This chapter assesses Denmark’s progress in integrating environmental considerations into economic policy and promoting green growth. It analyses the use of taxation and other pricing instruments to pursue environmental objectives, and advances in eliminating environmentally harmful subsidies. The chapter also examines spending on environmental protection, investment in low-carbon energy and transport infrastructure and services, and promotion of green growth and eco-innovation as sources of growth and employment. The final section analyses inclusion of environmental issues in development co‑operation programmes and export promotion.
OECD Environmental Performance Reviews: Denmark 2019
OECD Environmental Performance Reviews
Chapter 3. Towards green growth
Abstract
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
3.1. Introduction
Denmark’s small, open economy is doing well, with robust gross domestic product (GDP) growth since 2015, although slow productivity growth remains a challenge (OECD, 2019[1]). The 5.8 million inhabitants enjoy high income levels and living standards, low unemployment rates and extensive welfare benefits, and have generally strong environmental awareness.
The country’s history of ambitious environmental and energy policy goals contributed to the decoupling of greenhouse gas (GHG) and air pollutant emissions and other environmental pressures from economic activity (Chapter 1). Good progress has already been made against the target to decarbonise the economy by 2050, especially in the energy sector. The commitment to address environmental challenges and economic success associated with the export of clean technology, notably renewable energy resources, made Denmark a front runner in green growth.
This chapter assesses Denmark’s progress in integrating environmental considerations into economic policy and promoting green growth, focusing on the period since 2005. It analyses the use of taxation and other pricing instruments to pursue environmental objectives, along with advances in eliminating environmentally harmful subsidies. The chapter examines spending on environmental protection, investment in low‑carbon energy and transport infrastructure and services, and promotion of green growth and eco‑innovation as sources of growth and employment. It also analyses the international dimension of Denmark’s environmental policy, particularly the inclusion of environmental issues in development co‑operation programmes and in trade.
3.2. Action framework for sustainable development and green growth
Having played a leadership role in the development of the 2030 Agenda, Denmark aims to spearhead implementation of the Sustainable Development Goals (SDGs). Its Action Plan for Implementation of the 2030 Agenda and SDGs, adopted in March 2017, includes 37 targets supported by national indicators. Progress reports are made public and sent to Parliament annually, and are to be complemented every four years by more comprehensive status reports that also cover policy measures. Denmark was among the first countries to conduct a voluntary national review on progress towards the SDGs, in 2017, and committed to conduct two more reviews by 2030 (MOF, 2017[2]). The review was supported by publication of the first indicator report, largely based on readily available data and indicators. Statistics Denmark aims to broaden the statistical base for future reports to facilitate comparison of progress with international measurement frameworks. Harmonisation of statistics is a key issue, as only one-third of the indicators are currently comparable with those of other EU and OECD countries.
Green growth ranks high on the political agenda and is anchored in strategic policy documents and cross-party political agreements. The 2009 Green Growth Agreement establishes a long-term strategy for environmental policy in the agricultural and food industries. The Energy Agreement for 2012-20 set ambitious targets to decarbonise the energy sector, which were confirmed in the Energy Agreement for 2020‑24, adopted in June 2018. This includes the goal to achieve 100% green electricity by 2030 and net zero emissions economy-wide by 2050. It was complemented in 2018 by a climate and air proposal addressing emissions outside the EU Emissions Trading System (EU ETS), such as in transport and agriculture. The overarching framework to achieve a low‑carbon society was already set by the 2014 Climate Change Act. Some municipalities set local low-carbon targets and strategies. The capital city, Copenhagen, for example, aims to become carbon neutral as soon as 2025, though this target will be difficult (and more costly than expected) to achieve (Politiken, 2019[3]).
The government has recently increased the emphasis on cost‑effectiveness of green growth measures, ensuring they are beneficial to employment and competitiveness, on the one hand, and environmental and climate concerns on the other. The 2018 Energy Agreement, for example, aims to expand renewables on market conditions and to reduce costly subsidies. At the same time, subsidies for some technology, as well as tax concessions to businesses, remain in place, reducing overall cost-effectiveness (Sections 3.3 and 3.5). Denmark has chosen to make significant use of flexibility mechanisms to achieve its ambitious mitigation goal for non-EU ETS sectors: land use, land-use change and forestry (LULUCF) credits and cancellation of EU ETS quotas (Chapter 1). The agricultural sector, which accounts for 20% of total GHG emissions, remains without direct regulation or taxation, which Denmark justifies because of high price competition and limited availability of cost-effective mitigation technology in the sector (Box 3.1). However, continued investment in research and cost-benefit calculations of emission reduction options in agriculture are called for, especially in view of a recent announcement by the Danish food industry that it aims to become carbon neutral by 2050 (DFAC, 2019[4]).
Social cost-benefit analysis has long been used for decision making in sectors such as energy and transport. Its use has been more limited in the environment sector, but has increased in recent years. The Ministry of Finance has published guide values to estimate the benefits of environmental improvements in such analysis, which has helped enhance transparency and consistency across studies. The ministry also increased the recommended value for statistical life to be used in cost-benefit analysis, bringing it closer to values cited in the related OECD meta-analysis (OECD, 2012[5]). As noted in Chapter 2, policy making in Denmark benefits from regular engagement of stakeholder and expert groups, such as the Environmental Economic Council, which examines environment-economy links and environmental policy efficiency, and the Climate Council, which advises on how to become a low-carbon economy by 2050. An SDG Council was established in 2018. In May 2018, the government set up a “growth team” of business leaders to develop recommendations on better framework conditions for business opportunities related to the green transition, notably regarding green energy and environmental technology and digitisation.
In early 2018, Statistics Denmark published a comprehensive report on green national accounting (SD, 2018[6]). Developed over three years, the initiative aimed at developing a green national accounting framework. The report gives an overview of recent developments and resulting environmental pressures, the state and trends of natural capital stock and the contribution of green activities to the economy. Some indicators under this framework are directly linked to the SDGs. A follow-up project with the University of Copenhagen is to further develop green national accounting, including an environment-adjusted GDP. With stable funding, this work could become the basis for a permanent green growth monitoring framework. Development of an environmental-economic macroeconomic model is also planned, to better forecast interaction between economic activity and the environment.
Box 3.1. Climate mitigation in Danish agriculture
Agriculture accounts for 20% of GHG emissions in Denmark (Chapter 1). Emissions have slightly declined since 2005, mostly through efficiency gains in production and efforts to limit nitrate pollution of water bodies. Denmark does not directly regulate agricultural emissions, citing limited availability of cost-effective mitigation technology and high price competition in the sector, as well as carbon leakage concerns.
Ex ante evaluation of the cost-effectiveness of GHG mitigation measures in agriculture revealed that between 13% and 26% of the sector’s emissions could be reduced by 2030 (Dubgaard and Ståhl, 2018[7]). Converting highly organic soil, such as peatland, to nature areas was found to have by far the largest mitigation potential at relatively low cost. Other options were increased biogas production, sustainable slurry management, changes in livestock feed and the addition of chemicals to fertilisers and slurry (Table 3.1). The findings were broadly consistent with international estimates of mitigation potential in agriculture.
Costs estimates for such mitigation measures range from DKK 273 (EUR 37) to DKK 1 588 (EUR 213) per tonne of CO2 equivalent (t CO2 eq). This is more costly than climate action in the energy and industrial sectors, which are mostly covered by the EU ETS (the price of allowances in the EU ETS have been around EUR 20 per tonne of CO2 since mid-2018). But it is below the estimated cost of further emission reductions in the transport sector, where taxes already impose a relatively high implicit carbon price (DEC, 2018[8]). It is important to note that most measures evaluated have considerable co-benefits on water or air quality (Table 3.1). The Danish Economic Council (2018[8]) found that marginal mitigation costs in agriculture were negative up to 0.8 MtCO2 eq thanks to co‑benefits.
Despite transport’s higher mitigation cost, the government has prioritised climate action in that sector, in particular through a goal of phasing out sales of fossil fuel‑based cars. Denmark has begun to expand catch crops, introduce slurry acidification and convert organic soil. However, it has decided not to pursue reduced fertiliser use as a mitigation measure, which studies had found to have great mitigation potential (MCEB, 2013[9]). Resources have been earmarked for research and development (R&D) in agriculture mitigation as well as carbon capture, use and storage (Section 3.6.1).
Table 3.1. Cost-benefit analysis of selected GHG mitigation measures in agriculture
* Based on a low-end estimate of the shadow price of reduced nitrogen leaching (DKK 25 per kg N).
** Mitigation potential includes LULUCF emissions. Excluding LULUCF, the emission potential of conversion of arable organogenic land would reach ‑168 000 t CO2 eq and total mitigation potential 1.41 Mt CO2 eq.
