OECD Economic Surveys: Denmark 2021

Report

OECD Economic Surveys: Denmark

16 December 2021

3. Climate policies for energy, transport and agriculture

Abstract

Denmark’s energy, transport and agriculture sectors are responsible for a large share of the country’s greenhouse gas emissions. Fast decarbonisation of these sectors will require radical transformations of business plans, large public and private investments, and a reskilling of the workforce. In the energy sector (electricity and district heating), past progress made to ramp up clean technologies provides a good blueprint to achieve further decarbonisation, but the focus will need to be put soon on lowering reliance on woody biomass. In the transport sector, emissions have continued to increase despite the shift to more fuel-efficient vehicles, highlighting the need for more transformative policies to expand alternatives to individual car uses. In agriculture, little has been done so far to cut emissions, especially from livestock. The sector is subject to leakage risks, but nonetheless should be encouraged to transform its practices. Helping farmers to monitor their GHG emissions should be combined with more stringent regulation.

This chapter sets out priorities in three sectors that are responsible for a large share of Denmark’s emissions of greenhouse gases: energy (19% of 2019 emissions, excluding emissions from land use, land use change and forestry (LULUCF)), transport (29%) and agriculture (24%). Other important sectors are manufacturing and construction (8%), industrial processes and product use (4%), waste (3%) and residential and other (11%) (OECD, 2021[1]). In all these sectors, achieving rapid decarbonisation will require transformative policies, both in the short and medium terms.

Maintaining progress in the energy sector

Denmark has made considerable progress in reducing GHG emissions from electricity generation (Figure 3.1). While coal was the main source of energy in the 1990s, renewable sources now account for over 80% of electricity generation. The 57% wind share of total electricity generation is the highest of any country (IEA, 2021[2]). Renewable power is expected to account for 97% of electricity generation in 2030, leaving heat generation as the main source of sectoral emissions. Production process emissions from oil and gas exploration and production in the North Sea also contribute. In December 2020, parliament brought an immediate end to new oil and gas exploration as part of a plan to phase out production by 2050.

Figure 3.1. Renewable generation has grown fast

Share of renewable sources in electricity generation

Policy measures have contributed to the falling cost of renewables

Support for renewable energy generation through a complementary combination of research and development funding, streamlined planning processes, subsidies and national targets has driven down costs through learning-by-doing and economies of scale. This is particularly the case in offshore wind where it took decades of sustained support to bring down high installation costs (Box 3.1). Key initiatives to incentivise deployment included first feed-in-tariffs, complemented by the introduction of a carbon tax in 1992, then an environmental premium added to the market price and finally tenders for new renewable capacity. This approach has seen risk gradually shift from the government and electricity consumers to investors. A range of renewable technologies are now competitive with fossil fuel generation (Figure 3.3), particularly after taking into account a mid-range estimate of the cost of carbon consistent with the Paris Agreement (OECD, 2021[3]). While sunk capital reduces the economic cost of existing plant, renewable energy facilities are still set to be installed without subsidies in the decade ahead (Energinet, 2019[4]). Denmark’s lead in wind energy has contributed to the development of a sophisticated export industry. The manufacture of wind turbines embodies a continuous accumulation of sophisticated knowledge, with the technological advantage of a few leading companies growing over time (Garsous and Worack, 2021[5]).

Support for energy research, development and deployment is currently unexceptional by international comparison (Figure 3.2) and further increases are likely to be needed given the scale of ambition on electrification, carbon capture and storage, and power-to-X (conversion of electricity to sustainable fuels such as hydrogen, methane or ammonia that can be used in other sectors). Major energy-related research and development programmes include the Energy Technology Development and Demonstration Programme (EUDP), the Innovation Fund and ELForsk, which mainly provide support to projects implemented in public-private partnerships. Support stepped up in 2020 and is tilted towards new and emerging technologies: for example, of DKK 543 million in new EUDP grants in the second half of 2021, more than DKK 200 million is for carbon capture and storage as well as power-to-X projects.

The intermittence of weather-dependent variable renewable electricity has been managed via effective grid management, gas peaking plants and baseload biomass combined heat and power, as well as interconnection with the Nordic electricity market and Germany. Interconnection with the hydroelectricity-rich Swedish and Norwegian systems has been a key factor in the Danish power system remaining one of the most reliable in Europe as renewable penetration increased, underlining the importance of further increasing interconnector capacity and aligning renewable policies in the Nordic region (IEA, 2017[6]). There have also been steps taken to ensure system-friendly deployment of renewables through optimising locations, generation profiles and integrated resource planning. There are nevertheless some costs that tend to increase with penetration of variable renewable electricity related to balancing and the time profile of production (NEA, 2019[7]). Denmark-specific estimates of these costs are highly uncertain, but central estimates indicate they are manageable relative to the overall advantage over fossil fuel generation (Figure 3.3). System-wide grid costs may also increase with renewable deployment but these are highly location- and context-specific. For example, concentrated wind development far from demand increases grid costs, while solar power close to consumers reduces costs.

Figure 3.2. Public support for energy research, development and deployment is moderately high

Government expenditure on R&D, 2020 or latest year available

Figure 3.3. Wind and solar are now the cheapest source of electricity after including environmental costs

Levelised cost of electricity generation, 2020 and 2015

Challenges from security of supply will increase over the next decade as wind penetration continues to grow and baseload biomass generation is reduced. Outages are projected to remain at or below an average of 30 minutes per year until 2027, which is lower than currently in most western European countries, but step up to a more typical 65 minutes per year by 2030 (Energinet, 2021[8]). Strategies employed to date will need to be ramped up, along with increasing interconnector capacity and maximising flexibility of the non-renewable fleet, for example through gas peaking plants. Electricity storage, such as large-scale batteries, could also be part of the solution but is not yet cost efficient compared with the use of hydro storage through interconnection with Norway and Sweden. Nuclear power holds benefits in some situations as a low-emissions source of baseload power, but does not have the same capacity as gas-fired generation to quickly vary production to meet demand. For the Nordic region it is likely to cost less to transition to a more distributed electricity supply with a high share of wind than a system reliant on centralised nuclear and thermal generation (IEA/Nordic Council of Ministers, 2016[9]).

Demand-side flexibility to use electricity when wind power is readily available will become increasingly important. In the short-term, this means ensuring consumers have sufficient temporal price signals to use renewable power when it is cheap (charging electric vehicles overnight, for example). Making household electricity prices more cost reflective by reducing taxes (see below) is a key step to benefit from an early rollout of smart meters and hourly billing for end users, as well as the information available from the DataHub repository of electricity consumer data. Over a longer period, technologies such as power-to-X (Box 3.2) can use electricity when available, provided prices are sufficiently low when supply is plentiful.

Box 3.1. Government-supported innovation in offshore wind

The world’s first offshore wind farm was commissioned in Denmark in 1991, but it took two decades of sustained support to get to the point where it met 18% of Danish electricity demand in 2019 (Figure 3.4). Policy measures have been central in increasing deployment and bringing down costs.

Sustained support for wind research, development and deployment, with significant subsidies in the late 1970s and 1980s and increasing funding throughout the 2000s, peaking at DKK 618 million in 2013.
Quantitative targets for wind energy in energy plans for 2000, 2005 and 2020, all exceeded.
A spatial planning committee for offshore wind was established in 1995 to ensure coordinated development. Grid connection for large offshore wind farms is planned, procured, operated and paid for by the transmission system operator and can contribute to the broader network and interconnection.
The Danish Energy Agency is the single body responsible for issuing all required licenses. The average consent processing time of 16 months is considerably shorter than in the Netherlands, Spain or Germany.
Feed-in tariffs determined by competitive tender, which peaked at DKK 1.05/kWh for the Anholt wind farm in 2013, falling to DKK 0.372/kWh for the Kriegers Flak project scheduled to be operational in 2021.
Development sites for government-run tenders are de-risked: prior to tender there is a fully approved Environmental Impact Assessment of the offshore area and possible grid solutions.

