Green Carrot & Stick: How Sweden Became a Heat Pump Success Story

Emily Collins, Zondits guest, 2/1/2024

By now, it’s no secret that heat pumps just might be a key factor in climate solutions. From reducing greenhouse gas (GHG) emissions to saving homeowners money on their monthly utility bills, the heat pump continues to increase in popularity. In 2022 alone, even before the U.S. passed the Inflation Reduction Act, Americans purchased more than 4 million heat pumps, beating natural and propane gas furnaces for the first time in history.

But when it comes to electrifying home heating, Nordic countries have everyone beat. Europe now has more than 19 million heat pumps installed, and Norway, Finland, and Sweden are leading the way. Historically, Sweden has accounted for the largest European heat pump market, and today almost all Swedish single-family homes have an electric-powered heat pump installed. These are more than just bragging rights. According to Martin Forsèn, President of the European Heat Pump Association, widespread heat pump adoption in Sweden has led to a 94% reduction in the use of heating oil. This combined with the growth of renewable energy has led to a dramatic reduction in GHG emissions.

So how did Sweden, a country once primarily heated by oil boilers, make this happen? Can non-Nordic countries follow in their footsteps?

Carbon taxation

The answer lies in decades of Swedish incentives and environmental taxes. Sweden follows the Polluter Pays principle: the party responsible for producing pollution is financially responsible for the damage done to the natural environment, with energy consumption taxes dating back to the 1920s. Sweden’s 1991 carbon tax, one of the first of its kind (Finland introduced a carbon tax the year before) is the most recognized of Sweden’s value-added taxes that aim to reduce greenhouse gases. Sweden implemented the tax to help solve two distinct problems: Sweden’s need to reduce carbon emissions without limiting economic growth and the country’s need for an entire tax reform that would, among other things, offer alternative sources of tax revenues.

Since its implementation, the carbon tax has helped Sweden achieve its environmental and tax-related goals. The tax provides Sweden with an alternative tax base, and in the past 30 years, Sweden’s carbon emissions have decreased by 29 percent. Today the country produces lower GHG emissions per capita than most other EU countries.

Here’s how it works: the carbon tax targets all fossil fuels commensurate with the carbon dioxide emissions released during combustion. The tax is levied on companies that supply fuels and consumers. Carbon tax funds go exclusively to the Swedish government, which in turn uses the funds to advance climate change initiatives. Sweden’s carbon tax rate is the highest worldwide at around 1,190 Swedish krona (107.01 USD) per tonne of carbon dioxide. The tax has led to steady economic success too, with Sweden seeing an increase in its GDP by 59 percent between 1990 and 2012, proving that high carbon taxes can both reduce GHG emissions and boost economic growth.

Carbon taxation and the rise of heat pumps

Despite its world-renowned success, the Swedish carbon tax was initially a burden for residents. The tax raised the price of heating oil, nudging residents to find alternative sources to heat their homes. The tax resulted in a kind of green “carrot and stick” approach: the carbon tax led to higher energy bills for residents. If homeowners wanted to lower the cost of those bills, then they needed to find cheap, energy-efficient ways to heat their homes.

At the 2023 Heating, Refrigeration and Air Conditioning Institute (HRAI) symposium in Mississauga, Ontario, Martin Forsèn described the impact of heat pump adoption on residents from 1994 to 2000. According to Forsèn, high heating oil prices were “a pain for the consumers,” CBS news reports. “[Consumers] had to think,” Forsèn said, “‘Can we really do anything about it?…It became this kind of [social] pressure from everyone. All of a sudden, they knew: you have to make a shift.’”

Sweden has long championed renewable energy, and a surplus of electricity helped heat pumps become a cost-friendly option for residents in the 1990s. After 2000, the Swedish heat pump market grew, and the heat pump developed a positive reputation among residents. Forsèn said that by the mid-2000s, “everyone was familiar with the technology” and no longer required financial incentives to give heat pumps a try.

Yet, ever since the early days of the carbon tax, Sweden has implemented heat pump incentives to help lower installation costs. For example, today Sweden offers 30 percent tax rebates on labor costs of retrofit installations of up to €5,000 a year.

Thanks to the carbon tax, heating oil for residential and commercial use has decreased significantly. Today new single-family houses are built with the expectation that heat pumps will be the primary heat source, and the transition to district-style heat pump systems for multi-family homes continues. As of 2023, Sweden has over two million operating heat pumps.

Who will be the next heat pump leader?

Swedish policy may have influenced heat pump installation in neighboring Nordic countries, but Norway, Finland, and Sweden are not the only countries making headway on heat pump installation. Canada started its own carbon tax in 2019 and has implemented subsidized heat pump programs to encourage more residents to electrify their homes. The Italian government will pay for the entire cost of a heat pump installation and lower the owner’s taxes by 10 percent for the next five years if they install a heat pump. In September 2023, a consortium of U.S. states and territories declared they would reach 20 million residential heat pump installations by 2030.  

Realistically, no single policy can create a mass clean heating success story. Even the Swedish carbon tax faces ongoing criticism. Some critics today argue that the carbon tax could do more to reduce emissions. The tax only covers about 40 percent of all nationally emitted GHGs and not all exempted industries undergo carbon pricing. Parts of the industrial sector such as mining, agriculture, and forestry are exempted from both the carbon tax and the European Union Emission Trading Scheme (EU ETS), the world’s first major carbon market that incentivizes covered industries to reduce emissions through a cap and trade system. Critics believe that if Sweden levied a carbon tax on all sectors, it could potentially reduce more emissions and more readily meet its climate goals. 

Regardless of how the carbon tax has been received, Sweden’s seen positive environmental effects, and practical energy-efficient options remain widely available. As for heat pumps, one thing remains certain: installation is increasing worldwide, and we can in part thank Sweden for this revolution.