Source: Based on Dubgaard and Ståhl (2018[7]), Omkostninger ved virkemidler til reduktion af landbrugets drivhusgasemissioner (Costs of instruments for reducing agricultural greenhouse gas emissions).
3.3. Greening the system of taxes, charges and prices
3.3.1. Overview
Denmark’s public finances are strong, known for mostly close to balanced budgets and low public debt (50% of GDP in 2017; Basic statistics). The fiscal balance was in deficit during the global financial crisis and prolonged recovery, as fiscal policy supported demand, but it has improved in recent years. The government’s medium-term economic plan envisages structural balance after 2020. The tax burden is high by international comparison. Denmark ranked second among OECD countries for tax/GDP ratio in 2017 (46%, compared with the OECD average of 34%), due in part to high personal income tax. The government aims to lower the tax burden, however. Several tax cuts have contributed to a 2.5 percentage point decline in the tax/GDP ratio since 2014. Nearly three‑quarters of tax revenue is collected by the central government and the rest by local governments (OECD, 2018[10]).
Denmark has a long history of applying environmentally related taxes, being among the front-runners in integrating environmental considerations into its tax system. Many taxes align closely with the estimated external cost of production or consumption activities. Environmentally related tax revenue has been declining, though at 3.7% of GDP in 2017 it is still the highest value among OECD countries and more than twice the OECD average (1.6% of GDP in 2016) (OECD, 2018[11]). Revenue declined considerably during the 2008‑09 financial crisis, mostly because vehicle tax revenue fell due to deductions for fuel‑efficient cars introduced in 2007; the level stayed relatively constant in the following years (Figure 3.1). As in most OECD countries, energy-related taxes account for the largest share of tax revenue. Yet Denmark differs from other countries in its large taxes on vehicles. Taxes on pollution and natural resource use account for a small share of total green tax revenue, although the level is higher than in many other OECD countries.
Figure 3.1. Environmentally related tax revenue has decreased slightly
3.3.2. Taxes on energy products and carbon pricing
Denmark has a long history of energy taxation and carbon pricing, being one of the first countries to introduce a carbon tax (1992) and pioneering CO2 emission trading for the power sector (2000). Taxes on energy products accounted for 2.2% of GDP in 2016, one of the highest levels in the OECD (OECD, 2018[11]). The following are the main taxes on the use of energy products (OECD, 2018[12]):
Energy duty (52% of energy-related tax revenue in 2017): applies to fossil fuel use (oil products, natural gas, coal, coke and fossil waste) at rates that depend on the fuel’s energy content and on user category. In line with the recommendation in the 2007 OECD Environmental Performance Review of Denmark, rates are now indexed for inflation.
CO2 tax (8%): applies to fossil fuel use (oil products, natural gas, coal and coke), at rates that depend on the fuel’s carbon content. Rates are the same for most users, at DKK 173/t CO2 (EUR 23) in 2018, and indexed for inflation.
Electricity tax (28%): is levied on electricity output (per MWh). Tax rates vary widely by purpose and user group. Fuels used to generate electricity are not taxed.
Other taxes on energy use include a tax on fossil waste1 and taxes on emission of SOX (for energy products containing more than 0.05% sulphur) and NOX from fuel combustion (Section 3.3.4). A Public Service Obligation (PSO) tax on electricity use was introduced in 2012 to generate resources for renewables subsidies, but it was decided in 2016 to phase it out over 2017-21.
Taxes on energy products
The tax burden resulting from energy taxes varies widely across fuels, users and purposes. As in most OECD countries, transport fuels are taxed at the highest effective rate (Figure 3.2). Yet Denmark also has one of the OECD’s highest effective tax rates on energy use in non-road sectors (OECD, 2018[13]). This is explained by relatively high tax rates on electricity and other energy use in the residential and commercial sectors. Industry and agriculture face a considerably lower tax burden due to reductions and exemptions. The electricity tax for industry (i.e. production processes), for example, was set at DKK 4 (EUR 0.54) per MWh in 2019, just above the EU minimum and about 200 times below the ordinary electricity tax applicable to households (DKK 884 or EUR 119/MWh). The large disparity in energy tax rates creates unequal incentives for energy savings, and is not justified from an environmental perspective. The energy tax burden on industry (e.g. energy tax revenue as a share of industry’s gross value added) declined from 1.5% in 2004 to 0.8% in 2016 (MIBFA, 2018[14]), increasing the scope for adjustment.
Electricity taxes for households are the highest in the EU (EC, 2018[15]). While historically high taxes have encouraged power savings, their justification diminishes as power generation becomes cleaner. They also interfere with the cap in the EU ETS2 and discourage switching towards efficient solutions for electric heating (e.g. heat pumps and electric boilers) or electric vehicles, and create incentives for self-generation of power (e.g. with individual rooftop photovoltaic systems), even where socio‑economically inefficient (IEA, 2017[16]). The government has taken steps to address this issue. It has reduced the electricity tax for heating (both for households and businesses) to DKK 259 (EUR 35) per MWh and plans to differentiate the tax on electricity used for electric vehicles. The phase-out of the PSO levy will reduce overall electricity prices and the 2018 Energy Agreement announced a gradual reduction in the standard electricity tax to DKK 774/MWh (EUR 104/MWh) by 2025. This will help increase the attractiveness of electric heating and mobility vis-à-vis fossil fuel- and biomass-based solutions. Unfortunately, the Energy Agreement also lowers the rate for some businesses to the minimum set for industrial processes, contributing to disparity among users. The change aims to equalise rates among businesses.
Figure 3.2. Effective energy tax rates are highest in the road sector
Note: Tax rates applicable on 1 July 2018. Energy use data are for 2016 and adapted from IEA (2018), World Energy Statistics and Balances. Excludes the PSO tax.
Source: OECD (2019), Taxing Energy Use 2019.
An open question is how to finance the reforms. Energy taxes are an important source of budget revenue, accounting for 5% of total tax revenue in 2016. Energy-related tax revenue has fallen by 11% since 2005 in real terms. The decline was driven by reductions in revenue from the CO2 tax and the energy duty on petrol and natural gas, which in turn reflected declining consumption of fossil fuels and associated CO2 emissions. Revenue will likely continue to fall with the projected decline in fossil fuel consumption, the phase-out of the PSO tax and reductions in the electricity tax. The government is considering temporarily increasing energy taxes or establishing a new temporary energy tax to finance the shortfall. Reducing the gap between industrial processes, heating purposes and other uses and/or taxing biomass could help in this respect.
Solid biomass, which is exempt from the energy duty and CO2 tax, has gained in importance as a source for domestic and district heating. It use has more than doubled since 2005 and it accounted for 58% of renewables in 2017 (IEA, 2019[17]). While the use of biomass helps in meeting renewables targets, the assumption that it is carbon neutral from a lifecycle perspective has increasingly been challenged in the scientific literature (OECD, 2018[18]). In Denmark, 43% of consumed biomass is imported, primarily from Estonia and Latvia, making it even more difficult trace the fuel’s sustainability and carbon neutrality. The burning of biomass also creates significant air pollution (Chapter 1). The favourable tax treatment for biomass should therefore be reconsidered. Energy utilities have put in place a voluntary programme to ensure sustainable use of biomass, which includes sustainable management of the forests from which the biomass is derived.
Petrol is taxed significantly more heavily than diesel, at DKK 4.561 (EUR 0.61) per litre compared to DKK 3.104 (EUR 0.42) per litre of diesel. The tax gap between the two fuels is one of the largest in the OECD and increased over 2012‑15. This is regrettable from an environmental perspective, as diesel combustion emits more CO2 and local air pollutants than an equivalent volume of petrol. In addition, a litre of diesel normally allows more kilometres to be driven, meaning the tax on it should be higher to internalise driving-related externalities (Harding, 2014[19]). Road transport fuels are taxed at an effective rate (i.e. when considering both energy taxes and the carbon tax) that is comparable to average OECD levels but lower than in other Scandinavian countries and neighbouring Germany (OECD, 2018[13]).
To address the diesel-petrol gap, Denmark levies an annual countervailing charge on diesel cars (Section 3.3.3). The rationale is that a direct increase in diesel tax rates might encourage fuel tourism to neighbouring countries. However, as an annual tax that is not linked to vehicle use, it is less efficient way of addressing externalities. In addition, end‑user prices for diesel are lower than in Sweden and Norway, although indeed higher than in Germany (IEA, 2018[20]). In any case, the countervailing charge failed to balance the lower diesel tax: both the sale of diesel vehicles and diesel consumption increased, with the share of diesel cars in the passenger fleet jumping from 10% to 31% over 2005‑17 (DRD, 2018[21]). Denmark would benefit from phasing out the reduced energy duty for diesel, especially if it co‑ordinated with similar moves in neighbouring countries.