Despite higher costs, offshore wind may still offer greater development opportunity than onshore wind by facing less local resistance, scarcity of good sites and planning problems. The cost of offshore wind developments globally increased in the early 2000s as projects moved further from shore and into deeper waters and key commodity prices increased, but have been on a consistent decline since 2014 as construction costs have fallen while scale and capacity factors increased. Denmark had the lowest levelised cost of offshore wind for projects commissioned in 2019, reflecting experience in offshore developments as well as projects located relatively close to shore and in shallow water.

Figure 3.4. Offshore wind capacity has increased rapidly over the past two decades

Cumulative number of turbines and generation capacity

Box 3.2. Wind energy islands and power-to-X

The Danish government is planning to develop two wind energy islands, an artificial island in the North Sea and the Baltic island of Bornholm, to provide renewable electricity, sustainable fuels and interconnection with other countries. The first stage of the North Sea project carries an estimated cost of EUR 29 billion, making it the largest construction project ever in Denmark. The projects will be developed as public-private partnerships, with a target to deliver the first 5GW of capacity by 2033. The lifetime cost of power from the energy islands has been estimated at EUR 62-66/MWh, comparable to the current cost of offshore wind power.

Energy island investments carry considerable risk in advance of the development of commercially viable technology to convert electricity to sustainable fuels such as hydrogen, methane or ammonia (power-to-X). Producing such fuels using renewable electricity offers potential to cut emissions from hard-to-decarbonise sectors that cannot use the electricity directly, such as aviation, heavy road haulage, shipping and industrial processes, as well as a flexible demand source that can use electricity when there is excess wind supply. Several Power-to-X demonstration projects are in progress or operating.

Copenhagen Infrastructure Partners is working with agricultural and shipping companies to establish Europe’s largest production CO₂-free ammonia using wind power in Esbjerg.
A consortium of energy users and renewable energy companies plan to produce sustainable fuels close to Copenhagen from late 2021 under the H2RES project.
The city of Aarhus in 2015 added an an electric heat pump to an existing combined heat and power plant to create heat from excess wind generation in western Denmark in winter.

Sources: (Cowi, 2020[14]); (International Renewable Energy Agency, 2019[15]); (Ørsted, 2021[16]).

Electricity taxes unrelated to environmental effects should be reduced

Electricity taxation is concentrated on households and is the same whether electricity comes from renewables or fossil fuels (Figure 3.5). Exemptions for businesses that use electricity in production processes protect their competitiveness but increase the burden on households (Figure 3.6). Only a small fraction of electricity taxation is used to support renewables: the Public Service Obligation (PSO) used to fund renewables is being phased out by 2022 but before the phase-out began had only accounted for 20% of taxation of electricity for a typical household (Secretariat for Energy Tax and Subsidy Analysis, 2018[17]).

High taxation of electricity has curtailed abatement outside the energy sector via electrification, such as the use of electricity in electric heat pumps and electric vehicles. Measures have been taken to reduce the tax on specific uses of electricity, notably electric heating once a household’s annual consumption goes above 4 000kWh and charging electric vehicles through a business service. These schemes are ad hoc and create perverse incentives, for example by providing bigger benefits from shifting to electric heating for households that use more electricity. A comprehensive electrification strategy would help reduce emissions in other sectors by driving the transition to widespread use of renewable electricity.

Figure 3.5. Electricity taxes are concentrated on households

Effective tax rates on energy use in the electricity sector, 2021

Electricity taxes, which apply to electricity from renewables as well as from fossil fuels, should be gradually reduced as GHG emission pricing ramps up. Removing non-transport energy taxes has been estimated to halve the economic welfare cost of meeting the 2030 emissions target (Danish Economic Councils, 2021[18]). Electricity taxes do not directly encourage power producers to shift to cleaner sources and may decrease the effectiveness of carbon taxes by discouraging electrification (OECD, 2019[19]). In addition, Danish electricity taxes are highly regressive: lowest income decile households spend on average almost 2% of their disposable income on electiricy taxation, compared with less than 0.5% for the the top decile (Ministry of Taxation, 2020[20]). Consequently, using 55% of the revenue from emission pricing to reduce non-transport energy taxes (predominantly electricity taxes) can make the overall income distribution more equal, with no welfare losses for the bottom four income deciles and a loss of approximately 0.5% of consumption for deciles 7 to 9 (Kraka and Deloitte, 2020[21]). Outcomes should be monitored to ensure that lower electricity prices do not trigger a fall in energy efficiency and jeopardise compliance with the EU Energy Saving Directive, though current electricity taxation of DKK 900/MWh is far above the EU minimum of DKK 7.4/MWh (EUR 1/MWh). Energy taxes on heating oil, coal and gas should also be reviewed to ensure these are aligned with non-climate environmental costs, such as local air pollution, as GHG prices increase.

Figure 3.6. Electricity prices for households are among the highest in the OECD

2020 or latest available year

Reliance on biomass for heat and power needs to be reduced

Biomass has played an increasing role in Danish energy supply, particularly woody biomass used for district heating. District heating accounts for the highest share of residential energy consumption among OECD countries (IEA, 2019[22]). Biomass is now the dominant fuel for district heating (Figure 3.7) and its share of electricity generation has gone from 1% to 18% (Danish Energy Agency, 2020[23]). In total, over half of Denmark’s end use of renewable energy comes from solid biomass in the form of wood pellets, wood chips, firewood and straw. The shift to biomass has been incentivised by an exemption for otherwise high energy taxes on the basis that biomass is a renewable energy source. Electricity produced using biomass-fired combined heat and power plants with capital costs that have not been fully written-off also receive an add-on to the market price of EUR 20/MWh.

Tax exemption and subsidies for using woody biomass for heat and power are inconsistent with the environmental costs. Burning biomass emits gross CO₂ roughly equivalent to burning fossil fuels, but where it is harvested from forests that are managed sustainably then regrowth offsets these emissions. While there are climate benefits from shifting from fossil fuels to biomass, there can also be emissions from land use change and the assumption that biomass is carbon neutral from a lifecycle perspective has increasingly been challenged in the scientific literature (OECD, 2018[24]; Booth, 2018[25]; Searchinger et al., 2018[26]). Median international estimates of lifecycle GHG emissions from biomass-fired electricity are more than a quarter of those from coal and half those from gas, which is an order of magnitude higher than other renewables such as wind and solar (Schlömer et al., 2014[27]). For Denmark specifically, CO₂ emissions from transporting, drying and processing biomass are estimated to be between 5% and 25% of those from fossil energy (Danish Energy Agency, 2020[28]). There are also negative local air pollution effects from burning biomass and harvesting can be detrimental for the use of land as carbon sinks, for biodiversity and soil quality. Pursued at scale, biomass production can have negative consequences for land conversion. Woody biomass sourced from residue and waste has limited detrimental effects, but supply is limited, particularly in Europe. Woody biomass carries the greatest environmental and land use trade-offs, whereas other forms of biomass such as agricultural waste (also used extensively in Denmark) can provide energy without impinging much on land use (Catuti et al., 2020[29]).

