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Carbon Pricing

Will The Forthcoming New Danish Climate Law Boost A Carbon Tax?

In the beginning of September the newly elected Danish government, comprised of the parties Socialdemokratiet, Radikale, Socialistisk Folkeparti, and Enhedslisten, started its work on a new climate law. Denmark already has a climate law in place from the former Venstre led government, but it was not overly ambitious and not legally binding.

In the beginning of September the newly elected Danish government, comprised of the parties Socialdemokratiet, Radikale, Socialistisk Folkeparti, and Enhedslisten, started its work on a new climate law. Denmark already has a climate law in place from the former Venstre led government, but it was not overly ambitious and not legally binding.

An Ambitious Agenda

When the current government was formed, a memorandum of political understanding titled “A Fair Direction For Denmark” was published. In it, the ambitions for a new direction in climate legislation was drafted, which I went through here, and since the beginning of September the work to put these ambitions into binding legislation has been underway.

In short the memorandum had these points regarding climate:

  • Introduce binding targets.
  • Transform the transport sector.
  • Ensure climate contributions from agriculture.
  • Adopt a climate action plan.
  • Combat plastic contamination and ensure better drinking water protection.
  • Take responsibility for more ambitious goals in the EU and strengthen green diplomacy.
  • Create greater biodiversity and more forest.
  • Strengthen the green calculation models.
  • Raise the goals of organic foods and strengthen efforts against food waste.
  • Involvement of stakeholders.

But why is it even interesting what at tiny country like Denmark is working on in this regard? There are many reasons, in political terms, like how this small Scandinavian democracy is in fact highly functional and what can come of such a system with shorter communication distances than larger countries, but I think an important reason is that its size makes Denmark more like a testlab for new ideas. Geographically the country is well situated for testing and combining many different energy concepts and policies.

Huge Investments Needed

Shortly after the newly elected government began to discuss how to make all the things in the memorandum materialize, the major Danish pension funds threw a number on the table: DKK 350 billion ($51.7 billion). This is actually a very huge chunk of money in a Danish perspective, and even though the pension funds say they will only invest in ventures in which they expect a reasonable return for the benefit of their clients, it is a significant signal that says: Let’s do it!

At the end of September, Prime Minister Mette Frederiksen (Socialdemokratiet) made it clear in a interview that: “I believe that if we are to be able to deliver politically on the ambitious goals we have set, then we will have to rely heavily on private capital.”

Well, combined with a reshuffling of existing taxes I suppose, but be careful with that. Voters don’t like it.

Will The Consensus Make Or Break?

In the 2019 baseline projection report form the Danish Energy Agency, which is a technical assessment of how energy consumption, energy production, and greenhouse gas emissions will develop in the period up to 2030 under a Frozen Policy scenario (i.e., business as usual), it is painfully clear that Denmark must accelerate its reduction of greenhouse gas emissions 3- to 4-fold in order to reach own targets and comply to the Paris agreement.

Mette Frederiksen and the other ruling government party leaders knew very well back in July when they drafted the memorandum that it would be hard, very hard indeed, to reach the reduction target of 70% from 1990 levels by 2030.

Until now, all parties in the Danish parliament, except one small one (Nye Borgerlige), is in on the 70% reduction target, but I wonder if they realize how tough this is going to be? Yes, it seems that the population that voted for the elected parties stand behind this policy, as long it’s just fancy words, but listen to what this guy at a gasoline filling station answered on primetime TV when asked about the drone bombings of the Saudi oil facilities recently, which made prices at the pump rise 4% for a week or so: “Well, I’ll have to get a pay raise then won’t I?”

When the general population realizes that this project of saving the planet is not going to be free, will they opt out? I don’t mean to be coy, but it’s often a matter of perception on where your hard earned tax money goes. It has to be controlled with incentives, in my opinion. You cannot just raise taxes on one thing without presenting the alternative. The whole issue of fossil fueled cars and electric cars is the perfect example. I mean, look at how different this has played out in Norway vs. Denmark. Norway being an oil-country with the world’s highest rate of EV adoption (lots of incentives). Denmark being a wind-country with virtually no EVs (hardly any incentives).

Could A Simplified Carbon Tax Be Key?

Carbon tax is a difficult topic. Many initiatives are being discussed, and as citizens we have more ways than one to influence this. One example is the carbon fee and dividend system that EU citizens can support. The website states: “A steadily increasing price on fossil fuels will reduce pollution. It leads companies and consumers to choose cleaner, cheaper options. All the money collected is returned fairly every month to citizens as a dividend.”