Pricing carbon emissions from energy use
The carbon tax was introduced in 1992 for households and space heating in industry and has since been increased and extended to other uses. In 2008, Denmark raised the tax from DKK 25 to DKK 150 (which was the expected price of allowances in the EU ETS) and later indexed it to inflation. In 2018, the rate was DKK 173.2/tCO2 (EUR 23/tCO2), lower than in neighbouring Sweden, Norway and Finland. It should be noted, however, that Denmark levies higher excise taxes on some energy uses, such as transport fuels and residential energy use, which raises the implicit price of carbon. As explained above, energy excise duties – and thus the implicit price of carbon – vary significantly by user group, creating unequal incentives for CO2 emission reductions. In addition, industrial processes benefit from a reduction of the CO2 tax (IEA, 2017[16]).
In addition to putting a price on carbon via taxes, Denmark participates in the EU ETS. In 2017, 34% of Danish GHG emissions were subject to carbon pricing through this system. EU ETS installations are exempt from the carbon tax, or receive a full refund, to avoid double taxation; the exceptions are incinerators (Chapter 4) and heat inputs for district heating plants. The OECD estimates that, accounting for energy taxes and the EU ETS, 78% of CO2 emissions from energy use in Denmark faced a price signal in 2015, albeit at a relatively low level (the remaining emissions largely stem from combustion of biomass, which is not taxed). Only 32% of CO2 emissions faced a price above EUR 30/tCO2 in 2015, which is a low-end estimate of climate damage. In contrast to a generally rising price signal in the OECD, the share of CO2 emissions priced at or above EUR 30 in Denmark has dropped from 52% in 2012 (OECD, 2018[18]). This is likely due to higher (untaxed) biomass consumption and lower energy tax rates for industry. As a result, the economy-wide carbon pricing gap increased from 40% in 2012 to 52% in 2015 (Figure 3.3).
Figure 3.3. Denmark ranks about average in pricing of carbon emissions from energy use
3.3.3. Transport taxes and charges
Vehicle taxes
Vehicle taxes consist of a one-off duty on purchase (the registration tax), an annual ownership duty (commonly called the green owner tax)3 and the countervailing charge for diesel vehicles. Added to this is a tax on car insurance premiums. While taxes for passenger cars have been reduced several times in recent years, they remain high by international comparison, mostly due to a high registration tax. They also appear high with respect to transport-related externalities (DEC, 2018[8]). Taxation of lorries, buses and trucks, by contrast, is relatively light.
High vehicle taxes discourage car purchases, resulting in a relatively low vehicle ownership rate and slow fleet renewal. The average passenger car is 8.9 years old, above the EU average of 7.4 years (EEA, 2018[22]). At the same time, the high registration tax (which is based on vehicle value) has encouraged purchases of cheaper vehicles, which tend to be small and more fuel efficient. In addition, both the registration tax and the green owner tax are linked to fuel efficiency.4 This combination had a significant impact on consumer choice, with higher sales of smaller and more energy-efficient cars that emit less CO2 per kilometre. Average emissions from new cars have been below the EU average in the past decade (IEA, 2018[23]). The exemption of lorries from the registration tax and reduced annual tax rates on cars and vans used for commercial purposes are not justified from an environmental perspective and should be reconsidered.
Shifting the tax burden from car ownership to the use of vehicles and roads would enhance transport taxation efficiency (OECD, 2019[24]). Some progress has been made in this direction. In 2017, the registration tax was reduced to 85% of vehicle list price for the first DKK 185 000 (about EUR 25 000) from 105% of list price for the first DKK 106 000 (about EUR 14 000), while the annual vehicle tax was increased. The remainder is taxed at 150%, still high by international comparison. As the reductions were not compensated by measures targeting the externalities of car use, care must be taken to avoid cutting average car prices to the point of stimulating car sales and outweighing emission reduction benefits. The number of cars on the streets has grown continuously since 2010 (Chapter 1).
The countervailing charge that diesel car owners must pay aims to offset the difference in energy duty between diesel and petrol (MT, 2015[25]) but has not slowed the increase in diesel car sales. For normal diesel cars, the countervailing charge is calculated as the estimated tax saving from using diesel instead of petrol for 22 000 km annually. In addition, since 2010, a surcharge of DKK 1 000 (EUR 134) has been applied to diesel cars and new commercial vehicles (registered after March 2009) not fitted with particulate filters. Diesel buses pay a fixed countervailing charge of DKK 1 230 (EUR 165) per year and trucks and tractors are exempt. This exemption is not justified from an environmental perspective and should be reconsidered. Overall, taxation of trucks fails to internalise their external environmental costs.
To promote sales of electric and hydrogen vehicles, they were exempt from the registration and green owner taxes until 2015. The government aimed to phase in a registration tax for such cars (20% in 2016, 40% in 2017, 65% in 2018, 90% in 2019 and 100% in 2020), but this, coinciding with a general decrease in the registration tax, paralysed electric car sales (IEA, 2018[23]). The government thus decided to maintain the registration tax for electric vehicles at 20% for two additional years or until a threshold of 5 000 new registrations was reached. More recently, as part of the climate and air proposal, the government suggested imposing a registration tax for electric vehicles and hybrids with a list price of less than DKK 400 000 (EUR 54 000) in 2019 and 2020. This measure was adopted in late 2018 (see also Section 3.5.3).
Road and congestion pricing
Heavy vehicles and trucks with a permissible total weight of over 12 tonnes have to pay a road tax (Eurovignette) on motorways.5 Coaches are exempt. In addition, tolls apply on two major bridges: the Great Belt and Øresund. As part of the political agreement on lowering the registration tax, the government agreed to examine possibilities of introducing period‑based tolls for passenger and vans from 2020 (MOT, 2017[26]). No details on implementation of such tolls have been released to date. Previous attempts to better internalise external environmental costs (e.g. through tolls per kilometre driven on certain roads) have been abandoned because they were considered very costly.
Congestion pricing is not applied. Introducing dynamic congestion pricing, where tolls can be adjusted according to traffic conditions, in the most affected cities would reduce pollution, enhance infrastructure use and generate revenue. Plans to introduce a congestion tax in the capital, the city most affected by congestion, were replaced by an air quality protection plan to reduce PM10 and NO2 pollution. In February 2019, the government set up a consultative commission to study ways to reduce CO2 emissions from transport, giving it a mandate to consider road pricing and road tolls, among other measures, as alternative sources of revenue (MOF, 2019[27]).
Company cars and commuting expenses
As in most OECD countries, the employee benefit of being able to use a company-owned car (including for private purposes) is taxed less than cash wages. Harding (2014[28]) estimated that this favourable tax treatment created an annual subsidy of EUR 1 800 per company car, causing a tax revenue shortfall of about EUR 300 million in 2012 (compared to EUR 3 billion in revenue from vehicle-related taxes that year). Denmark’s system of company car taxation provides no incentive to choose efficient or less polluting vehicles. Company cars increase an employee’s annual taxable income by 25% of the vehicle’s listed value, irrespective of car type (unlike in Belgium, for example, which differentiates rates by CO2 emissions and fuel type). In a positive step, the government’s climate and air proposal would make it cheaper to choose electric cars for use as company cars.
Employees who commute more than 24 km a day can deduct expenses related to commuting from their taxable income. The amount of deduction is calculated by applying a set rate to the distance travelled between home and workplace; the farther the employee lives from the workplace, the lower the deduction per kilometre travelled. There is no differentiation between forms of transport (unlike in Switzerland, for example, which allows deductions for private car use only in limited cases, a lump sum deduction for biking, and full deduction of public transport costs, providing an incentive to favour public transport and biking). Public transport costs paid by the employer are not treated as taxable income to the employee, increasing the attractiveness of public transport relative to other forms of commuting (including private car use), yet comparatively penalising lower‑cost forms such as walking, biking and carpooling (Harding, 2014[28]).
3.3.4. Other economic instruments to limit pollution and resource use
Air pollutants
A tax on SOX emissions for products containing more than 0.05% sulphur was introduced in the mid-1990s. A tax on NOX emissions was introduced at DKK 5/kg in 2010. In 2012, the NOX tax was raised to DKK 25/kg (and the limit value for mandatory measurement reduced from 30 MW to 10 MW to cover more producers), but it was reduced back to DKK 5/kg in 2015. Both the SOX and NOX tax rates are below the respective external costs of these pollutants as acknowledged in the guideline values for cost-benefit analysis published by the Ministry of Environment and Food (MEF) (Andersen, 2018[29]). There is no specific tax rate for particulate matter or volatile organic compounds.
