Denmark was one of the first countries in Europe introducing a CO2 tax on top of already existing energy taxes levied on oil products, coal and electricity consumption but not on petrol. The CO2
tax was introduced in two phases; it was levied on energy products consumed by households in
May 1992 and in January 1993 for businesses11. Interesting to note is the fact that the introduction of the CO2 tax was partly offset via the reduction in the existing energy tax rates (see Tables A1 in the Annex 4).
The introduction of the CO2 tax in 1992 was a turning point in energy taxation especially for indus-trial energy consumption because energy consumption by industry was exempt form paying the energy tax. During the period 1993 to 1995 industry was granted a 50% reduction of the CO2 tax rate, i.e. instead of the 100 DKK per ton of CO2 energy consumption by industries were subjected to a 50 DKK per ton CO2 rate. A three-tiered reimbursement scheme granting further tax relief was put in place in 1993, which was set up in accordance to the energy intensity of each business. The refund scheme was differentiated based on the actual energy costs paid and in relation to total sales (Malaska et al 1997):
• If the CO2 tax burden was between 1 and 2 % of the difference between sales and purchases (i.e. net sales), the company was eligible for a tax refund of 50% of that part exceeding the 1% limit.
• If the CO2 tax burden was between 2 and 3 % of the difference, the tax refund amounted to 75% of the part exceeding the 2% limit.
• If the CO2 tax burden was above 3 % of the difference, the tax refund was 90% for that part exceeding the 3% limit. Companies falling under the 90% refund scheme could receive ad-ditional tax support covering the remaining part of the CO2 tax burden. However, this sup-port was limited to three years only and the company had to pay at least DKK 10,000 in CO2 taxes.
This refund scheme was valid until 199512 and was adapted when the second phase of the Danish Environmental Tax Reform was introduced in 1996.
The Danish ETR reform process can be distinguished between three phases.
• 1993 Tax Reform/Phase 1: period 1994 – 1998
o Political objective of the ETR: The over revenue loss through the reduction in in-come taxes amounted to around 2.3% of GDP in 1998 – a total tax shifting pro-gramme of around 45 billion DKK occurred in 1998.
o Tax shifting programme: Reduction in revenues generated from income taxes were offset by environmental taxes – anticipated increase of revenues of 1.2% of GDP - and payroll taxes – increase of 1% of GDP.
o The household sector was targeted in Phase I.
o Additional environmental taxes have been introduced – tax on tap water, wastewa-ter tax, tax on plastic and paper bags. Revenues from energy tax, which were in-creased, accounted for 7.5 billion DKK of the projected 12 billion DKK coming from environmental taxes.
• The 1995 Tax Reform/Phase 2: period 1996 – 2000
o Seize of tax shift programme was smaller as compared to the first phase; e.g. it was projected that revenues raised from environmental taxes amounts to 2.45 bill DKK – around 0.2% of GDP in 2000.
o Tax shifting programme: Reduction in employers’ social security contribution and the provision of subsidies for investment in energy efficiency programmes (see Ta-ble 4.1 below for detailed information on the recycling mechanisms) were offset by
11 Industry was also liable to pay CO2 tax in 1992 but the whole CO2 tax paid by industry was refunded in 1992 (Nordic Council 2006 (forthcoming)).
12 This additional refund scheme reduced the average CO2 tax burden to around 35% of the standard rate, i.e. a rate of 35 DKK per ton of CO2 (Ministry of Finance 1995).
increases and introduction of energy taxes (a reform of the industrial CO2 taxation and implementation of an SO2 tax13 and natural gas taxation in 1996).
o Industry was the main target in the Phase II of the Danish ETR. The main economic instruments used in this tax shifting programme are carbon dioxide and sulphur taxes levied on industrial energy consumption.
o Refund scheme for industry underwent a major overhaul. Industrial energy con-sumption is subdivided into three components: space heating, light and heavy proc-ess. The rationale behind this reform process was the aim that industry should pay the same energy tax rates than households. This was partly achieved because indus-try faces the same tax burden on energy used for space heating; i.e. indusindus-try pays the full energy as well as the full CO2 tax rates. However, energy used for activities other than space heating is still fully exempt from energy tax and a reduced CO2 tax rate is levied differentiated according to the actual purpose (see below for further information).
