Danish government plan generally ignores the idea that additional taxation would see businesses quit the country
AMBITIOUS PRICING
Denmark’s proposed carbon price, above that of Europe’s emissions trading system (ETS), is high enough to change business cases and spur decarbonisation efforts
HEAVY DISCOUNT
Heavy-industry may be offered a discount tax rate
KEY QUOTE
This is a clear recognition that the EU ETS is not working well enough and that more is needed
Companies with activities in Denmark should pay for their carbon footprint through a “more uniform” CO2 tax, the Danish government said when it presented a new proposal for green tax reform. It is based on a polluter-pays principle and proposes a minimum price of €100 per tonne of CO2 (/tCO2). It will apply to the vast majority of Danish companies though there are some exceptions for the agricultural sector, parts of the transport sector and companies within the so-called “mineralogical processing” sector. The tax, which will be phased in from 2025, could reduce up to 3.7 million tonnes of CO2 emissions annually by 2030, according to the government’s own calculations. Denmark has committed to a 70% emissions reduction target by 2030, which equates to around 20 million tonnes of CO2. According to Torsten Hasforth, an economics expert at Danish green think tank Concito, the proposal is an important step. “This proposal clearly says that we need a more ambitious price instrument as part of our decarbonisation efforts and departs from the idea that we can’t risk taxing companies,” he says. The Danish proposal is one of the most far-reaching and ambitious tax models seen in Europe so far, Hasforth adds. “It also includes companies covered by the EU emissions trading system (ETS). This is a clear recognition that the EU ETS is not working well enough and that more is needed,” he says. Ulrich Bang at the Danish Chamber of Commerce believes the proposed carbon tax could have a significant impact in reducing the country’s emissions. “We are at a price level per tonne, which… will encourage companies to accelerate decarbonisation. The proposal provides the necessary economic incentives that have been lacking,” he says. The proposal has not yet been adopted and negotiations with the other parties in the Danish parliament are currently underway, but there is generally broad political support for the tax. Meanwhile, the Danish government has committed to including areas of the agricultural and transport sectors which are currently exempt from the proposal.
RECOMMENDED INSTRUMENT For many years, independent experts and organisations have argued that a tax on carbon is one of the primary and most effective tools in supporting decarbonisation. The World Bank directly states that a price on carbon is the “most flexible and least-cost way” to achieve climate goals. “Emissions trading schemes and carbon taxes are political instruments that have proven to have a very large impact as vehicles for reductions in carbon emissions,” says Rohan Best of the Centre for Corporate Sustainability and Environmental Finance at the Macquarie Business School. But while the latest IPCC Working Group III (WGIII) report is specific about the need for carbon taxes, the authors believe they could be stronger. “Where implemented, carbon pricing instruments have incentivised low-cost emissions reduction measures, but have been less effective… to promote higher-cost measures necessary for further reductions,” the authors wrote. Best co-authored a 2020 study focused on the efficiency of carbon pricing based on data from 142 countries over a period of two decades. This found that the average annual growth rate of CO2 emissions from fuel combustion is around two percentage points lower in countries that have had a carbon price compared to countries without. The study also showed that every additional €1/tCO2 reduces the following year’s emissions growth rate by 0.3 percentage points. 
Figure:
The decadal growth in CO2 emissions from fuel combustion over 2007–2017 against the previous decade’s growth rate in this variable. For countries without a carbon price in 2007, both of these decadal growth rates were close to 3% per annum. In contrast, there was a substantial reduction in the average emissions growth rate for countries that had a carbon price in 2007: their emissions grew at an average annual rate of 0.5% over 1997– 2007, then fell by an average of 2% per annum over the subsequent ten years.
PRICE PROJECTIONS The Danish government’s proposal was anticipated after the Danish prime minister Mette Frederiksen cited a carbon tax as the main tool in getting companies to contribute to the Danish Climate Act and the ambition to reduce annual carbon emissions by 70% by 2030. The proposal suggests applying a uniform tax to nearly all Danish businesses, including industrial and manufacturing companies, non-road-related transport and the electricity and heating sector. It is suggested that the tax will be €100/tCO2 for the companies outside the EU ETS and €50/tCO2 for the companies that are currently covered by the EU ETS. In addition to the expected increase in EU ETS prices, the total will be €150/tCO2 for these companies by 2030. Bang from the Danish Chamber of Commerce says the suggested price per tonne sends a clear message for companies to further reduce energy consumption. “The price signal is high enough to make decarbonisation an attractive business case when looking at, for instance, the incentives to phase out the use of gas in the industry. With the suggested price level it will become much more attractive for companies to pursue this even more.”