Waste
Denmark applies taxes on waste landfilling and incineration. The landfill tax, introduced in 1987, was increased in 2015 to DKK 475 per tonne from DKK 160/tonne in 2012-14 (MT, 2015[25]). The tax has helped reduce landfilling but had only limited effect on recycling rates. The incineration tax was converted in 2009 from a weight-based tax to one based on energy and CO2 content. The new system aims at providing a stronger incentive to recycle the most energy‑intensive waste, such as plastics (Chapter 4). The tax is a combined input-output tax, charged at DKK 26.5 per GJ according to the energy content in the input waste and DKK 19.8 per GJ for heat output. Waste from biomass and processing of meat waste are exempted. An exemption for hazardous waste was abolished in 2010. Waste incineration for power and heat generation represents a large share of waste treatment in Denmark. Denmark also applies a volume-based packaging waste tax on several types of beverage containers that are not part of the deposit-return system, and on bags and disposable tableware (Chapter 4). A weight-based packaging tax was removed in 2014.
Agricultural products
Denmark is one of the few countries taxing pesticides. In 2013, the pesticide tax, which was introduced in 1996, was redesigned from a value-based tax to a quantity-based tax that varies depending on human health hazard classification and the environmental impact of the pesticide: products with higher persistence, bioaccumulation or leaching to groundwater face higher rates. The generally higher tax rates and revenue were reimbursed to the agricultural sector (which accounts for more than 90% of pesticide use) through a reduction in the land value tax (GBE, 2014[30]). The change was made in a bid to reduce the pesticide load (a risk indicator) by 40% by 2015 from the 2011 level. Pesticide sales dropped significantly following the reform, partly because farmers stockpiled pesticides ahead of the reform (Chapter 5) (Eurostat, 2018[31]).
A tax on mineral phosphorus added to animal feed was introduced in 2005 at a rate of DKK 4 per kg of phosphorus to encourage a switch to phytase so as to reduce the saturation of soil with phosphorus. Mineral phosphate use in animal feed has fallen by about 15% since the introduction of the tax, and phytase use has increased. The tax is thus believed to have improved overall efficiency in the use of animal feed (Andersen, 2016[32]). A new phosphorus regulation introduced in 2017 allows efficient feeding, for example using high doses of phytase, to meet requirements on phosphorous reductions. It has resulted in a stronger incentive to increase phytase and reduce mineral phosphorus use than the tax. To prevent double regulation, the tax was to be withdrawn in July 2019.
Denmark pioneered construction of nutrient accounts at farm level. Agricultural nitrogen use has been partly regulated by a quota system, with allowable nitrogen consumption based on crop selection and soil type, among other criteria. Denmark recently adopted a new political agreement on more targeted regulation for agricultural nitrogen emissions, with targets based on geographical differences in watershed vulnerability and the soil’s ability to retain nitrogen (Chapter 1). The nutrient accounting system facilitates this new regulation paradigm. Since 2018, the nutrient accounting system has also been used to administer maximum allowable levels of phosphorus consumption at farm level.
Water
Denmark does not tax water resource abstraction but applies a tax on piped water at a rate of DKK 6.5 (EUR 0.9) per cubic metre. Most companies are exempt from the water tax (EEC, 2017[33]), implying that industry is in some sense cross-subsidised by households, which indeed face very high end-user prices (Section 3.5). Water supply plants must pay the tax on a minimum of 90% of water pumped, so if the plant has losses of more than 10%, it still pays on the balance of water lost. This rule, referred to as the water loss tax, creates an incentive for water companies to reduce leakage.
A wastewater charge applies to all direct discharges from sources including industry, municipal wastewater treatment plants and individual households in the countryside. The tax is proportional to the pollution load and applies to nitrogen (DKK 30/kg), phosphorus (DKK 165/kg) and organic material (DKK 16.50/kg). The rate is uniform nationwide, whatever the quality objective or the diluting capacity of receiving waters. Utilities pass on the cost to households; direct dischargers pay it directly to authorities. Some industrial sectors, including fish processing, benefit from reductions of between 70% and 80% in this tax liability. A small part (less than 5%) of the revenue raised is earmarked for government mapping of groundwater and municipal action planning.
3.4. Support to fossil fuel consumption and agriculture
3.4.1. Fossil fuel subsidies
The Ministry of Taxation reported total tax expenditure related to environment, energy and vehicles was DKK 12.1 billion (EUR 1.6 billion), or 25% of total tax expenditure in 2017 (MOT, 2018[34]). Table 3.2 provides a full breakdown of the expenditure. Several of the measures involved qualify as fossil fuel support: for instance, the exemption of agriculture from the energy duty; tax exemptions or deductions for shipping, aircraft and companies with heavy processes not covered by the EU ETS; and the lower diesel ownership tax for lorries, buses and tractors (for which there is no countervailing charge). The OECD Inventory of Fossil Fuel Support estimated total support to fossil fuel consumption at DKK 1.5 billion in 2017 (OECD, 2019[35]).6 This equals 0.15% of total tax revenue, below the OECD average support to fossil fuel consumption (0.5% of total tax revenue in 2016) (OECD, 2019[35]).
Table 3.2. Tax expenditure for the environment, energy and vehicles
Measures relating to environmental, energy and car taxes, 2017
*Qualifies as fossil fuel support.
Source: MOT (2018), Tax Expenses: Total Level at the End of 2017.
Until 2014, the OECD inventory listed another measure: the reduced energy duty for combined heat and power (CHP) generation. The Ministry of Taxation then decided to cease regarding this measure as tax expenditure.7 District heating customers pay a reduced energy duty for heat delivered from a CHP plant to discourage them from using other heating fuel, such as fuel oil. Tax revenue forgone due to this reduction has declined over time due to the increasing share of non-fossil heating sources (e.g. wood, straw), which are not subject to the energy duty. In 2014, revenue forgone from this measure reached DKK 5.7 billion (EUR 0.8 billion) (OECD, 2019[35]).
3.4.2. Agricultural support
Arable land and cropland take up more than half of total land area, the highest share among OECD countries (OECD, 2019[36]). This puts pressure on the environment, especially where farming takes place on peatland or close to sensitive natural areas and water bodies. Farmers receive agricultural support under the EU Common Agricultural Policy (CAP), mainly as direct payments for income support. The payments comprise a basic payment and additional payments, notably the so‑called green payment provided if farmers diversify crops, maintain permanent grasslands and keep 5% of their land as ecological focus areas.8 Farmers also receive support through the Rural Development Programme (RDP), co‑financed by Denmark and the EU, which finances individual projects on farms and/or activities in rural areas on the basis of economic, environmental or territorial priorities. Denmark has taken advantage of a flexibility mechanism to transfer part of the EU funds allocated to its farmers through direct payments into the RDP instead.9
Denmark built its RDP for 2014-20 around four focus areas: growth and competitiveness; organic farming; nature, environment and climate; and rural development. The organic farming and nature, environment and climate components received by far the largest volume in 2015‑19 (Table 3.3). Such funding has supported expansion of organic farming (Chapter 1). Overall, three-quarters of payments have an environment-related objective, which represents DKK 1.1 billion (EUR 148 million) per year. There has been a relative shift in the RDP from supporting investment at farm level to organic farming and activities addressing nutrient pollution of the aquatic environment. The shift is partly to support the targeted approach to nitrogen regulation of farmers (Chapter 1). Spending on biodiversity purposes is more limited.
Subsiding peatland conversion
Conversion of peatland to wetlands or permanent grassland has considerable climate mitigation potential due to lower decomposition of soil carbon, with a potential to reduce agricultural GHG emission by about 15% (Dubgaard and Ståhl, 2018[7]). However, EU policies limit this potential, as farmers lose income support under the CAP when agricultural peatland is converted to nature areas. Moreover, the EU 2030 Climate and Energy Framework caps how much member states can use carbon sequestration to meet their reduction targets for non‑EU ETS sectors.
Under the RDP, Denmark subsidises farmers for conversion of peatland into permanent nature areas. DKK 65 million (EUR 9 million) was allocated to this purpose per year for 2016‑19 (see “Rewetting of low-lying areas” in Table 3.3). In addition, Denmark set up a Multifunctional Land Redistribution Fund (MLRF) with a budget of EUR 20 million as part of the drought package for agriculture from 2018. The fund’s aim was to acquire and redistribute agricultural land where farming had a significant environmental impact and convert it to natural areas or grassland; examples include peatland and soil close to ammonia-sensitive nature areas or close to drinking water boreholes. In February 2019, Denmark’s two main environmental and agricultural interest groups jointly recommended increasing the MLRF by at least EUR 130 million to buy environmentally valuable agricultural land so as to support the target of achieving net zero emissions by 2050 and deliver co-benefits for biodiversity, water and air quality, and climate adaptation (DN and DFAC, 2019[37]).
Table 3.3. Environmental components of the Danish Rural Development Programme
Planned spending with environmental objectives under the Danish Rural Development Programme, 2015-19, DKK million
* Estimates are used for 2019.
** Part of the payments under the growth and competitiveness focus area is reserved for green investment: in 2015 DKK 25 million, in 2016 DKK 20 million, in 2017 DKK 62 million and in 2019 DKK 13 million.
