Danish firms want regulatory rewards for climate action

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This article comes from the spring 2020 edition of the FORESIGHT Climate & Energy magazine, which was largely written before, or at the beginning of, the Covid-19 pandemic. 

Denmark’s largest business organisation has launched a plan to reduce carbon emissions by 70% by 2030, in line with government plans, but companies are uncertain about how it will be financed. They want favourable terms from government in return for implementing climate action initiatives

THE PLAN The 2030 climate action plan for business presented by the Confederation of Danish Industry proposes green tax reforms in the belief regulatory and fiscal design can mitigate any potential risks of slower economic growth when companies divert investment into funding the green transition

EXPERT VIEW More clarity is needed about what exactly needs financing to achieve ambitious carbon reduction goals and what is the best approach. Legislation is important to push companies to adopt change in-house and throughout their value chains

KEY QUOTE “Industries are already investing billions in the green transition and the plan fails to examine where money should be invested, how much and the best ways to invest.”

“Together we create green growth” is the title of the 2030 climate action plan from the largest business organisation in Denmark, The Confederation of Danish Industry (DI), which represents around 11,000 companies. The initiative, revealed in September 2019, presents a 70% by 2030 carbon reduction target mirroring the aspirations of the Danish government’s Climate Act. Prime Minister Mette Frederiksen praised the plan as a “giant leap forward” and plenty of cash has been pledged to create change, but energy experts warn it could fail to live up to expectations without a better understanding of exactly which projects need most investment and how best they can be financed.

The 2030 plan is a “together we move faster” statement from business to politicians and a financial plan outlining how Denmark can achieve its goal. The plan proposes green tax reforms grounded in the belief that regulatory and fiscal design can favour companies willing to fund the green transition, without impeding growth. In the plan, public funding will amount to €2.16 billion from 2020-2030 to realise 31 decarbonisation proposals. This sum includes €135 million a year in subsidies and grants to promote energy efficiency in industry and €337 million annually to increase investment in research and development. The government will also set aside €385 million in 2030 to compensate for losses to its wallet from reduced electricity and surplus heat tariffs.

By making Denmark a low-carbon technology leader, the plan as a whole is expected to stimulate national growth, adding at least €14.7 billion to the economy by 2030 and creating 120,000 new private sector jobs.

The Danish business sector is “signing up to invest massively in decarbonisation efforts and clean energy technology,” says Troels Ranis, sector director at DI. “We present a clear plan for how growth and the green transition can go hand in hand.” But the plan is short on specifics for reaching the 70% goal. “We cannot accurately say how much companies will have to and are planning to invest,” says Ranis.

The lack of specifics prompts energy expert Brian Vad Mathiesen from Aalborg University to describe the plan as a “vague political wish list”. He supports its ambitions and intentions, but decries the lack of detail. “Industries are already investing billions in the green transition and the plan fails to examine where money should be invested, how much and the best ways to invest.”

ACTIVE ROLE

DI published its plan three months after the 2019 general election in Denmark brought the centre-left Social Democrats to power. They increased Denmark’s carbon dioxide reduction target to 70%. The Danish business community was quick to signal with the plan that it would not passively await government instructions, but wants to play an active role in drawing up the 2030 decarbonisation roadmap.

A swathe of DI member companies were invited to participate in the making of a Climate Action Act and Prime Minister Frederiksen launched 13 climate partnerships representing almost all Danish industries, with each group presenting proposals aimed at reducing carbon emissions from their respective sectors. The Climate Act was due to be finalised in 2020, but discussions were put on hold as the country dealt with the Covid-19 crisis. Despite the global economic downturn caused by the pandemic, DI and its members have actively encouraged the government to focus on climate investments to help get the Danish economy back on track with calls for greater investment in infrastructure and green research and innovation.

Vad Mathiesen hopes the climate partnerships will ultimately contribute to “clearer roadmaps of what the companies should invest in and how — especially when it comes to electrification, surplus heat, biogas and the other mechanisms we need in place to reach the 70%”. The estimated payback periods for green investments are a central issue for him that needs further thought. “Most industrial companies invest with a payback period of three to five years, but research reveals that a time horizon of eight to ten years will accelerate decarbonisation significantly,” he says.

CARROTS OR STICKS

DI’s plan is based on an “if I scratch your back, you’ll scratch mine” approach. In return for business support for climate action, companies expect the government to create an attractive environment for green investment through changes in tariffs, new legislation, the expansion of infrastructure and attractive clean energy tenders. “We hope to see significant political focus on support for companies’ green investments,” says Ranis. “Flexibility, stability and predictability are key.”

This view is supported by vice president of Scandinavian Airlines (SAS) Simon Pauck Hansen. “We want to invest, but it is important that when we invest, there are no regulatory barriers applied on top,” Pauck Hansen says. “If regulation makes it much more expensive for us to buy fossil fuels, we will not have money to invest in the green transition.” Lars Saltoft Kristoffersen, CEO of DSV Transport, a middle-sized transportation company, takes a similar stance. “We need political will and courage to reform taxes to promote the green transition and to invest in new technologies that do not use fossil fuels, for instance through public tenders,” he says.

DI recommends the government adopts economic “carrots”, such as more favourable tariff regimes for lower emission fuels and technologies, rather than “sticks”. It argues that measures such as carbon taxes would damage growth by encouraging companies to relocate to countries with less strict regulation. But research does not support this line of thinking. A study by the London School of Economics concludes there is little evidence that protecting the environment impacts competitiveness in the long term and suggest the opposite is true. “The benefits of environmental regulations often vastly outweigh the costs,” state the researchers. Evidence shows such legislation “induces innovation in clean technologies and discourages research and development in conventional (polluting) technologies…[and] can help economies break away from a polluting economic trajectory and move to a clean one”, they add.