Denmark consumes much more biomass per capita than would be sustainable on a global scale (Danish Council on Climate Change, 2018[30]) and imports a greater share of its solid biomass use than any other OECD country (Figure 3.8). The high share of imports, predominantly from Estonia, Latvia, the United States and Russia, makes it more difficult to ensure forests are managed sustainably. If extraction of biomass for energy leads to a decline in the forest carbon stock or carbon sink strength, this should be accounted for in the emissions accounting of the exporting country, but not all countries supplying Denmark have binding and adequate mitigation targets that include all sectors correctly (Danish Energy Agency, 2020[28]). The EU Renewable Energy Directive II requires that forest biomass is sourced only from locations where legislation at national/subnational level, or management systems at the forest sourcing area, ensure that forests are regenerated and that carbon stocks and sink levels in the forest are maintained or strengthened over the long term. Denmark has recently approved stringent new sustainability criteria that build on an earlier voluntary programme and go beyond EU requirements, but these criteria do not take into account indirect effects on land use change.

Figure 3.7. Biomass use has grown and now powers the majority of district heating output

Fuel sources as a percentage of total production of district heating

While steps taken to ensure sustainable supply of biomass are laudable, the scale of Denmark’s reliance on biomass for heat and power is a problem. There is a limited supply of truly sustainable woody biomass, and greater use increases the risk of environmental costs. In the longer term, scarce sustainable biomass is likely to be most valuable in applications where the substitution of carbon-based fuels is particularly difficult, such as aviation and long-distance shipping. Combining bioenergy with carbon capture and storage is one of the most promising options for achieving negative emissions, as long as the bioenergy is sourced sustainably.

Figure 3.8. Biomass imports are a large share of Denmark’s energy supply

Share of imports of primary solid biofuels in total energy supply, 2019 or latest year available

Denmark should gradually shift away from using scarce woody biomass for heat and power, and incentives to use biomass should be better aligned with the environmental effects from net carbon emissions, local air pollution and damage to biodiversity and soil when harvesting. International GHG accounting standards stipulate that lifecycle emissions from biomass should be accounted for in land use, land use change and forestry and any pricing of lifecycle emissions should follow this classification in order to avoid the risk of double taxation. At present, however, emissions from the land use, land use change and forestry sector are either not priced (as in Denmark), or not subject to binding and adequate mitigation targets (as in some countries supplying biomass to Denmark), which undermines incentives to shift away from woody biomass. While a range of technological solutions should be considered to underpin the shift, the most promising is a move to large capacity electric heat pumps that will provide opportunities to act as an energy store and be a flexible source of electricity demand (EnergiKommissionen, 2017[31]; Heat Pump Centre, 2019[32]). District heating in Sweden already relies on large capacity heat pumps to a substantial degree. Recent government initiatives have gone in the right direction by supporting large capacity heat pumps, reducing taxation of electric heating and removing fuel restrictions. While biomass was valuable as a transition fuel to reduce emissions from burning coal, and combined heat and power provided efficiency gains, further policy steps are needed to access environmental benefits from the reduced costs and increased efficiency of electric heat pumps, wind and solar generation.

Reforms to promote competition in district heating generation have the potential to drive down costs of the transition away from biomass through innovation and private investment. Throughout Europe, based on EU legislation and competition policy, district heating generation is increasingly managed separately from the distribution network (European Commission, 2020[33]). In Denmark, however, competition in the heat market is weak with incumbents protected by a lack of third party access to the network. Denmark should move towards greater competition as in Sweden, where liberalisation led to significant investment and a greener system (EA Energy Analyse, Deloitte and Konveks, 2017[34]).

The rate of renovations should be increased to meet energy efficiency goals

There is a need to accelerate the rate of renovations to improve the energy efficiency of existing buildings and reduce energy use, as existing buildings will form around 85% of the building stock in 2050. Final energy consumption for heating has declined by 45% since 1975, but energy consumption by Danish households increased between 2000 and 2017 as growth in the number and size of dwellings outweighed efficiency improvements (Odyssee-Mure, 2021[35]). Energy use for space and water heating per dwelling is higher than in Germany, the Netherlands and Sweden (European Environmental Agency, 2019[36]). The Danish Climate Council (2017[37]) has identified energy renovation of buildings as a relatively cheap source of abatement, after taking into account reduced local air pollution, when it occurs at the same time as other maintenance and renovation activity. However, the rate of energy renovation lags the EU average, which itself is insufficient to meet long-term energy use and GHG emissions targets (European Commission, 2019[38]). There also remain opportunities where the cost of energy savings in commercial buildings is well below the cost of generating and distributing more electricity. Examples include improving office ventilation, energy-efficient industrial electrical motors and pumps (Danish Energy Agency, 2018[39]). The high and increasing share of renewable electricity reduces the emission reductions from energy efficiency improvements, with household and business use of electricity, district and space heating forecast to be responsible for only around 2 million tonnes of CO₂ emissions in 2030, down from over 10 million tonnes in 2018 (Danish Energy Agency, 2020[40]). However, energy efficiency can still serve to reduce energy demand, freeing up renewable electricity and biomass for other uses.

Denmark has strict minimum standards for new buildings and renovations that must be verified by an independent expert under the Building Code, which is updated at least every five years, though a building class consistent with near zero energy buildings under the EU Buildings Directive remains voluntary. Other positive aspects of Danish regulation include initiatives supporting installation of electric heat pumps, energy saving measures for government-owned buildings, grants to owners who can demonstrate the lowest costs of energy savings, the Better House scheme that provides advice on reducing all forms of energy consumption and access to qualified contractors, and energy labelling. Energy labelling requires owners to pay a trained consultant to review their building’s energy efficiency, with results available to potential buyers and renters, and deliver a plan to improve efficiency (though this could be made more specific (Bjørneboe, Svendsen and Heller, 2018[41])). Several studies indicate a positive correlation between the labelling grade and the market price of the dwelling (IEA, 2017[6]). As elsewhere, energy renovations of private rental properties are more problematic because of the split-incentives problem whereby landlords pay for renovation while tenants benefit from lower energy bills. Almost half (47%) of Danish households are renters, with social rentals comprising 21% of all dwellings (OECD, 2021[42]). The capacity of owners to pass on the costs to tenants varies by type of rental, but schemes are typically based on costs rather than energy savings (European Commission, 2021[43]). Allowable rent increases should instead be better tied to the reduction in energy bills from energy-efficient renovations. Mandating minimum energy performance for rental properties can be a powerful measure to force upgragrades of the most inefficient buildings, as in the UK (Economidou and Bertoldi, 2015[44]).

The housing-job scheme (BoligJobordningen) provides tax deductions for the costs of energy saving renovations of private homes, but annual caps mean that it does not cover major energy renovations, support is linked to the type of renovation rather than energy saved, and owners of rental properties are ineligible. The housing-job scheme should be reformed to focus on renovation that offers the most cost‑effective energy savings without increasing overall funding, as there is little spare construction industry capacity at present. Excluding other house-work such as cleaning and gardening services that do not provide broader societal benefits while prioritising credit-constrained households, as recommended in the 2016 Economic Survey, would better target the scheme towards cost-effective energy savings. Consideration should be given to merging with a new scheme taking effect in 2020 (Bygningspuljen), which is available to landlords and targeted at dwellings with the greatest scope for energy efficiency improvements. The heating allowance for pensioners (varmetillæg) works against energy efficiency by subsidising heating costs of up to DKK 22 500 per year at an annual cost exceeding DKK 300 million. It should be replaced with targeted support that is independent of the quantity of energy used.

Reversing the increase in GHG emissions in the transport sector

The transport sector has become the largest emitter of GHGs

Emissions from the transport sector have increased since 2013, despite a small drop in 2019 (‑2%), driven by road transport (Figure 3.9. ). The number of vehicles per inhabitants is relatively low, with an average of 565 road vehicles per thousand inhabitants in Denmark, 689 in Germany, 789 in Norway, 592 in the United Kingdom and 655 in the Netherlands. Emission intensity of vehicles has been regularly decreasing and requirements for blending biofuels, which emit less GHGs than conventional fuels, have been particularly stringent. However, due to more intensive use of vehicles, transport emissions per inhabitant are higher than most OECD countries (2.2 tonnes of CO₂ emissions per thousand inhabitants against 1.9 tCO₂ in Germany, 1.8 in the Netherlands and the United Kingdom and 1.6 in Sweden). There are thus likely to be opportunities to cut emissions by emulating best practices in other countries.