Source: Country submission.
As this proposal requires substantial public funding, Denmark should evaluate the pilot phase before scaling up the fund. In the medium term, it should seek opportunities for complementing public funding with private resources to finance peat conversion subsidies or land acquisition under the MLRF. In addition to philanthropic payments, this could be achieved by using peatland as carbon credits that could be purchased by parties that must offset their GHG emissions through voluntary or compliance markets.
3.5. Investing in the environment to promote green growth
Infrastructure is a key element of any green growth strategy, with significant opportunity to improve environmental performance, boost economic growth and ensure resiliency to climate change. Denmark has modern and generally high-quality infrastructure. The World Economic Forum Global Competitiveness Report found the quality of Denmark’s infrastructure to be better than the European and North American averages (WEF, 2017[38]). Compared to its European peers, Denmark scores high with respect to road, port and air infrastructure, and in the mid-range for rail infrastructure (EC, 2018[39]). The latter is reflected in the fact that Denmark has one of the lowest shares of rail transport in inland freight in the EU (Chapter 1). It has considerable transit freight transport on its rail system: about 80% of the freight transported on its railways is in transit.
The government has set up funds and earmarked resources for the green economy transition. For example, the Green Investment Fund was established in 2014 to co-finance commercially viable projects with a positive environmental impact. The state capital contribution was DKK 80 million (EUR 10.7 million), with a state-guaranteed lending limit of DKK 2 billion (EUR 268 million). The latter can be increased to DKK 5 billion (EUR 671 million) and the capital contribution to DKK 200 million (EUR 27 million). While most projects supported have concerned renewables or energy efficiency, the fund has more recently also supported bio-economy projects (e.g. production of alternative protein). The fund’s performance has not yet been evaluated. The Climate Investment Fund was established to support initiatives promoting Danish investment in developing and emerging economies’ green transitions (Section 3.7.2). The 2018 Energy Agreement earmarked new funding to support renewables development and energy efficiency, and the climate and air proposal announced new funding for mitigation options in agriculture and transport.
3.5.1. Expenditure for environmental protection
Public environmental protection expenditure averaged around DKK 30 billion (EUR 4 billion) over the past decade.10 As in most OECD countries, expenditure is mostly directed towards waste management and wastewater treatment (Figure 3.4), provided by public corporations. General government expenditure mainly targets biodiversity and landscape protection, air and climate, as well soil and water protection. With a decline in expenditure on wastewater management, total public environmental protection expenditure was DKK 32.8 billion in 2017 (EUR 4.4 billion), or 1.5% of GDP, lower than in previous years (Figure 3.4).
Figure 3.4. Environmental expenditure remains relatively constant
Household expenditure on environmental protection services is the highest in the EU at 1.6% of total final consumption expenditure as of 2016 (Figure 3.4). This reflects high consumer tariffs for environmental services such as waste and wastewater treatment. These, in turn, may reflect high service quality and full cost recovery, but also inefficiency in service provision. In the waste sector, for example, waste collection costs decreased as most municipalities outsourced services. Now, however, municipalities increasingly want to go back to direct management and do not have to bid for competition with private companies, which does not help improve efficiency (Chapter 4).
3.5.2. Investment in renewables and energy efficiency
Renewable energy resources
Denmark has experienced a boom in renewables over the last decade: they now account for around one-third of primary energy supply and almost two-thirds of electricity generation (Chapter 1). This growth, which was particularly strong for wind and biomass, has been driven by strong and broad political will at the local and national levels, targeted support policies and community-based engagement (IEA, 2017[16]). The main supporting policies include direct subsidies (a feed-in premium system), taxation (including exemptions of biomass from various energy taxes), subsidised grid connection and balancing costs, and reinforcement of the grid to connect plants running on renewables. Denmark also has used several funding pools, including for renewables in district heating (geothermal energy and large heat pumps) in 2012-15, and in processing in 2013-20 (IEA, 2017[16]). The share of renewables in energy demand doubled over the past decade to reach 35% in 2017 (Chapter 1), putting Denmark on track to reach its goal of meeting half of energy demand with renewables by 2030.
Current support policies were set up by the 2012 Energy Agreement and have since been adjusted several times. New post-2020 measures were agreed in the 2018 Energy Agreement. A “frozen policies” scenario modelled by the Danish Energy Agency shows that without new measures such as those in the 2018 Energy Agreement and climate and air proposal, growth in renewables would stagnate and fossil fuel consumption rise after 2020, due in part to planned energy-intensive data centres,11 so GHG emissions would begin increasing again from 2022 (EA, 2018[40]). If the 2018 Energy Agreement is fully implemented, GHG emissions will continue to decrease gradually after 2022 (Chapter 1).
Denmark’s incentive structure had varying levels of success across renewable energy sources. Successful offshore wind tenders have resulted in record low prices, which, combined with technological advances, led to a 48% cost reduction in offshore wind between 2010 and 2016 (IEA, 2017[16]). The tenders have many successful characteristics, including guaranteed grid connection and electricity offtake and one primary entry point (one-stop shop) for permitting and licensing – both of which provide certainty to investors and drive costs down. Denmark has become a global leader in wind energy technology throughout the supply chain. Expansion of renewable and alternative fuels in the transport sector is increasing slowly. The support system for solar photovoltaic power has been revised several times over the last five years and the feed-in premium system was withdrawn for new projects in May 2016 because Energinet, the state-owned enterprise that runs the electricity and natural gas transmission systems, was receiving too many applications.
The overall cost of supporting renewables has increased quite sharply since 2010 (Figure 3.5), reaching over DKK 8 billion (EUR 1.1 billion) in 2015. The government estimates that subsidies totalled about DKK 8.5 billion in 2018, the largest share being for offshore wind. The increase was driven by steadily growing generation eligible for support (notably offshore wind) and low electricity prices. Some 62% of gross electricity is produced with renewables support (the average across 26 EU countries is 16%), though the unit support levels (direct cost per MWh of supported electricity) are lower than in some EU peers. The cost of support per unit of renewables generation is highest for solar and biogas (IEA, 2017[16]). Most existing support measures have been financed by the PSO levy, which is added to the electricity price. It is being phased out over 2017‑21, after which renewables development will be supported directly from the state budget. The PSO, determined quarterly, rose along with growing subsidy expenditure, reaching DKK 7.3 billion in 2015. It covered nearly all subsidy expenditure that year.
Figure 3.5. The cost of supporting renewables has increased sharply since 2010
In 2017, the Energy Commission published recommendations on Danish energy policy after 2020. It estimated that the cost of reaching the target of 50% renewables by 2030 was manageable, provided Denmark could reduce the need for subsidies for renewables deployment and make development market-driven in the long term. The 2018 Energy Agreement aims to ensure a market-driven green transition. Among other things, it allocates DKK 4.2 billion (EUR 564 million) for technology-neutral procurement through tenders, and commits to harmonise and simplify subsidies as far as possible (Box 3.2). The agreement maintains sizeable subsidies to offshore wind and biogas. Both entail a risk of low value for money, but Denmark is willing to bear the high initial cost of being a front runner and exploring renewables options with environmental co‑benefits (in the case of biogas).12 The agreement also announced “continued extensive extraction” of North Sea oil and gas to generate funds for the state budget and investment for the green transition.
Box 3.2. Key components of the 2018 Energy Agreement
In June 2018, the Danish government and Parliament reached agreement on a new energy policy to 2030. The Energy Agreement aims to help Denmark source 55% of gross final energy consumption from renewables by 2030 and to phase out coal from electricity production by the same year. Key measures include:
building three offshore wind farms with capacity of at least 2.4 GW
allocating DKK 4.2 billion (EUR 564 million) to a tender process by which different technologies compete on delivering renewable electricity at the lowest price
allocating DKK 4 billion (EUR 537 million) to expand green biogas production, including organic biogas
allocating DKK 500 million (EUR 67 million) to green transport over 2020‑24 to enhance green mobility and transport
allocating DKK 500 million (EUR 67 million) annually to a market-based grant pool focused on energy savings (primarily in business) over 2021‑24, of which DKK 200 million is earmarked for energy savings in buildings
allocating DKK 100 million (EUR 13 million) annually over 2021‑24 to help finance energy renovations in buildings owned or operated by municipalities or regions
establishing a DKK 400 million (EUR 54 million) reserve in 2025 and allocating DKK 500 million (EUR 67 million) annually after 2026 to further enhance the use of renewables
relaxing electricity and electric heating taxes by about DKK 2 billion (EUR 268 million) in 2025
intensifying export promotion activities with DKK 174 million (EUR 23 million) over 2019‑24
increasing funding to energy and climate research to DKK 1 billion (EUR 134 million) by 2024.
Source: (Government of Denmark et al., 2018[41]).