THE JOB OF GOVERNMENT

Anne-Louise Thon, co-founder of SDG Invest, a sustainable finance fund, believes economic sticks are vital for change. She advocates for legislation that pushes companies to adopt new financing models and green taxonomies, and clean up their value chains. She cites France, where a recently passed Vigilance Law requires companies to create and implement publicly available vigilance plans for which they can be held accountable, forcing them to address potential corporate and social risks in their supply chains. “The effect is that more companies in France live up to SDG Invest’s screening criteria and are acceptable for our portfolios,” says Thon. This case shows a hard law principle can help create sustainable companies with profitable returns, while the soft law principles in Denmark mean few Danish companies take sustainability seriously and often do not live up to SDG Invest’s criteria, she adds.

Politically there is broad support in Denmark for financing the green transition through taxes and a carbon emissions tax proposal has been welcomed by parties across the political spectrum, but industry opposition could ultimately quash the idea.

Despite a lack of support from business for certain political proposals, there is general agreement that backing for DI’s climate plan from a wide range of companies — from those with no plans to decarbonise to those with strong ambitions — is good news. “It is positive they are collectively setting the bar very high,” says Thon. “The 70% creates a sense of urgency throughout the Danish business community.”

ØRSTED AND SAS

Ulrik Stridbæk, vice president at energy company Ørsted, which aims to be almost totally carbon neutral by 2025, agrees. He says the DI plan is the result of many years of discussions and negotiations within the organisation and can be a stepping stone towards a more joined up roadmap and further investments in the green transition by companies and the Danish government. Ørsted plans to invest €27 billion globally by 2025 in green energy infrastructure.

The company has come a long way in a few years, abandoning its identity as a coal-intensive utility and oil company to be ranked as the world’s most sustainable energy company in 2019, having reduced the carbon intensity of its energy generation by 83% compared to 2006. “For us, decarbonisation is a clear business case,” says Stridbæk.

For SAS the case is different. Decarbonising heavy transport, in particular aviation, is a massive challenge. Its aims are more modest than those of Ørsted. SAS plans to reduce emissions by 25% by 2030 and ensure 17% of its highly polluting fossil fuels are replaced with biofuels. Between 2005 and 2019, the airline reduced its emissions by a mere 3%. A lack of international regulation and the need for huge investments are at least part of the reason for this slow pace of change. “A 25% reduction is as ambitious as we can be right now if we want to continue to be a viable company operating in a global market,” says Pauck Hansen. “Without more ambitious European and global regulation, we cannot move any faster.”

SAS says it will not, and cannot, sacrifice the growth of its business to reduce emissions. Rather than fewer flights and passengers, it argues that more business, not less, is needed to finance change. “We are facing massive investments in stimulating and growing the supply of sustainable aviation fuels and in R&D related to new types of airplanes,” says Pauck Hansen. Some of the funding will have to come from consumers, he says. “It will likely become a bit more expensive to fly more sustainably in the future,” he continues. “The solution is not to reduce air traffic, but to implement more energy-friendly solutions that can lower emissions, while growing the market. This year we expect our capacity to grow 3% and reduce our carbon emissions by 2%.”

SMALLER COMPANIES, BIGGER CHALLENGES

While both Ørsted and SAS are big companies with global reach, DSV Transport believes it is often more difficult for smaller companies in sectors that are harder to decarbonise to play much of a role. Saltoft Kristoffersen says DSV Transport “fully supports” DI’s climate action, but the company has no emissions reduction targets and no plans to invest heavily in any major decarbonisation efforts. “Our sector is faced with a number of challenges, which gives us very little manoeuvrability to carry through such a transition,” he states.

Biofuels are likely to play a role in decarbonising the road haulage sector, but a lack of financial and political support is slowing change, he adds. “We have very uncertain political signals and we lack the reduced tariffs and tolls we have seen in Germany and Sweden on gas and other alternative fuels.” Since the 1920s, the average carbon emissions of fuels have been used to calculate tax rates in Sweden, leaving sustainable biofuels exempt from carbon taxes.

In Denmark, politicians have been reluctant to give tariff relief to biofuels and have focused more on the potential to electrify transport. Saltoft Kristoffersen says only a few public tenders for fuels support climate action. He cites the municipality of Aarhus that has introduced hydrotreated vegetable oil (HVO) in tenders for its refuse collection vehicles. HVO can replace diesel and reduce CO2 emissions by up to 90%.

Without legislation to give more climate-friendly fuels and technologies a competitive advantage over more polluting fossil fuels, little will change, says Saltoft Kristoffersen. When it comes to larger vehicles in Denmark, it is still only primarily public bus fleets that are becoming electric, he adds. “It is not economically feasible for the private sector to change. If I offer a client a climate-friendly solution such as HVO fuel or gas trucks that costs 20% more they opt out. The transport sector is very competitive and subject to fierce competition nationally and internationally.”

Vad Mathiesen agrees the lack of certainty is a problem. “We need political clarity that can help eliminate the price gap between fossil and climate neutral fuels,” he says. “Our politicians must be open to many solutions if we are to succeed in transforming the transport sector. When formulating the Climate Action Act, it is important to keep in mind the need to invest in a line of different technologies.”

A different tariff system for transport is being examined by the climate partnerships and this could include a new financing model promoting biofuels, but until this happens DSV Transport is not budging. “We are ready to invest when the technology and the solutions are there,” says Saltoft Kristoffersen.

TEXT Anna Fenger