On the political side of things, it gets a bit more complicated. Systems are in place and running every day. The voters hand over the controls to new trusted politicians from time to time, but other than that, they just run. We as citizens don’t think much about it, but could that be because the systems themselves are too complicated to understand? Absolutely.

The current tax and subsidy system on energy in Denmark is unique in its structure due to good intentions going back to the oil crisis of the 1970s. Layer after layer of rules in this system has made it very complex, and truth be told, very few people understand it, myself included.

Put very simply, the currents tax system in Denmark works in 3 parts:

Energy tax:

Taxes on energy, without any thought on emissions, play the main role. Energy tax is applied to all fuels that are not used for electricity generation. The rate depends on the type and use of the fuel. E.g., fuels used in production processes pay a very low energy tax, while coal used for district heating pays a high energy tax. Biomass is exempt from energy tax.
Fuels used for electricity generation are not subject to energy tax, but instead, energy is taxed on the electricity consumed. This energy tax is called the electricity tax.

Electricity tax:

By imposing the tax on electricity instead of fuels for its production, imported electricity and the Danish-produced electricity are both taxed. Electricity tax is 4 to 5 times higher than the energy tax on fuels for heat production, which is partly due to the fact that the electricity tax is added after any conversion loss in the production of energy, while the other energy taxes are added to the fuel itself before conversion loss. The difference in the rates implicitly results in a conversion loss of 70 to 75%, which is substantially higher than the conversion loss in today’s power plants (50 to 60%).

CO2 tax:

The CO2 tax plays a minor role in the current tax system. CO2 emissions are regulated either with the Danish CO2 tax or with CO2 quotas in the EU emissions trading system. CO2 tax is imposed on all fossil fuels used for road transport, heating of buildings, and process purposes. The CO2 tax varies on the different fuels unit of energy, but corresponds to about DKK 170 ($25) per tons of CO2 emitted when burned. The CO2 tax is significantly lower than the energy tax. E.g.: The converted CO2 tax per GJ fuel on coal is 70% lower than the energy tax.

In addition, many energy sources are also subject to a number of environmental taxes. In particular NOx and SO2 emissions, while particulate pollution is only regulated through use of filters on vehicles, powerplants, domestic furnaces, etc..

To encourage the use of renewables in the current tax system, a subsidy system is implemented on top, which complicates things to a degree that it is almost impossible to grasp. And due to the dynamic nature of these systems, the perspective from the consumer becomes muddled.

For example, I invested in solar panels in 2012 on the premise that I would have a yearly net metering regulation of kWh consumed vs. produced for at least 10 years, meaning that if I consumed the same amount as I produced I would pay zero in electricity. The former government apparently thought this was too good a deal for consumers, so they scrapped it, and since the beginning of 2019 I have paid DKK 2.3 (34 cents) per kWh for the electricity I buy from the grid including taxes, but have only been paid DKK 0.3 (4 cents) per kWh for the electricity I sell to the grid because I cannot charge taxes. In this case though, it prompted me to buy an electric car, but that’s another story.

At least Denmark has a carbon tax of sorts, but the question is if the time has come to emphasize this tax domain to the maximum? Last year, the Danish Council on Climate Change, which is an independent body of experts, proposed a new tax system based heavily on CO2 emissions as a means to accelerate the transition to a low-carbon society.

A very interesting notion in the proposal is the following (in regard to the government’s proposed 70% reduction target):

“The Climate Council proposes a major reform of the tax and subsidy system. An improved tax and subsidy system should focus on reducing CO2 emissions. A target for the share of renewable energy set by the current government may be a useful policy indicator, but CO2 reductions should be the main focus of taxation and subsidy policy, since ultimately it is the purpose of the conversion to renewable energy.”

Good point. It is the efficiency of the system itself designed to reduce emissions that should be optimized, regardless of what the target may be. 70%? 80%? That’s politics. Converting the whole energy system to renewables as fast as technically possible is what this is all about. In 2030 we can see what number we have reached, sure, but let’s not fool ourselves with fluffy numbers, let’s just go all-in!

Denmark Has A Unique Chance To Go First

The main element of the proposed improved tax and subsidy system is a general CO2 tax paid by electricity plants, district heating plants, households, companies, and in the transport sector. The current energy tax, with its somewhat unclear purpose, is removed. Instead, it will be the task of the CO2 tax to help ensure that Denmark achieves its goal of becoming a low-emission society with an energy supply based on renewable energy. This means that the CO2 tax must be significantly higher than today.