Energy efficiency
Denmark’s praiseworthy decoupling of GDP growth from energy consumption growth has been achieved through national energy efficiency objectives and various measures to meet them. A comprehensive energy savings strategy was published in 2014.
The main measure on the supply side is the Energy Efficiency Obligation (EEO) for grid and distribution companies in the electricity, natural gas, district heating and oil sectors. Initiated about 20 years ago, it is a market-oriented system in which participants can choose the most cost-effective measures to achieve savings. The system is financed by end-users via energy bills.13 Annual saving targets set by the EEO have mostly been met. However, the additionality of the programme is rather low. There has also been concern about its rising cost to bill payers, in part linked to the lack of incentives for participants to reduce the cost of implementing the obligation (Fawcett, Rosenow and Bertoldi, 2018[42]; IEA, 2017[16]). The rising cost influenced recent reductions in EEO savings targets for 2015‑20 (by about 15%). The 2018 Energy Agreement announced that the programme would expire in 2021, to be replaced by a market-based system, based on open tenders, in which bidders would offer energy savings at a given price. Savings are targeted in process energy in industrial and service businesses as well as the building sector. The new system is to be complemented by an information and data initiative to enhance knowledge about savings opportunities.
The Danish Energy Agency has used voluntary energy efficiency agreements with large, energy-intensive businesses since 1996. Businesses that enter into a binding three-year agreement and commit to improve energy efficiency obtain a substantial reduction of the PSO (though that tax will be phased out by 2021). As the International Energy Agency has recommended, an option for continuing such agreements would be to increase the electricity tax (or other energy taxes) in industry from the current DKK 0.004/kWh except for companies committing to efficiency agreements (IEA, 2017[16]).
Standards for new buildings have been strengthened considerably and are quite high. The rate of improvement of existing buildings is still quite low, despite numerous initiatives launched over the last several years, and is a major challenge for the future. One area that may require attention is energy labelling of buildings, which can have an impact on selling prices. The Energy Agreement commits to establishing a long-term building renovation strategy, including milestones for 2030, 2040 and 2050 (IEA, 2017[16]).
3.5.3. Investment in sustainable mobility
Government expenditure on transport increased by more than 50% over 2005‑16 in real terms, driven by a notable increase in rail infrastructure investment (Figure 3.6). This increase reflects commitments made in the 2012 Transport Agreement to improve public transport, which includes development of a new metro line in Copenhagen and light rail in Aarhus and Odense, as well as investment to electrify and improve signalling on the railway network. A former government agreed on a DKK 28.5 billion (EUR 3.8 billion) investment plan to build new railways, upgrade existing lines and electrify the network. The conversion was supposed to be financed by the Train Fund (Togfonden). The project was put on hold shortly thereafter, however, and later limited in scope. Investment and maintenance expenditure on roads decreased over 2005‑16, but remains higher than rail investment in absolute terms (Figure 3.6).
The 2018 climate and air proposal sets out goals and measures to reduce GHG emissions in the transport sector. These include stopping sales of new diesel and gasoline cars by 2030 and of hybrid cars by 2035; convening municipalities to discuss how to achieve zero GHG and air pollutant emissions from buses by 2030, building on Copenhagen’s goal to use only electric buses by then; tightening taxi requirements so that no taxis emit GHGs or air pollutants by 2030; increasing scrapping premiums in an existing scrapping programme for old diesel vehicles;14 investing in climate-friendly asphalt; and increasing the required biofuel content of gasoline and diesel to 8%. The proposal also announced surveillance of sulphur emissions from ships in Danish waters. For the longer term, towards 2030 and 2035, the government established a commission of experts and government officials to propose measures on the transition of car transport.
Figure 3.6. Investment in rail infrastructure increased
In March 2019, the government and the Danish People’s Party agreed on a long-term infrastructure investment plan. It includes DKK 112 billion for 2021‑30, of which 54% is dedicated to road and 46% to rail. Measures such as upgrading core sections of main highways, building new highways and corridors, and upgrading connections to central highway corridors are expected to reduce congestion. Investment is also planned to upgrade speed and capacity on the rail corridor from Jutland and Funen to Zealand. As the infrastructure investment plan includes projects that were found to have negative net present value (e.g. Routes 9, 11 and 15), Denmark should prioritise projects with high socio-economic returns and re‑evaluate projects with potentially negative returns. The Danish Productivity Commission noted in 2014 that unprofitable transport investments had led to a loss of DKK 21 billion for society over the previous decade (Productivity Commission, 2014[43]).
Denmark had nearly 10 000 electric vehicles (EVs) on the road in 2017 (IEA, 2018[23]). This is rather low compared to European leaders such as Norway (about 170 000), the United Kingdom (140 000) and Germany (125 000), but Denmark’s overall car fleet is relatively small. To promote EVs, Denmark began offering rebates on registration, sales and circulation taxes as well as local incentives such as waivers on tolls, parking fees and ferries. The decision to phase in a registration tax for EVs due to concern over the level of government revenue resulted in a significant decline of new EV sales from 2015. A freeze on the EV registration tax phase-in, adopted in April 2017, followed by an overall reduction of the registration tax in October 2017, continued to provide mixed signals, undermining consumer confidence and limiting opportunities for a rebound. In late 2018, Parliament passed a bill exempting EVs and hybrids worth less than DKK 400 000 (EUR 54 000) from the registration tax in 2019 and 2020.
The Danish Road Directorate procured fast public EV charging points along the main highway corridors. EVs using such publicly accessible charging points get a 50% discount on the electricity tariff. Denmark is the only Nordic country that has used fiscal rebates on private charging infrastructure: homeowners who install an EV charging point can deduct the installation cost from their income tax. Until 2020, consumers who charge at home will receive a tax rebate of DKK 0.94/kWh (USD 0.14/kWh), cutting electricity costs almost in half. Denmark received the largest share of EU funding for charging infrastructure deployment in the Nordic region, participating in projects that totalled more than EUR 47 million and developed more than 150 public charging points (IEA, 2018[23]). It has a target of 3 000 publicly accessible charging stations by 2020, along with network coverage amounting to a charging point every 60 km. In this regard, the climate and air proposal announced investment of DKK 80 million (EUR 11 million) in new high-speed EV charging stations, along with regulatory changes (e.g. allowing municipalities to reduce parking charges for low-emission cars and let EVs drive in bus lanes). On the negative side, Denmark has some way to go to ensure interoperability of publicly accessible chargers. EV owners need different membership cards for access to outlets of the three main charging point operators. The government has discussed a policy framework to address this issue, but there have been no concrete implementation steps to date.
3.5.4. Investment in water and sanitation
There are 87 municipally owned water utilities and 100 municipally owned wastewater companies, as well as more than 2 000 private waterworks. Investment in and operation of public water supply and wastewater treatment are entirely financed by user charges. All water users (households and industry) are metered, and both public water supply and wastewater treatment are charged according to metered consumption. Average water prices paid by households are the highest among OECD countries (Figure 3.7), although prices and price structure vary across the country.15 Price increases stimulated significant reductions in water consumption over the past decade, except in agriculture and industry (Chapter 1).
There are no social tariffs (water pricing is purely volumetric), but since its inception in 2009, the Danish Water Utility Regulatory Authority has set annual price caps on each company subject to regulation (i.e. municipally owned water supply and wastewater treatment companies). The Water Sector Act of 2009 sets requirements with respect to a price ceiling and efficiency of water companies’ operating costs. The requirements are based on benchmarking16 by the regulatory authority aimed at identifying efficiency potential in the sector and in individual companies (DANVA, 2016[44]). Ultimately, the regulation aims to imitate competitive pressure. The Water Sector Act was amended in 2016 to require utilities to meet efficiency targets for total costs (i.e. operating and investment). This has created some policy uncertainty that may have contributed to a drop in investment in 2016 and could affect planned investment levels in the near term (DANVA, 2017[45]). Parliament recently agreed to strengthen the regulation in coming years by introducing revenue caps that can be adjusted to actual investment, instead of being fixed at a historic level. This will help improve companies’ ability to invest in new technology.
Figure 3.7. Water and wastewater tariffs are the highest in the OECD
On the basis of the price caps, the company sets tariffs for the following year. The tariffs must be approved by the municipality. Regulation has been effective in stopping price increases observed since 2004; tariffs have remained relatively stable since 2009, and investments, especially in wastewater utilities, have increased since that year while operating expenses have fallen for both drinking and wastewater utilities. In the long run, the rate of reduction in operating expenses is expected to decrease, and as a consequence there will be more focus on reducing investment costs.