• The 1998 Tax Reform/Phase 3: period 1999 – 2002
o The tax shift programme is planned to be revenue positive in the range of around 6.4 billion DKK over the period 1999 – 2002, although it is expected that the 1998 Re-form should be revenue neutral in the long-run. The total amount of 6.4 billion DKK accounts for around 0.3% of GDP in 2002 (see Table 4.2).
o Tax shifting programme: Increase in environmental taxes and corporate taxes to be used for reduction in personal taxes and taxes levied on the yield of pension savings and in addition a tax on share yields (corporate taxes).
o Biggest share of additional revenues raised should come from environmental taxes:
Energy tax rates were increased during this period – increase between 1999 and 2002 around 5-7% for petrol, light fuel oil and heavy fuel oil but 16% for diesel, 12%
for coal, 15% for electricity and natural gas by 33% (nominal terms - see Tables A1).
o This tax shifting programmes targets primarily the household sector because energy taxes were increased. Industry is only partly affected because industrial energy con-sumers are paying energy taxes only on energy products used for space heating; en-ergy products used for other purposes are still exempt from enen-ergy taxation.
All these tax shifting programmes have been designed to be revenue neutral although the last re-form process should only guarantee revenue neutrality over a time period which itself was not clearly determined.
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The first ETR implemented in Denmark concerned mainly households. The political objective un-derlying this tax reform was to bring down the marginal tax rates on personal income.14
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The business sector was not affected by the 1993 Tax Reform and revenues were therefore recycled back to households. However, the government already announced at that time that new
13 Energy products are subject to SO2 taxation and the tax has to be paid by industry and household. The SO2 tax is levied according to the sulphur content.
14 See for a discussion on how the marginal tax rates on wage incomes have been developed in Denmark: Jensen 2001, especially Table 2.
mental taxes would be introduced targeting industry. An inter-ministerial committee was estab-lished which recommended an increase of the CO2 tax rates paid by industries, to differentiate the tax rates according to energy intensities and to make suggestions how to recycle back the revenues to industry.
The main recycling mechanisms to industry adopted have been:
(i) the provision of investment grants for energy-saving measures;
(ii) to recycle a fraction of the revenues to private enterprises compromising two elements:
- reduction of the employers’ contribution to the additional labour market pension fund: reimbursement amounts to 1,325 DKK; (177 EUR) per year and per employee in 1996 compared to 1,166 DKK (156 EUR) in 1995;
- reduction of employers’ contribution according to the Act on labour market funds:
contribution will be lowered by 0.11 percentage units in 1997, 0.27 percentage units in 1998, 0.32 percentage units in 1999 and 0.53 percentage units in 2000;
(iii) the establishment of a special fund for small and medium sized enterprises because it was expected that small and medium sized enterprises will only receive a small share of measure (ii).
An overview of the expected revenues generated and distinguished between industry and house-holds as well as the recycling mechanisms are illustrated in Table 4.1.
7DEOH Phase II of Danish ETR 1996 – 2000
Total tax revenue collected 915 1,440 1,955 2,220 2,450 ,QGXVWULDODQGFRPPHUFLDO
VHFWRUV 710 1,230 1,730 1,900 2,075
- Space heating 420 750 1,050 955 910
- CO2 tax 65 245 425 585 775
- SO2 tax 225 235 255 360 390
+RXVHKROGV 205 210 225 320 375
Revenue recycled
7RWUDGHDQGLQGXVWU\ 710 1,230 1,730 1,900 2,075
- Investment subsidies 300 500 500 500 0
- Small businesses 180 210 255 255 295
- Reductions in employers’
SSC
200 490 945 1,115 1,750
Administration costs 30 30 30 30 30
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KHDWLQJXVHUV 60 60 60 60 60
7RKRXVHKROGV 145 150 165 240 315
Notes: * Subsidies for conversion to electric heating; revenue figures as planed as of 1995 in million DKK Source: Hansen J. H. H. 1999.
It is noteworthy that the proposed recycling mechanism clearly reflects the contribution of the two different economic sectors. Industry and households are receiving the amount back which they are expected to be paying as a consequence of the reform process, i.e. no cross-subsidisation of any type should occur. This Danish approach of a fair and equal distribution of revenues has to be seen and compared with the German approach as discussed in Chapter 4.3.
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The 1998 Tax Reform affected again mainly the household sector (Larsen 2002). The expected re-sults with regard to the tax shifting programme are shown in Table 4.2.