Figure 3.9. CO₂ emissions from transport have been increasing after a fall in the late 2000s

International transport by Danish companies is also responsible for a large part of emissions, but are not accounted in domestic emission accounts and climate targets. Globally, aviation is responsible for 2.8% of CO₂ emissions (adding to short-lived non-CO₂ GHG emissions such as NOx, which can double this impact (Lee et al., 2021[45])). International shipping accounted for around 2% of global energy-related CO₂emissions in 2019 (IEA, 2020[46]). In Denmark, fuel use for international aviation accounts for 9.5% of fuel use CO₂emissions and international marine for 5.8%. The high risk of leakage in the international transport sector calls for international coordination. Denmark’s action to reduce its emissions from the international maritime sector are in the context of the European Union or the International Maritime Organisation, which adopted in 2018 an initial strategy for the reduction of GHG emissions from ships by 70% by 2050 (Danish Maritime Authority, n.d.[47]). As for other EU countries, emissions from intra-EU international aviation are included in the EU ETS; they have also been subject to the GHG emission regulation mechanism CORSIA from this year. The shipping industry in Denmark has played an active role in climate mitigation policies by setting a target of carbon neutrality by 2050 (without emission offset), proposing policies and building partnerships for research and development. Margins for action lie in energy efficiency gains and low-carbon fuels, as well as the electrification of short-distance shipping. The establishment of a carbon pricing mechanism at the international level would encourage further actions (ITF, 2020[48]).

The increased use of private cars has driven most of the recent rebound in CO₂ emissions from transport in Denmark, together with a small rebound in road freight traffic since 2008 (Figure 3.10). Road passenger use has increased by 30% between 1999 and 2019 and private cars now account for 82% of inland passenger traffic. A shift to less emissions-intensive vehicles and the smaller share of gasoline-fuelled cars in the private fleet (from 95% in 1994 to 68% in 2020) partially offset the climate impact of increased use of road vehicles. This is related to higher fuel efficiency and more stringent regulation on vehicles’ CO₂ efficiency for manufacturers at the EU level.

Figure 3.10. The increasing number of private cars and traffic outweighs greener vehicles

Estimation of drivers of CO₂ emissions evolution in the transport sector over the period 2000-2016

The transport sector is one of the hardest and most expensive to abate in terms of the cost per tonne of GHG (Danish Ministry of Climate, 2020[49]). This is first due to path-related dependency on private vehicle use and ownership, as the recourse to private vehicles in transport has been increasing for more than 30 years. Motor vehicles constituting medium term investments for households and firms and the renewal of the whole fleet takes 15 years on average, a reversal of trend is likely to be difficult in the short term. Fossil fuel consumption for transport and their related GHG emissions respond poorly in the short term to policy incentives such as emission pricing and are therefore likely to make only a small contribution to the 2030 target. Regulation and further incentives for the procurement of zero-carbon vehicles could increase this contribution, but also calls for a full deployment of charging and fuelling stations throughout the country well before 2030, entailing substantial costs for consumers or the public budget. Conversely, a sharp decrease in transport GHG emissions is required for 2050 climate neutrality and current action can initiate this potential. Putting a clear and strong signal on future prices of fossil fuels will accelerate the immediate change in the vehicle fleet.

Reducing vehicles’ carbon intensity is the focus of government policy

Decarbonisation of the vehicle fleet is at the centre of the government’s strategy. In the short term, the government aims to promote biofuels, though the margins for action are very limited. It proposes to integrate a CO₂ displacement requirement to fuel producers instead of a blending requirement. This will allow consideration of the climate impact of biofuels, but the technical capacity of blending remains limited. Hydrotreated Vegetable Oil (HVO) has the ability of fully replacing diesel without a technical blending limit or change of motor, but the resources required can be very large (estimated at DKK 2.1 billion for 10% use of HVO (Danish Ministry of Climate, 2020[49])). This suggests that the timing for adjusting production might be too long for such a transitional measure. Moreover, the potentially substantial carbon component of biofuels (OECD, 2019[50]) can be better taken in consideration by increasing the carbon component of fuel prices (currently null for biofuels).

The Green Transportation Agreement, reached in Parliament in December 2020, is expected to reach the target of 775 000 zero- and low-carbon emission cars in 2030 (with an ambition of 1 million vehicles). The penetration of zero or low-carbon vehicles in the private fleet has been growing rapidly, accounting for 31% of new sales from January to August 2021, up from 5% in 2019 (De Danske Bilimportører, 2021[51]). However, these vehicles are still more expensive than conventional cars, particularly for the most affordable micro and small car categories (Danish Ministry of Climate, 2020[49]). The speed of charging, the limited availability of charging stations or hydrogen fuel and the small range of model choices in these car categories are other barriers to more widespread adoption of non-conventional cars. Historically, policy uncertainty regarding infrastructure and pricing has hampered a significant roll-out of electric vehicles. The 2020 agreement and the Infrastructure Plan 2025 (agreed in June 2021), which sets aside DKK 500 million for 2022-2030 to support charging services both provide multi-year horizons, and are therefore welcome. Domestic legislation can also be adapted to the proposal by the European Commission in its July 2021 climate package, which includes requirements for the distribution of charging points and sustainable fuels (Chapter 2, Box 2.7).

Current measures in Denmark for green vehicles are generous and will be ramped up by future reforms. A central measure is a heavily reduced registration tax on zero and low-carbon vehicles in order to make them more competitive with conventional cars. This tax accounts for a very large part of the final price of conventional vehicles and depends on the pre-tax value of the car, with a progressive tax rate (85% up to a threshold of DKK 197,700 in 2020 and 150% thereafter). It can be reduced on the basis of fuel efficiency criteria, and carbon emissions. As a result, the registration tax that applies to electric vehicles is very low, or even zero for some models (Danish Automobile Commission, 2020[52]). The Green Transportation Agreement of December 2020 will restructure the registration tax, which will be based on the taxable value and emissions per km driven (which will be progressive with the value). This will maintain strong incentives for electric vehicles and extend them to other types of low-carbon vehicles, without technological bias. However, these incentives will be higher for more expensive vehicles, which means that the purchase of cheap low-carbon vehicles will be encouraged less than expensive ones.

Access to charging is also crucial for the development of electric vehicles, whether provided privately or publicly. Electricity for charging is taxed at a significantly lower rate if the charging takes place through a business service (at home or elsewhere), but this scheme still needs further development. Facilitating charging at home can contribute to the use of electricity when supply is plentiful, as charging is more likely to happen overnight.. Households with an electric car benefit from a cut in electricity taxation when they reach a certain level of energy consumption (Section 3.1), if the household where the electric car is charged is registered with electric heating as the primary heating source. However, generally, electricity taxation entails that the tax on energy is much higher for electric vehicles than for motor-fuelled ones (DKK 248/GJ against DKK 133/GJ for petrol and DKK 78/GJ for diesel (Danish Automobile Commission, 2021[53]) ). Energy taxation is also not aligned with the climate cost of fuel use as an electricity-driven kilometre incurs an average DKK 0.17 of taxation (against DKK 0.26 for petrol and DKK 0.15 for diesel), although its climate impact is about one fifth (Danish Automobile Commission, 2020[52]). Implementing an electricity tax cut for households with electric cars, as for households with electric heating, can be a first temporary step to reduce this disincentive to electric vehicles (Danish Automobile Commission, 2021[53]), until electricity taxes are substantially reduced (Chapter 2 and Section 3.1).