HEAVY HITTERS One obvious omission in the proposal is the “mineralogical processing” sector—companies manufacturing cement, insulation, glass and bricks—which includes two of Denmark’s highest-emitting companies; cement manufacturer Aalborg Portland and insulation manufacturer Rockwool. It is proposed this sector is offered a discount, meaning that they will only be taxed by €13.44/tCO2. In addition to the EU ETS price, they should expect to pay €114/tCO2 by 2030. The government defended the discount by suggesting the sector is exposed to competition and a large tax increase would risk these companies moving production abroad. Bang, on the other hand, considers this one of the shortcomings of the proposal. “The €13.44/tCO2 [rate] does not change anything from the already adopted energy tax in 2020. With this discount, the additional incentive to decarbonise will be very limited.” Concito’s Hasforth agrees that the discount limits the incentive for these firms to decarbonise. Such a deduction means the companies will not have to take steps to cut their emissions until after 2030, he says. “Instead, it should have a prerequisite in the proposal that these companies will have to decarbonise and that should have been reflected clearly in the tax,” he adds. On the opposing side, Thomas Uhd from Aalborg Portland says the company is already navigating on a price signal from the EU ETS. “We expect to be paying three times what we pay today for every tonne of carbon in 2030 through the EU ETS. This is a powerful price signal and incentive for us to reduce and invest in the green transition,” he says. Aalborg’s conservative estimate shows a cost increase from €26.88 million today to €80.64 million in 2030 as a result of EU ETS price rises. Aalborg Portland has a stated goal of reducing carbon emissions by 30% by 2030.
BEYOND TAX The proposal from the Danish government also suggests a package of financial support to help companies with the green transition. More specifically, a reserve of approximately €940 million will be set aside to support also green innovation and technology investments and to help companies with the green transition to minimise the risk that they will move abroad to avoid the carbon tax. Part of the reserve—€403 million—is specifically targeted for carbon capture and storage projects (CCS). According to Hasforth, this is a critical part of supporting the companies’ decarbonisation efforts and fulfilling the carbon reduction potential. “If the carbon tax is to become a vehicle for decarbonisation, there is a need for further investments and funds. Part of that funding must come from public sources otherwise we would be in a situation where many companies would not be able to take the necessary economic risks and make the required investments,” he says. Uhd from Aalborg Portland agrees this is an important part of the proposal. “It is absolutely necessary for the political side to take on some of the risks and part of the investment burden, which will increase significantly in the wake of the announcement that CO2 is becoming more expensive,” he says. Aalborg Portland expects a CCS plant capturing 400,000 tonnes of CO2 would cost around €537 million. Uhd says that this estimate shows that the extra €400 million of government funding “is at the low end.” “If we look at Norway, the amount of public funding that has been set aside to support the development of CCS is much greater. It is essential to scale the public funds if we are to become a frontrunner in this field and succeed to the extent and with the speed that our climate goals require,” says Uhd. There is an ongoing political debate among some of Denmark’s political parties about the suggested size of the fund, which could change by the end of the political negotiation around the final carbon tax policy.
GLOBAL TRENDS Denmark is not the only country looking at increasing the price or scope of carbon taxation. The EU ETS is estimated to cover only 45% of the EU’s greenhouse gas emissions, but the European Commission is considering adopting policies that expand it to other sectors including aviation and maritime. Elsewhere, in 2020, the Dutch parliament approved a steadily-rising CO2 tax as a tool to achieve the nation’s climate goal. The tax was to start at €30.40 per ton in 2021 and rise to €128 by 2030 (minus EU ETS price), but economic conditions resulting from the Covid-19 pandemic made the Dutch cabinet decide to limit the carbon tax’s impact in the first few years. This means that Dutch companies will effectively start paying for their carbon emissions from 2024. Meanwhile, China also launched a national emissions trading scheme, becoming the world’s largest carbon market in the process. Countries such as South Africa and Singapore have recently adopted carbon tax measures. The South African carbon tax rate was raised to about €8.55 per tonne, effective from January 1st, 2022, and will increase each year by at least €0.95 per tonne until it reaches €19 per tonne. According to Best from the Macquarie Business School, these are important steps, but also show that there is still a long way to go in regards to limiting international differences and increasing the global price of carbon. “Putting a price on carbon is becoming a global trend, but progress is still slow and in many countries, you start with prices on carbon that are too low to have an actual effect. So there is still a long way to go.” Several reports suggest a minimum of €71.24 ($75) per tonne if a carbon tax would have the greatest effect. This is supported by the IPCC WGIII report. “Both coverage and price are lower than is needed for deep reductions,” the report authors wrote_._Best points out that there are initiatives underway such as the EU’s carbon border adjustment mechanism—effectively a carbon tax on imports—which could pave the way for more uniform and compelling carbon pricing. “That kind of leadership from the EU will create clear incentives for other countries to adopt either emission trading schemes or carbon taxes. This could very well catalyse a global acceleration over the next few years in terms of prevalence and price level of carbon taxes and schemes,” he says. •
TEXT Anna Fenger