7DEOH Denmark’s Green Tax Shift Programme – Third Phase 1999 - 2002
Personal taxes 0 1 -0.1 -2.9 -6.2
Green taxes 0.6 3.1 3.9 4.8 5.6
Taxes on yield on pen-sion savings
0 -1.1 -3.7 -3.7 -3.8
Corporate taxes 0.8 1.9 2 2 1.9
Total 1.4 4.9 2 2 -2.5
Note: forecasts for 1999-2002 in billions DKK Source: Jensen A. H. 2001.
The reduction in personal income taxes mainly affected lower and medium income owners and it also included compensation for pensioners. As mentioned above the main revenue raising policy was to increase solely energy tax rates and not CO2 tax rates. This is insofar of significance because the business sector is not too affected when energy taxes are being increased because of special tax provisions (see for further information: Jensen 2001).
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Industry benefited from favourable energy tax provisions for a long time. This sector was not sub-ject to any taxes levied on energy products until the introduction of the CO2 tax in 1992. Between 1993 and 1995 enterprises were subject to 50% of the standard CO2 tax and in addition energy
in-tensive industries were eligible for a special CO2 tax refund scheme depending on the CO2 tax li-ability as measured with respect to value added (Nordic Council 1994, pp. 66-67 and Ministry of Finance 1995).
The scheme of special tax provisions for industry changed in 1995. Companies are paying CO2
taxes according to different type of usage. A differentiation between space heating – the full CO2
tax rate applies – and process purposes which are further distinguished between heavy and light processes. Process energy is generally exempt from any energy taxes.
In general, energy consumed in processes other than space heating are levied with a CO2 tax rate which increased gradually from 50 DKK per ton CO2 up to 90 DKK per ton CO2 in 2000. Compa-nies entering an agreement with the Danish energy authorities on increasing the energy efficiency are eligible for a reduction in the CO2 tax rate as illustrated in Table A4-1c.
The Danish government developed the so-called ‘Proms-criterion’ – defining whether process is energy-intensive – and whether the CO2 tax rate is therefore further reduced. Based on this list15 a process is designated to be energy intensive if ‘WKHOLDELOLW\ LQFXUUHGRQ WKH SURFHVVWKURXJKD WD[ RI '..SHUWRQQH&2ZLOOSHUPDQHQWO\H[FHHGRIDGGHGYDOXHZKLOHWKHOLDELOLW\VLPXOWDQHRXVO\H[
FHHGVRIVDOHV·(Ministry of Finance 1995, p.14). Energy used in such heavy processes is subject to an even more reduced CO2 tax rate as shown in Table A4-1c.
Interesting to note is the fact that the standard CO2 tax rate of 100 DKK per ton CO2 has not been increased since the tax was implemented in 1992. The CO2 tax burden of industry increased gradu-ally during the period of the second phase of the ETR (1996-2000) but remained then constant until 2004. In 2005 the nominal CO2 tax rate of 100 DKK was reduced to 90 DKK per ton CO2. However, this revision does not affect the effective tax rates paid by industries as the share has been in-creased proportionally so that the tax rate per ton CO2 remains the same as before (Nordic Council 2006 (forthcoming))... This reduction in CO2 tax rate was compensated by a slight increase in en-ergy tax rates but which does not affect industry because this sector is still exempt from enen-ergy taxes apart from energy used for space heating. Although the effective tax rates are rather low, especially when compared to the high Danish nominal tax rates, they are still exceeding the mini-mum excise tax rates set by the European Union in the recently adopted Taxation of Energy Prod-ucts Directive (Directive 2003/96).
Electricity consumption of the manufacturing industry is also subject to some special tax provi-sions. The standard Danish electricity tax differentiated between an energy tax components and a CO2 tax component is one of the highest electricity taxes in Europe. The scheme applies a two-tier approach by distinguishing between electricity used for heating purposes and for all other uses.
Furthermore, manufacturing industry enjoys some further tax provisions for the consumption of electricity for process purposes because of some favourable exemption rules. First of all, companies paid an energy tax rate of 10 DKK per MWh as compared to the standard rate of 566 DKK per MWh in 2004 and they are also eligible of a 40% refund on the CO2 tax rate of 100 DKK per MWh.
Therefore, the tax electricity rate paid by manufacturing industry amounted to 70 DKK per MWh as compared to 566.6 DKK per MWh in 2004, i.e. an effective tax rate of around 12% of the nominal tax rate. Furthermore, the reduced energy tax rate only applies to the first 15 million kWh con-sumed each year (Nordic Council 2006 (forthcoming)).
15 The European Commission approved the process list as part of the overall Danish energy taxation scheme.