In parallel, the government plans to accelerate the roll-out of charging infrastructure. A 10 years funding program for fast chargers on the trunk road network was part of the Infrastructure Plan 2035 agreed in June 2021. The government has announced a change in the regulation of charging infrastructure for electric cars which has the aim to increase competition among charging infrastructure operators and to adapt the regulation for municipalities so that they can take a larger role in the local roll out of charging infrastructure. On top of that an industry agreement with the Danish Electric Car Alliance includes the installation of 23 000 charging stations by 2025 (against 3 000 in 2021). These plans aim to make the use of electric vehicles easier, including for long journeys.

In the longer term, the development of alternative fuels like advanced biofuels or fuels generated by power-to-X can also allow the decarbonisation of heavy vehicles, planes and ships, which are very difficult to electrify. The green research strategy contains a large component for green fuels and Power‑to‑X in industry and transport and the abatement potential is relatively large, even for 2030 (from 0.5 to 3.5 MtCO₂ (Danish Ministry of Climate, 2020[49])). As an example, Ørsted recently unveiled a plan to combine carbon capture and carbon-neutral fuel generation (Ørsted, 2021[54]). A clear strategy on the carbon taxation of fuels in all sectors, at the domestic and international level, would accelerate the realisation of this potential, foster private research and support the future roll-out of these fuels.

Although there is a strong potential for the deployment of clean vehicles in Denmark, their deployment will provide a small contribution to the 2030 climate objectives and might create a public finance risk if targets are exceeded. Past experience in Norway has shown that ambitious policy packages (including tax cuts, carbon pricing and reduced urban tolls for green vehicles) can substantially increase the recourse to electric vehicles to the point that they account for a majority of new car sales (54.3% of new car purchases in 2020). However, Norway has been leading such policy for decades, putting a heavy burden on public finance, as abatement costs amount to hundreds euros per tonne of CO_2,with regressive effects (Eskeland and Yan, 2021[55]). Similarly, short-term effects in Denmark will be hard and expensive to get. Reaching 775 000 zero or low-carbon vehicles in 2030 would have little climate impact in 2030 (‑0.41 MtCO₂ relative to 2020 and -1.1 MtCO₂ relative to a 2030 base scenario) (see scenarios 1 and 2 in Table 3.1), relative to the 30MtCO₂e cut needed between 2020 and 2030 to meet official targets, although it will be particularly expensive for public finance (the registration tax reform will cost a total of DKK 7 billion between 2021 and 2030 (The Danish Government, 2021[56])). The generalisation of tax cuts and the decrease of fuel use would also generate a substantial tax revenue drop, as the vehicle registration tax amounts to more than DKK 20 billion and 1.9% of total fiscal revenues in 2019 and fuel taxation (excluding carbon taxation) DKK 17,6 billion (1.6% of tax revenue). As a result, the Danish Automobile Commission estimated that the social cost of registrations tax cuts to reach 750 000 electric vehicles in 2030 will amount to DKK 3,400 per tonne of reduced CO₂ (Danish Automobile Commission, 2020[52]). This shadow price is likely to be much higher, as the tax cut also benefits hybrid vehicles, which have a higher climate impact when powered using conventional fuels, and make up two-third of low-carbon vehicle sales so far in 2021 (De Danske Bilimportører, 2021[51]).

A general reduction in car taxation due to an increase of low-carbon car purchases might also improve the attractiveness of car ownership and increase the damages caused by car traffic through accidents, congestion and air pollution caused by non-exhaust emissions (Danish Automobile Commission, 2020[52]) (OECD, 2020[57]) without a strong climate impact (see scenario 3 in Table 3.1). In Israel, a drop in car registration taxes aiming to green the vehicle fleet led to a large increase in car ownership (+17% between 2013 and 2016), which exacerbated congestion and its related nuisance (time loss, noise, pollution) (OECD, 2016[58]). In Denmark, while electric cars might benefit air quality, further use of vehicles might worsen congestion and the quality of road infrastructure. Average air quality is relatively good (Figure 3.11) but the concentration of particulate matter is beyond WHO recommendations in urban areas and particularly in Copenhagen. Furthermore, the increased purchase of vehicles will increase the material impact of Denmark’s consumption, as alternative fuel vehicles have a higher material footprint than conventional ones, especially due to the impact of battery manufacturing (Sen et al., 2019[59]).

	2030 base	2030 scenario 1	2030 scenario 2	2030 Scenario 3
Car fleet	3.2 M	3.2 M	3.2 M	3.5 M
of which electric and low-carbon vehicles	500 000	775 000	1 000 000	775 000
Evolution of emissions from private vehicles relative to 2020	7%	-4%	-13%	6%
in MtCO₂	0.70	-0.41	-1.31	0.60
Evolution of emissions from private vehicles relative to base scenario	-	-10%	-18%	61%
in MtCO₂	-	-1.1	-2.0	60.1

How to read: scenario 1 is based on the hypothesis that in 2030 there will be 3.2 million vehicles, of which 775 000 will be electric and low-carbon vehicles. This results in a decrease in GHG emissions from private vehicles by 4% (i.e. 0.41 MtCO₂) relative to 2020 and by 10% (i.e. 1.1 MtCO₂) relative to the 2030 base scenario.

Note: The 2030 base scenario is built on current evolution of the overall car fleet and non-conventional cars. Scenarios 1 and 2 estimate that a change of the registration tax increases the recourse to electric and low-carbon vehicles up to respectively 775 000 and 1 million without changing the trend of car ownership. Scenario 3 considers that a change of the registration tax increases the recourse to zero and low-carbon vehicles up to 775 000 and these vehicles add to current trends, accelerating overall car ownership.

Source: Author calculation considering a fixed emission factor of conventional vehicles, similar scenarios were made in the Danish Automobile Commission (2020), Interim report 1: Roads to a Green Taxation, also considering socio economic impacts.

Shifting the tax burden to encourage sustainable use of transport in a cost-effective way

Emissions rather than the number of low-carbon vehicles is what matters for the climate and non-climate externalities of car use should also be taken into account in policy making. While revenues from the registration tax are being decreased (due to recent reforms and the increasing uptake of low or zero-carbon vehicles), shifting part of the fiscal burden from vehicle purchase to vehicle use and emissions would make the transition to net-zero more cost-effective, mitigate the drop in fiscal revenue and discourage the use of polluting fuels and vehicles. Petrol and diesel are estimated to become around 20% more expensive under a uniform carbon price consistent with meeting Denmark’s 2030 abatement target (Danish Economic Councils, 2021[18]), which is a similar magnitude to cyclical price changes such as between mid-2014 and the start of 2015 (decrease) or between November 2020 and September 2021 (increase) (EC, 2021[60])

Well-tailored road pricing could improve the integration of the social costs of car use in people’s behaviours. While purchase taxes on conventional vehicles are already high, the recurrent social costs of car use are not fully priced through taxation. It is estimated that the annual social cost1 of a conventional car on average amounts to DKK 8,100 and that for an electric car to DKK 6,100, compared to an annual taxation (including energy taxes but excluding purchase taxes) of respectively DKK 6,700 and DKK 4,900 (Danish Automobile Commission, 2020[52]). Road pricing could help to fill that gap and could compensate part of the potential erosion of revenue from other taxes related to the deployment of zero and low-carbon vehicles. Past experience in big cities showed that such policy successfully reduced externalities related to traffic and enhanced the shift to public transport (Croci, 2016[61]).

A first step, which could contribute to 2030 climate objectives and is currently under study, would be to replace the current heavy vehicle toll by a distance-based toll, applying to all heavy vehicles. A carbon component would incentivise the choice of trucks with lower emission intensity and reduce the risk of users purchasing fuel abroad. This could have a direct impact on emissions in a sector that is hard to decarbonise while fossil fuel alternatives are still difficult to deploy at scale.