The price charged to users for drinking water (which is almost entirely from groundwater) covers the cost of groundwater protection, abstraction, treatment and delivery. The component charged for wastewater covers sewer operation, maintenance, renovation and expansion, as well as operation and inspection of wastewater treatment plants (DANVA, 2017[45]). The political decision in 2013 to gradually reduce the wastewater charges for large water users – up to DKK 700 million per year from 2018 has resulted in considerable discounts for large users such as slaughterhouses, refineries and breweries. The change from a flat charge to a regressive system (i.e. lower rates as consumption increases) aimed to reduce the share of total wastewater company costs that large consumers paid, which was considered disproportionate. The water companies compensate for this discount by either increasing efficiency or raising wastewater tariffs for other users (DANVA, 2017[45]). Properties discharging particularly polluted wastewater pay an additional fee on top of the annual fee for ordinary wastewater.17
3.6. Promoting eco-innovation and green markets
3.6.1. Eco-innovation
Denmark is an innovation leader: its innovation system ranked second only to Sweden among EU countries in 2017 (EC, 2018[46]). The business, entrepreneurship and innovation environment is one of the most favourable in the OECD, reflecting a flexible and well‑functioning labour market, low regulatory barriers and high public spending on R&D. In 2016, gross domestic R&D expenditure amounted to 2.9% of GDP, above the OECD average of 2.3%. Business R&D expenditure accounts for 1.9% of GDP, compared to 1.6% for the OECD. The high level of overall spending masks a strong concentration in a few large firms, dominated by pharmaceuticals and biotechnology. Only 25% of business R&D is attributable to small and medium-sized enterprises (SMEs) (OECD, 2019[1]).
Denmark has developed a high level of specialisation in environment-related technology (Figure 3.8). In 2015, 17% of high-value inventions were environment-related, down from nearly 25% in 2010 but still one of the highest shares among OECD countries. Per capita, Denmark ranks second among OECD countries, following Korea. Most patents are filed in the fields of wind energy and energy-related climate change mitigation technology.
Figure 3.8. Denmark is a leader in green patents
Government budget allocations for environmental R&D reached 1.1% of the total government R&D budget in 2018; energy-related R&D reached 3% and agricultural R&D 2.7% (OECD, 2018[47]). While the energy-related R&D budget was halved over 2013‑16 (Figure 3.9), Denmark committed to increase investment in clean energy innovation by doubling funding to the Danish Energy Technology Development and Demonstration Programme (EUDP) from DKK 292 million (EUR 39 million) in 2015/16 to DKK 580 million (EUR 78 million) in 2020 as part of Mission Innovation.18 This will bring up total budget expenditure, although not to pre‑2015 levels. The 2018 Energy Agreement announced gradually rising state funding for energy and climate-related research, development and demonstration (RD&D) to DKK 1 billion (EUR 134 million) in 2024.
One of the most important RD&D programmes is the Danish Eco-Innovation Programme under MEF, which has supported development, testing and demonstration of environmentally efficient technology since 2007. Its budget in 2018 was about DKK 86 million (EUR 12 million). An evaluation found that the fund led to significant business activity among participating companies: for every DKK 1 million in grants, participating companies had average annual turnover of DKK 2.9 million related to that technology, in addition to experiencing a stronger employment development than the Danish business sector in general (DAMVAD Analytics, 2017[48]). Most supported projects focused on reducing nitrogen load in water bodies and reducing CO2 emissions. In addition, the Green Development and Demonstration Programme supports demonstration projects with positive environmental effects in the food industry. Its budget in 2018 was around DKK 206 million (EUR 27.6 million).
The greatest commitment to green technology and innovation has been in the energy area. Several RD&D programmes aim to increase employment, sales and exports, and reduce CO2 emissions, in the energy sector. An evaluation of the three main programmes found that they were successful in meeting these objectives, in part due to their risk alleviation mechanism (COWI et al., 2015[49]). The largest programme is the EUDP, which provides grants for clean energy technology with commercial potential that could be exported to growing markets (EUDP, 2017[50]). Its 2018 budget was about DKK 400 million, down from more than DKK 1 billion in 2011. The 2018 Energy Agreement committed to increase funding for energy and climate-related RD&D to DKK 1 million by 2024.
The climate and air proposal allocates additional resources to climate-related R&D, including DKK 90 million (EUR 12 million) to develop low-GHG farming practices that have synergies with other environmental policies, and DKK 100 million (EUR 13 million) for carbon capture and storage in farmland and forests. Subsidies are provided to support conversion of peatland under agricultural development to permanent nature areas (Section 3.4.2). While agricultural R&D is high compared to agricultural value added, the additional resources for climate technology are welcome in light of the limited cost‑effective solutions and lack of regulation for emission reductions for this sector to date, putting Denmark on track to establishing itself as a leader in providing climate‑friendly agricultural products.
Figure 3.9. Energy-related R&D budgets have been falling
3.6.2. Environmental goods and services market
Environmental goods and services (EGS) contribute significantly to the Danish economy. Production in the EGS sector totalled DKK 214 billion (EUR 29 billion) in 2016, an increase of 23% in nominal terms from 2014 (Statistics Denmark, 2018[51]). The rise is linked extensively to the production and export of renewables technology, especially wind turbines. Despite stiff competition, the wind sector continues to perform well and drove turnover growth over 2012‑16. Overall, 52% of EGS‑related production in 2016 was related to renewables, followed by energy efficiency (Figure 3.10). The EGS sector employed 71 000 people, or 3% of the workforce (SD, 2018[6]), and accounted for nearly 15% of exports in 2015, the highest share among OECD countries (OECD, 2017[52]). Green technology continues to be a focal area for environment, climate and agriculture, and substantial subsidies for it are provided.
The number of Danish companies adopting the ISO 14001 environmental management system has fluctuated between 800 and 1 000 in recent years. It increased gradually from 2013, potentially encouraged by public support promoting uptake (Chapter 2). Many companies in Denmark use the European Eco Management and Audit Scheme, which sets stricter environmental targets and company performance standards than ISO 14001. In the agricultural sector, producers have been more resistant to environmental standards but use food‑related eco-labelling (Varga, 2016[53]).
Demark has a well-functioning public procurement system that includes green, social, SME and innovation criteria. Green procurement criteria have been introduced for electricity‑using products and the timber and transport product groups. National initiatives supporting uptake of green public procurement include knowledge‑sharing networks, partnerships for front runners, best practice examples and a green public procurement task force to assist public authorities in implementing green public procurement (see also Chapter 4, Box 4.7). The Danish Environmental Protection Agency has published an e‑learning tool to provide stakeholders with basic knowledge on green public procurement.
Figure 3.10. Renewable energy production accounts for nearly half of EGS turnover
3.7. Environment, trade and development
3.7.1. Trade and export credits
Denmark’s open economy is highly dependent on foreign trade. Exports (in value added terms) contribute around 31% of GDP, below the OECD median but comparable with Sweden and Finland (OECD, 2017[54]). The transition towards a low-carbon, circular economy is seen as an economic opportunity through export of Danish environmental technology and services, notably in the energy technology field. Clean tech has been the fastest-growing Danish export sector in recent years. A major driver behind strong export performance is Denmark’s international reputation as a front runner in green solutions, a strong framework of export financing, and assistance for internationalisation of innovation and commercial activities.
The export strategy for energy technology, presented in March 2017, envisages doubling exports of energy technology from around DKK 70 billion in 2015 to at least DKK 140 billion by 2030. The strategy sets a strategic framework for export initiatives in the energy sector and introduces new efforts, including a programme aimed at the United States, United Kingdom and Germany. It also contains instruments to advance green energy through the Danish International Development Agency (Danida) in high-growth and developing countries (Section 3.7.2).
Denmark backs the 2012 OECD Recommendation on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence. Its Export Credit Agency, EKF, maintains an active corporate social responsibility policy that complies with the OECD Guidelines for Multinational Enterprises as well as the UN Principles on Business and Human Rights and The Common Approaches. Denmark is also a signatory to the UN Global Compact and the Equator Principles. Accordingly, EKF incorporates evaluation of environmental and human rights risk in its risk assessment (OECD, 2016[55]). It discloses information on Category A projects (those with potential significant adverse environmental and/or social impact under OECD Common Approaches) at least 30 days before it is decided if EKF can take part. In 2017, EKF for the first time withdraw financing from a copper mining project in Armenia, partly over non-compliance with terms of agreement on areas including tailing management and catch basin overflow (EKF, 2017[56]).
Between 2003 and 2013, Denmark provided more export credits for renewable power generation projects than any other OECD country, thanks to extensive support to wind energy. No support was granted to coal-fired power plants over the period, and the share targeting power generation projects based on oil, diesel or natural gas was relatively small (OECD, 2015[57]). EKF is a global leader in wind project funding, having financed more than 100 wind farms globally, worth more than DKK 100 billion, over the past 20 years. In 2017, wind projects made up 48% of EKF’s total portfolio.
