In this sense, Sweden’s focus on a single zero-carbon technology may turn out to be a costly mistake.

Sweden should use green industrial policy as a complement to, rather than a substitute for, its previous carbon pricing strategy. Furthermore, to reduce the risks of not picking the “winners,” it should diversify its support across multiple zero-carbon technologies – including electric vehicles, battery manufacturing, solar, and wind – rather than focusing narrowly on nuclear power.

References

  • Andersson, J. and Finnegan, J. (2024). Industrial Policy and Decarbonization: The Case of Nuclear Energy in France. Working Paper.
  • Bilicic, G. and Scroggins, S. (2023). 2023 Levelized Cost of Energy+. Lazard.
  • Ekström, J., and Mikaelsson, C. (2024). Därför nobbar regeringen Northvolt. Svenska Dagbladet. October 6, 2024.
  • IEA. (2005). Projected Costs of Generating Electricity: 2005 Edition. International Energy Agency. Paris.
  • IEA. (2015). Projected Costs of Generating Electricity: 2015 Edition. International Energy Agency. Paris.
  • IEA. (2020). Projected Costs of Generating Electricity: 2020 Edition. International Energy Agency. Paris.
  • Juhazc, R., Lane, N., and Rodrik, D. (2023) The New Economics of Industrial Policy. Working Paper 31538, National Bureau of Economic Research.
  • Milne, R., Johnston, I. and Bounds, A. (2025). Boss of bankrupt Northvolt urges Europe to invest in homegrown battery sector. Financial Times. March 13, 2025.
  • Nordensson, B. (2025). Expert: Inga utsikter driva Northvolt vidare. Svenska Dagbladet. March 12, 2025.
  • Nordhaus, W. (2015). Climate Clubs: Overcoming Free-riding in International Climate Policy. American Economic Review, 105(4), 1339–1370
  • Persson, I. (2022). Allt du behöver veta om ’Tidöavtalet. SVT Nyheter. 14 October, 2022.
  • Rodrik, D. (2014). Green Industrial Policy. Oxford review of economic policy 30 (3):469-491.
  • SVT Nyheter. (2024). Kärnkraften kan bli nära dubbelt så dyr som regeringen trott. SVT Nyheter. January 25, 2024.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.