The Climate Council has made calculation models that are relatively simple, but the aim is clear, so a warning is in order:

“Taxes and subsidies should be arranged with CO2 emissions in mind, since climate action is ultimately about reducing CO2 content in the atmosphere. If the tax and subsidy system is adapted to other goals, such as targets for the share of renewable energy, CO2 reductions will be taxed differently. This will, for example, mean that CO2 reductions achieved through renewable energy expansion will be rewarded more than a corresponding CO2 reduction achieved through energy savings.”

Also it’s important to make sure the system accounts for emissions from neighboring countries with which we trade energy. For this I have extracted the following nitty-gritty arithmetic that is suggested by the Danish Climate Council (I may have gotten it all wrong, but here we go):

A new system is designed on the basis that the result of the formula U + k x NI must be kept below a politically determined target, where:

U is the emission of CO2 from Danish soil.
NI is the net import of electricity.
k is a foreign trade correction that reflects the estimated content of CO2 in foreign electricity generation.

A correction of tonnes of CO2 per MWh means that electricity from abroad is assumed to have this CO2 content. This means that import of 1 MWh increase the total Danish CO2 emissions by k tonnes of CO2, while export of 1 MWh displace k tonnes of CO2 abroad. Let’s draft two simple examples:

Example 1:

10 MWh consumed in a non-windy period with a Danish energy mix carbon footprint of 0.8 tonne per MWh where 5 MWh are produced, and 5 MWh of foreign carbon footprint of 1.1 tonne per MWh is imported: 8 tonne + 1.1 tonne per MWh x 5 MWh = 13.5 tonne CO2 emitted 🙁 Bummer, let’s build some solar farms.

Example 2:

10 MWh consumed in a windy period with a Danish energy mix footprint of 0.4 tonne per MWh where 12 MWh are produced, and 2 MWh exported:
4 tonne + 1.1 tonne per MWh x -2 MWh = 1.8 tonne CO2 emitted 🙂 Hurray! We offset some coal power in Germany.

In other words: Exporting low carbon energy becomes more attractive, while importing high carbon energy is penalized, thus incentivizing even more renewables.

(And then of course there is the CO2 quota system in conjunction to this, but that’s very complicated so I won’t even try to get into that.)

This way the political desire that Denmark’s climate action should contribute to reducing global emissions is emphasized. If a small country like Denmark can succeed in implementing a model like this, then it does matter what we do, because the system will be prone to be mimicked by other much larger countries. For starters, the ones we trade energy with.

Indeed, a unified system seems like the only way to move forward. The Climate Council suggests a price per tonne CO2 emitted of DKK 850 ($125). Yes, that’s a lot. But hey, if eventually this becomes a global energy trade system, it shouldn’t be a problem.

And remember, if the 20 most CO2 emitting companies in the word, according to the Guardian (Worst first: Saudi Aramco, Chevron, Gazprom, ExxonMobil, National Iranian Oil Co, BP, Royal Dutch Shell, Coal India, Pemex, Petróleos de Venezuela, PetroChina, Peabody Energy, ConocoPhillips, Abu Dhabi National Oil Co, Kuwait Petroleum Corp, Iraq National Oil Co, Total SA, Sonatrach, BHP Billiton, Petrobras) feel the ground shaking under them, this planet might just have a chance.

So, Mette Frederiksen, Prime Minister of the tiny kingdom of Denmark, are you and your government ready to make global headlines? Are you ready to make a lot of old folks angry (short term) and young folks happy (long term)?

Keep it simple. Try the carbon tax. Risk your job. Retain your integrity. Save our planet.

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Written By

Jesper had his perspective on the world expanded vastly after having attended primary school in rural Africa in the early 1980s. And while educated a computer programmer and laboratory technician, working with computers and lab-robots at the institute of forensic medicine in Aarhus, Denmark, he never forgets what life is like having nothing. Thus it became obvious for him that technological advancement is necessary for the prosperity of all humankind, sharing this one vessel we call planet earth. However, technology has to be smart, clean, sustainable, widely accessible, and democratic in order to change the world for the better. Writing about clean energy, electric transportation, energy poverty, and related issues, he gets the message through to anyone who wants to know better. Jesper is founder of and a long-term investor in Tesla, Ørsted, and Vestas.


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