3.7.2. Development co‑operation
Development co‑operation and humanitarian action are guided by the World 2030 strategy, which is based on the 2030 Agenda and the SDGs. Inclusive, sustainable growth and development form one of the strategic aims, with a focus on energy, water, agriculture, food and other areas where Denmark has special knowledge, resources and interests (Danida, 2017[58]). The government aims to increasingly use official development assistance (ODA) to boost the contribution of the private sector to sustainable development in developing countries while promoting Danish technology transfer (MOF, 2017[2]). To this end, it aims to strengthen the Investment Fund for Developing Countries (IFU), Denmark’s central development finance institution. The IFU manages two major blended finance19 instruments: the Danish Climate Investment Fund and the Danish Agribusiness Fund (Box 3.3). While the focus on mobilising private sources for sustainable development is line with global efforts to scale up blended finance, it is important to ensure that these activities do not come at the expense of untied ODA.
Box 3.3. Using public-private partnerships in development co‑operation
The Danish Climate Investment Fund was established in 2012 to promote climate-related investment in developing countries and emerging markets, combining commercial and environmental objectives with the goal of reducing global warming and contributing to climate change adaptation in developing countries while promoting transfer of Danish climate technology. The fund started in 2014 with capital of DKK 1.3 billion (EUR 174 million), of which 40% was public funding and 60% private (from Danish pension and capital funds). The fund is now fully invested. One of its biggest projects includes development of a 300 MW wind park in Kenya, the largest wind farm in Africa. The IFU expected annual return of 12%.
The Danish Agribusiness Fund, based on a similar model, was established in 2016 to provide risk capital for agriculture and food investment in developing and emerging countries and to promote sales of Danish technology and know-how. Of its total capital of DKK 800 million (EUR 107 million), 37% comes from public resources (the state and IFU) and 63% from Danish pension funds.
In June 2018, the prime minister launched the SDG Fund to enhance investment in key SDG areas by mobilising public and private capital, technology and know‑how, and promoting responsible business conduct. It was established by six Danish pension funds and the IFU, which also acts as fund manager. By June 2018, capital commitments to the fund had reached DKK 4.1 billion (EUR 550 million), of which 60% was from private resources (each pension fund committed DKK 400 million) and 40% from public resources. It is expected that the fund will contribute to investment of at least DKK 30 billion. Investment will mainly be in sectors where Denmark has strong expertise and experience, such as renewables and energy efficiency, agribusiness and food, water and sanitation, and industry and services.
Source: (OECD, 2016[59]); IFU website (accessed on October 2018); country submission.
In 2017, Denmark provided USD 2.4 billion in net ODA, which represented 0.72% of gross national income (GNI) (OECD, 2018[60]). This makes Denmark one of five OECD Development Assistance Committee members to have met the UN target of allocating 0.7% of GNI as ODA. Net ODA disbursements have declined in recent years in real terms, reflecting the government’s pre-election promise to bring the ODA/GNI ratio back to 0.7% from nearly 0.9% in 2014. This affected budget for support to sustainable natural resource management, the energy sector and climate change activities (OECD, 2016[61]). Taken together, environment- and climate change-related ODA dropped by 44% between 2014 and 2017 (Figure 3.11), creating a gap between strategic priorities and financial allocations. In 2017, 26% of Danish bilateral allocable development finance supported the environment, compares with the DAC country average of 33% in 2016 (OECD, 2018[62]). The overall decrease in ODA has, however, been accompanied by increased efforts to engage the private sector and mobilise private investment (Box 3.3).
Figure 3.11. Environment- and climate‑related ODA has declined
The Danish Climate Envelope, established in 2008, is an important mechanism for channelling ODA to mitigation and adaptation activities. It also contributes to multilateral institutions, bilateral programmes in priority partner countries, framework agreements between Danida and Danish non-government organisations, and the IFU. In 2016, the government developed a document outlining guiding principles for using the Climate Envelope, as well as for monitoring and evaluating activities conducted through it (Danida, 2016[63]), as an internal evaluation recommended. The Climate Envelope’s budget decreased after 2014, but increased to DKK 540 million in 2019 (Danida, 2018[64]).
Recommendations on moving towards green growth
Framework for sustainable development
Continue developing green national accounts, publish them regularly and monitor their use in decision making; strengthen the statistical underpinning of the 2030 Agenda for Sustainable Development at the national level and ensure that indicators are as internationally comparable as possible.
Greening the tax system
Reduce the energy taxation gap between households and businesses to equalise incentives for energy savings and CO2 reduction; continue efforts to make electric solutions for heating and mobility more attractive vis-à-vis fossil-fuel-based options.
Improve alignment of transport taxes with transport-generated externalities; in particular, ensure that lower taxes on vehicle ownership are matched by an increase in taxation of vehicle use (e.g. in congested areas).
Investment in a greener economy
Continue to gradually phase out subsidies to renewables technology as it becomes economically competitive, and ensure that remaining support is technology-neutral.
Regularly evaluate the effectiveness of and necessity for biogas subsidies; foster synergies between biogas development policies and nutrient management policies.
Establish mechanisms to mobilise private investment in carbon capture and storage options, including those arising from peatland rewetting.
Eco-innovation and green markets
Continue support for and ensure continuity of R&D in energy and other environmentally relevant areas, including climate mitigation options in agriculture and land use. Strengthen opportunities and incentives for more SMEs to engage in R&D.
Development co-operation
Continue to use ODA to leverage private investment in projects supporting sustainable development, ensuring that it does not come at the expense of untied ODA.
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Notes
← 1. The tax on fossil waste applies only to heat produced from non-renewable industrial waste. Consumption of such waste is small.
← 2. As the EU ETS covers electricity generation, a reduction in electricity use in Denmark has shifted CO2 emissions to elsewhere in the EU. With the 2017 modifications of the EU ETS, lower electricity use in Denmark has some impact on EU-wide CO2 emissions, but it is expected to be modest.
← 3. The annual tax is levied on private cars registered since 1 July 1997 (cars registered before that date are subject to a weight-based tax) as well as on commercial vehicles registered since 18 March 2009.
← 4. The registration tax provides discounts or extra charges depending on the car’s fuel consumption. Requirements became more stringent in 2017. The current legislation allows a discount of DKK 4 000 for each kilometre a petrol-fuelled car travels in excess of 20 km per litre (22 for diesel cars), while the extra charge is DKK 6 000 per km/l a petrol car travels short of these values. As for the green owner tax, semi-annual rates vary from DKK 330 for petrol cars driving at least 50km/l to DKK 11 430 for cars driving less than 4.5 km/l (rates for diesel cars vary between DKK 130 to DKK 16 720).
← 5. The Eurovignette is used in the Netherlands, Luxembourg, Denmark and Sweden. It was also used in Belgium and Germany before these two countries switched to distance-based pricing in 2016 and 2003, respectively.
← 6. Preliminary estimate.
← 7. The Ministry of Taxation has decided not to regard this measure as tax expenditure and thus stopped calculating revenue forgone. In CHP there is no physics law to determine the split between fuel used for heat and fuel used for power. The reduced energy duty for CHP generation is a way to determine the tax base for fuels used for heat production in CHP. The Ministry of Taxation does not consider this a subsidy for fossil fuels.
← 8. The EU ecological focus areas cover a broad range of features, including ones that affect biodiversity directly (e.g. fallow land and buffer strips) or indirectly (e.g. reduced input use, better soil protection through catch crops or nitrogen-fixing crops).
← 9. The transfer represented 5% of EU direct payments in 2015, 6% in 2016 and 7% from 2017 onwards, adding around DKK 460 million to the RDP programme in 2019.
← 10. The statistics include only activities that directly serve an environmental protection purpose (such as waste or wastewater management) and exclude activities that produce specially designed products used to serve an environmental purpose (such as facilities for renewables).
← 11. The authorities estimate that installation of six planned data centres will drive up Danish electricity consumption by between 13% and 15%.
← 12. Digested manure provides high-quality natural fertiliser that emits less nitrous oxide than untreated manure.
← 13. Oil companies include the cost of energy efficiency measures in their prices.
← 14. The premium for scrapping diesel vehicles from before 2006 will be increased to DKK 5 000 (EUR 670); an additional DKK 100 million has been allocated for this purpose. The subsidy will be disbursed on a first-come, first-served basis.
← 15. For example, some companies charge a fixed annual basic contribution for water and wastewater plus a variable price per cubic metre consumed, while others calculate and bill for water only according to the consumed amount.
← 16. The efficiency requirement is based on a theoretical calculated net volume target. This enables comparison of multiple water companies, irrespective of size, type, framework conditions, number of customers, etc. The net volume target thus expresses how much in operating costs a company can be expected to have to match the average level of efficiency.
← 17. This type of wastewater varies among properties and the fee is based on the pollution content of wastewater discharged by an individual company.
← 18. Mission Innovation is a global initiative of 22 countries and the European Union to dramatically accelerate global clean energy innovation.
← 19. The OECD defines blended finance as “strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries”, with “additional finance” referring primarily to commercial finance.