A broad development of zero and low-carbon passenger cars and the erosion of fuel and registration tax revenues would justify the extension of a distance-based toll to car passengers in the medium to long term. Denmark has already taken a first step by defining environment zone schemes in Copenhagen, Frederiksberg, Aarhus, Odense and Aalborg, with environmental requirements for lorries, buses and vans (Danish Automobile Commission, 2021[53]). Extension to the whole territory and to a distance-based toll in the longer term should be considered to establish a stable tax base, whereby targeted extra-charges can be an efficient way to fight against congestion (van Dender, 2019[62]). The implementation of a toll-ring road in Copenhagen would, for instance, reduce traffic by 18% and related CO₂ emissions by 12% (OECD/ITF, 2018[63]). A more recent study showed the potential of time-based tolls that increase in rush hours to reduce congestion at limited additional cost for users (Danish Automobile Commission, 2021[53]).

This approach calls for broad complementary measures and infrastructure investment to avoid disproportionate costs for vulnerable households in remote areas. Low-carbon vehicles are significantly more expensive than conventional ones for small and medium models, even when accounting for tax exemptions (Danish Automobile Commission, 2020[52]). The temporary increase in the scrapping premium for old diesel cars, included in the 2020 plan, could help address this issue while accelerating the phasing out of diesel vehicles. Moreover, depending on the charge structure and rates, road pricing could be particularly costly for commuting households living outside city centres and market rigidities will not allow housing prices to adjust accordingly. In order to avoid putting a disproportionate cost on households living in remote areas and to ensure public acceptability, it is important that, in parallel, alternatives to individual cars are offered. An OECD-led survey showed that people are more amenable to limiting driving or paying for climate action when they have available public transport (Chapter 2, Box 2.3.). Accessibility to goods, services and opportunities are more limited in commuting areas and should not be further impeded, in order to ensure the social acceptability of reforms and promote people’s well-being (OECD, 2019[64]). An in-depth survey on these distributional impacts by income groups and territories should anticipate such issues. However, targeted subsidies for households contingent on their living in remote areas should be avoided, as they encourage urban sprawl. For this reason, the current tax cut for commuters, which increases with daily commute distance, needs to be revised and separated from housing choices or scrapped.

Solutions to reduce car use and car dependency should be implemented, focusing on commuting areas outside city centres. They include improved public transport, renovated road spaces that ensure the security of active mobility or land-use projects ensuring an easy access to basic goods and services. Big cities like Copenhagen have successfully launched ambitious policies to decarbonise through public transport and encouraging walking and biking (OECD, 2012[65]). The 2020 recovery plan includes DKK 1 billion in investments for 2021-2024 aiming to foster and secure bicycle use, including electric bicycles, with bike paths, specific charging stations and subsidies (The Danish Government, 2021[56]). The use of public transport (train, bus and coaches) as a share of inland passengers has been stable for the last 40 years in Denmark (around 18% of passenger-kilometres), despite an increase of population density in all regions, particularly in the Copenhagen area. Densified areas offer opportunity for the development of transport stops and measures promoting modal shift could improve the uptake to public transport in areas that are poorly served, more particularly outside city centres. Opening passenger rail to competition could help to make this transport mode more attractive for commuters (chapter 2). Finally, land-use projects promoting inter-modal transport use for commuters and fostering accessibility should be prioritised, for instance mixed-use urban development within close proximity (walking distance) to mass transit facilities (ITF-OECD, 2017[66]). The use of precise local indicators on accessibility to goods, services and opportunities, like the Public Transport Accessibility Level used in London, could help target areas and people that are the most in need, to adjust the transport system, but also land use policies (OECD, 2019[64]).

Figure 3.11. Denmark’s urban areas are slightly over-exposed to air pollution, while congestion is relatively low

Ramping up mitigation in agriculture

Agriculture and land use are key sectors in the long-term climate strategy of Denmark for their capacity to both reduce GHG emissions and sequester carbon from the atmosphere in soils and plants. Agricultural production covers 62% of land in Denmark but comprises a relatively small part of the Danish economy: agriculture, forestry and land use accounting for 1.6% of the Danish gross value added and 1.9% of total employment (European Commission, 2021[67]). However, agriculture and land use respectively account for 23% and 5% of emissions, (including LULUCF), which makes them the most GHG intensive sectors in Denmark relative to their output. Emissions come primarily from the animal sector which produces 61% of sectoral economic output and 77% of GHG emissions (Figure 3.12.). Without additional measures, emissions from agriculture are expected to grow and reach 16 MtCO₂e in 2030 (Danish Ministry of Climate, 2020[49]). Failing to reduce agricultural emissions while keeping the objective of cutting overall emissions by 70% would entail larger welfare cost for other sectors and households (Danish Economic Councils, 2021[18]).

Climate mitigation in the agriculture sector often can also help reduce other environmental damages from agricultural production. Fertiliser use and animals’ waste are potential sources for the leaking of nutrients, particularly nitrogen, into the environment, degrading water and air quality. Denmark’s nutrient balance (the quantity of nutrient inputs not removed by crop and pasture production) is high, exceeding the OECD average by 70% for nitrogen (OECD, 2021[68]). However, nutrient balances in Denmark have consistently fallen since the 1990s even as agricultural production has grown, with the nitrogen balance falling by more than 50% since 1990. As in other countries, biodiversity has been declining (-28% from 2000 to 2019, as measured with farmland birds population (OECD, 2021[68])). A large number of climate change mitigation measures also benefit the local environment and these synergies should be enhanced. Reducing fertiliser use, for instance mitigates nitrous oxide emissions (N₂O) and overall nitrogen leaching (OECD, 2018[69]). Land restoration can enhance carbon sequestration, while providing habitat for on-farm biodiversity (OECD, 2019[64]).

Agriculture offers clear opportunities for substantial, cost-effective abatement. Emissions from the agriculture sector are among the cheapest to reduce, with abatement costs of a number of GHG mitigation actions estimated to be well below the cost of action in other sectors such as transport (Danish Economic Councils, 2021[18]). Furthermore, taking into account benefits other than climate (water, soil and air quality) the overall improvements in welfare caused by some of the mitigation measures make the net abatement cost negative. This is the case for measures reducing nitrogen fertiliser load by optimising practices, which reduces farmers’ input costs and improves the environment without compromising competitiveness or productivity. However, actions that offer the highest mitigation potential for 2030 and would reduce emissions from enteric fermentation are the most expensive (estimated at DKK 1,300 /tCO₂e) (Table 3.2).

Ramping up ambitions in agriculture is technically feasible now, for medium to longer term results (2030 and climate neutrality in 2050) and with limited cost for society, particularly by improving nutrient management, reducing enteric fermentation and restoring peatlands (Arneth et al., 2019[70]). There are solutions available to improve the climate efficiency of feed provided to dairy cattle (by breeding animals with lower feed requirements, feed quality improvements, and additives that inhibit enteric methane), rationalise the application of nitrogen fertilisers and improve manure management (Searchinger et al., 2021[71]). The restoration of carbon-rich lands, and particularly peatlands also offer a great potential with limited cost and environmental benefits that could only be fully reached in the longer term, but should be initiated now. Several of these opportunities have been prioritised in an October 2021 political agreement on the green transition of Danish agriculture (Box 3.3). Increasing abatement in agriculture is consistent with the approach taken by the EU Commission in its 2021 proposal for climate (Chapter 2, Box 2.7) which pushes for climate neutrality in the EU land use, forestry and agriculture sectors by 2035.

Danish agriculture is open to international trade and potentially vulnerable to GHG emission leakage if unilateral measures increase production cost

Danish agriculture is strongly embedded in international trade and the European single market, which frames the policy options. Food and agriculture account for 16.7% of all Danish exports and 16.0% of exports to the European Union. Reciprocally, food accounts for 14.5% of imports from the European Union (European Commission, 2021[67]).

EU regulation has an important role in shaping Danish agricultural policies, as Denmark belongs to the EU common market and policies are operating under the Common Agricultural Policy (CAP). The EU Nitrate Directive (1991) and, more broadly, the Water Framework Directive (2000) set restrictive standards for water quality and nutrient loads, encouraging a reduction in nitrate leaching and nitrous oxide emissions (a large part of which comes from the leaching of nitrogen from fertilisers). The CAP also frames agricultural subsidies in Denmark as in other member states and CAP subsidies account for 37% of agriculture income nationally. The share of CAP subsidies for climate action is very small, as they mainly consist of direct payments (83,2%), depending on land area (European Commission, 2021[67]). This framework allows EU countries sharing a large market with common ground for regulation in order to enhance their competiveness. It also limits the margin of action for individual member states in the short term, until the new CAP is applied in 2023.

Figure 3.12. GHG emissions from agriculture in Denmark mainly come from the livestock sector

	Reduction		Costs	Shadow price	Shadow price
	Million tonnes CO2e /year		DKK million	DKK per tCO2e	DKK per tCO2e
	2025	2030	Annual average to 2030	(without side effects)	(with side-effects)
Increased proportion of fat in feed for conventional dairy cows and heifers	0.17	0.16	146	1 170	1 170
Frequent slurry flushing from pig housing	0.15	0.17	31	250	250
Increased state afforestation	0.002	0.01	25	800	300
Additional state afforestation	0.01	0.06	196	1 300	800
Current effort in targeted nitrogen regulation (3,500 t N abatement)	0.29	0.29	200	1 500	Negative
Collective nitrogen measures (1,500 t N abatement)	0.02	0.1	450	230 to 556 000	Negative to 500 200

How to read: Increased state afforestation has the potential to reduce GHG emissions by 0.002 million tonnes CO₂e per year in 2025 and 0.01 million tonnes CO₂e per year in 2030, for an annual average cost of DKK 25 million. This is equivalent to gross spending of DKK 800/tCO₂e and, after accounting for the welfare benefits of the measures (biodiversity, water retention, etc.) to a net welfare cost of DKK 300/tCO₂e. Each measure is here assessed independently, taking a bottom-up cost-engineering approach as described in (MacLeod et al., 2015[72]).

Source: (Danish Ministry of Climate, 2020[49]).

Box 3.3. Agreement on the Green Transition of Danish Agriculture

On 4 October 2021, the Danish Government and most of the parties in the Danish parliament entered an agreement that runs until 2030 regarding the green transition of Danish agriculture and forestry. The agreement contains a binding reduction target of 55% to 65% in 2030 compared with 1990, a reduction of approximately 6-8 million tonnes CO₂e. The agreement will use the Common Agricultural Policy actively through financing and regulation schemes.

Measures covered by the agreement are estimated to reduce GHG emissions by 7.4 million tonnes CO₂e by 2030. Of that, measures already agreed will reduce emissions by 0.5 million tonnes and implementation of existing technologies is anticipated to reduce emissions by a further 1.9 million tonnes. The remaining 5 million tonnes is the potential from technologies currently under development, including biochar, more efficient handling of manure, fodder additives for livestock, increased organic farming and peatland restoration.

A cornerstone in the agreement is the rewetting and restoration of natural hydrology on drained agricultural soils with an organic carbon content of more than 6% (mostly peatlands). The scheme is voluntary, whereby project owners (such as municipalities or farmers) can apply for grants for project expenses. Along with previous agreements, 50 500 hectares of agricultural land is expected to be restored, with an additional 38 000 hectares planned as part of an eco-scheme under the Common Agricultural Policy. Towards 2030, the goal of the agreement is to restore at least 100 000 hectares of carbon-rich land.

The agreement commits the parties to take measures to reach the 2027 goal set by the EU Water Framework Directive through measures to reduce the loss of nitrogen to the marine environment. The agreement specifies concrete measures to reduce nitrogen emissions by around 10 800 tonnes in 2027. This includes voluntary collective measures, such as mini-wetlands, which farmers can apply for funding to establish locally. The current targeted regulation, which delivers additional nitrogen efforts in relevant catchment areas, will remain in place until a new, more cost-efficient regulation can be phased in.

The openness of Danish trade creates some risk for the acceptability and the overall effectiveness of climate actions in agriculture, whether implemented via a tax or regulatory measures. If the cost of climate change mitigation actions is reflected in decreased productivity or increased costs, Danish farmers may lose shares of international and domestic markets. The first risk is that stringent measures for climate generate revenue and job losses in the agriculture and food sector. The Danish Economic Councils (2021[18]) estimated that the implementation of a CO₂eq tax of DKK 1 200/tCO₂e would destroy about 25% of current jobs in agriculture and 9% in the food sector (Chapter 2, Table 2.1).

The carbon leakage of the potential drop of agricultural production that could result from an emission price is hard to estimate, but calls for a careful implementation of climate policies in agriculture. In comparison to other countries, Denmark has low emissions-intensity in agriculture, excluding emissions from land use change (Figure 3.13.). Using a lifecycle approach (including the production of fodder and emissions from land use change), Denmark is also among the most climate efficient countries, a position shared with other Northern European countries (Searchinger et al., 2021[71]). As the global demand for food and particularly animal products is growing (OECD/FAO, 2021[73]) (Searchinger et al., 2021[71]), reducing production solely in Denmark might give market shares to competitors and goods with higher climate impact. There is therefore a risk that reducing emissions from Danish agriculture might trigger an increase of GHG emissions from other countries. This depends very much on the climate policy of other countries. So far, the risk is subdued as overall leakage (the share of emission cuts that would be shifted abroad) has been estimated at 35% for Danish agriculture under a DKK 1 200/tCO₂e emission tax (Danish Economic Councils, 2021[74]).

Figure 3.13. Emissions intensity of main agricultural products in Denmark is in many cases lower than non-European countries

Kg CO₂e per kg product, 2017

An ambitious policy mix of regulation and subsidies for carbon sequestration can enhance climate change mitigation in agriculture

Denmark succeeded in reducing its nitrous oxide emissions from fertilisers using a policy mix of regulation and subsidies to improve water quality. Compliance with water-related legislation, particularly EU Directives, entailed a set of requirements, with costs borne by farmers, for initiatives such as fertiliser accounting, mandatory catch crops, the period for manure application and restriction of fertiliser use in certain areas. In parallel, farmers can be supported when they implement measures mitigating nutrient leaching in the environment. As a result, nitrogen fertiliser use decreased by 0.81% in a decade (against a 0.66% increase in the OECD) and strongly improved the efficiency of nitrogen use for fertilisers (+33% between 2004 and 2014) (OECD, 2021[68]). As a result, the emissions intensity of crops has strongly declined in the last decade. In parallel, the milk sector has benefitted from highly digestible feed leading contributing further to the decrease of the overall agricultural GHG emissions intensity However, the emissions intensity of meat production has increased and pig meat production in Denmark is particularly emissions-intensive relative to other European countries (Figure 3.13. above).

These efforts fall short of reducing GHG emissions and the environmental damages of agricultural production. The agreement on the green transition of agriculture (Box 3.3 above) is a significant step forward in developing a strategy for agriculture that is consistent with Denmark’s 2030 climate target. However, the bulk of emission savings under the agreement rely on technologies that are not yet mature and further policy measures will be needed to deliver the associated emission reductions.

The 70% target calls for implementing promptly a clear strategy in the agriculture sector to offer rapid results and provide time for sectoral actors to adapt to future policy conditions. The second phase of the Green Tax Reform will determine the framework for a uniform carbon tax across the economy, including for agriculture. Although a specific carbon price is politically hard to implement in this sector and might generate leakage, this strategy should aim at pricing the negative outcomes of agricultural production and encouraging the most efficient actions for climate change mitigation. The current mix of strong regulation and voluntary subsidies are an acceptable short-term option, but should be reinforced and made more efficient to align with the government’s high climate ambitions. Increasing requirements for well-known mitigation practices together with monetary sanctions proportional to their cost would unlock the potential of the government plan for agriculture (Danish Government, 2021[75]). This can take the form of stronger environmental and climate requirements for CAP payments or other types of requirement. The Netherlands have restricted since 2019 the installation of nitrogen-intensive projects with more stringent regulations and requirement near protected (OECD, 2021[76]). Ramping up practices enhancing carbon sequestration (such as land restoration and forestry) in soils through subsidies (funded by CAP supports and central budget) could substantially contribute to 2030 targets.

Carbon sequetration using biochar also has high potential, but further research, development and demonstration is required. In the longer term, research and development can contribute to provide alternatives to GHG intensive practices and therefore abate emissions with limited leakage effects (Henderson and Verma, 2021[77]). Research is also needed to improve monitoring of emissions at the farm-level, which would aid monitoring and make the direct pricing of emissions practically feasible. The new CAP that will be implemented from 2023 to 2027 provides broad scope of action to National Strategic Plans while increasing mandatory funding of environmental programmes and the stringency of climate and environmental requirements. Furthermore, European Commission aims at building a climate neutral land use, forestry and agriculture sector by 2035 (European Commission, 2021[78]). EU-wide policies offer opportunity to Member States for bold climate and environmental policies in the sector without weighing on its competitiveness.

Regulating or pricing emissions requires strong monitoring of agriculture emissions at the farm level. In the medium-term, improved monitoring of farm emissions, as planned by the government, should help to individualise regulatory requirements and make enforcement easier. It could also allow pricing or regulation of GHG emissions and other environmental damage of agriculture production, instead of regulating actions or inputs as currently. This would provide more margin for farmers to innovate and reduce their impact in a cost-effective way.

Strengthening regulation and monitoring in the short term should be targeted so as to trigger the most cost-effective actions with current technology. Denmark has been developing spatially-targeted nitrogen regulation, and should continue following this path. Limiting the propagation of nitrogen in the environment is all the more beneficial as it would allow meeting EU requirements for water quality and improve soil and air quality. Reducing methane emissions will affect climate change in the short term (UNEP - UN Environment Programme, 2021[79]) and actions such as improving feed intakes and improving manure management are both feasible and cost-effective. Stronger requirement for fertiliser, manure and building management should therefore bring rapid results with limited costs.

Reciprocally, actions improving carbon capture and sequestration should be encouraged at the level of the generated benefits, accounting for other environmental services such as improvement of biodiversity or water quality. For this, current subsidy patterns such as the Agro-environmental measures of the CAP or the new government plan for land restoration could be made more cost- effective. CAP funding has so far had a small impact on EU emissions, due to poor targeting of measures (European Court of Auditors, 2021[80]). First, payments are based on actions instead of environmental and climate outcomes. Experience has shown that increasing payment for measures with multiple benefits (e.g. water quality and carbon sequestration), substantially improves uptake and general environmental outcomes (Lankoski et al., 2015[81]). Moreover, until now, these measures have been capped, which prevents any action over budget even though they can be cost-effective.

In the longer term, Denmark is set to play an active role in EU talks for aligning member states’ policies for a climate-friendly CAP and henceforth reducing its risk of GHG leakage. These talks will shape the agriculture sector from 2027 onward and then define the role of EU agriculture in climate change strategies. Shifting CAP payments, currently mostly based on land ownership, to payment for ecosystem services is crucial. The current EU framework is particularly expensive related to the services provided and the damages agriculture causes to the environment. Phasing out this inefficient scheme and paying farmers for the improvement of climate and environmental performance would accelerate climate action in agriculture in a cost- effective way in the perspective of a carbon neutral economy for 2050. A first step has been taken from the 2014 CAP that includes a mandatory share of direct payments for eco-schemes (30% from 2014 to 2022 and 25% in the next period) and the new 2023-2027 CAP tightens the green requirements related to payments (such as set-aside land and wetland protection). However, this is a mild effort relative to what is needed to reach climate targets. Conversely, while leaving the European Union, the United Kingdom undertook a similar path and decided to phase out direct payments and to pay farmers for “producing public goods” based on environmental and animal welfare outcomes (Defra, 2020[82]).

However, this shift of subsidies should be implemented gradually and in a predictable way, with accompanying measures for farmers, as CAP subsidies account for a large part of agricultural income. 28% of Danes live in rural areas and massive bankruptcies could have dramatic social and local impacts, more particularly as livestock production, likely the most impacted sector, is concentrated in provinces with smaller alternative job opportunities (chapter 2). A close cooperation with farmers, the food industry and rural stakeholders could help identify the most efficient actions for climate and build a plan that would gain endorsement from population in charge of its implementation. This is for instance the way New Zealand chose to reduce the climate impact of its agriculture and work towards pricing the emissions of the sector (Box 3.4).

Temporary measures could be considered to build new skills, in order to mitigate drops of individual incomes and facilitate transitions. The Danish government has taken specific measures to support generational change and a green transition through financial supports and a reform of agricultural leases, adding to the EU subsidies to young farmers (Danish Government, 2021[75]). Temporary tax rebates based on past outputs of the land property might be an option, provided they are temporary and do not exceed the cost of the monetary sanction (or the emission pricing cost in the longer term). Tying eligibility to these rebates to land ownership or management would avoid penalising new generations of farmers.

Box 3.4. Case study: mitigating emissions from agriculture in New Zealand – building a pricing scheme in agriculture with the cooperation of stakeholders

The agriculture sector plays a major role in New Zealand’s economy, accounting for 5.8% of its GDP in 2017 and employing 48 000 people across the country (around 3% of total employment). The dairy industry is the country’s largest export earner. Agriculture is also the main contributor of GHG emissions (48% of national emissions, including 23% dairy cattle).

The Interim Climate Change Committee (ICCC), an independent ministerial advisory committee projects that, in order for New Zealand to meet its climate objectives for 2050, dairy and sheep and beef animal numbers should be each reduced by around 15% from 2018 levels by 2030, cutting emissions by 8-10% relative to current policies (Climate Change Commission, 2021[83]).

In November 2019, the Climate Change Response Amendment Act passed into law with a cross-party consensus a specific target for biogenic methane emissions (10% less than 2017 level by 2030 and 24-47% by 2050),as other GHG emissions should reach net zero by 2050. It also states that, from 2025, agricultural emissions will be priced at the farm level. Pricing emissions is consistent with New Zealand’s Emissions Trading Scheme (NZ ETS), which now covers a large part of the economy, including transport fuels, electricity production, synthetic gases, waste and industrial processes. Currently under the NZ ETS, agricultural processors, e.g. meat and dairy processors, nitrogen fertiliser manufacturers and importers, are required to report on their agricultural emissions but do not pay for these.

Primary industry organisations and Maori representatives developed their own proposal called He Waka Eke Noa (He Waka Eke Noa, 2019[84]), which was adopted by government. The ICCC will review its progress in 2022.

Through He Waka Eke Noa, the development of a pricing scheme for agriculture emissions by 2025 will be undertaken in close cooperation with the farm industry and iwi/ Māori representatives and will involve building on-farm capacity to manage and mitigate emissions at the farm-level.

This process is flexible and the pricing mechanism still needs to be defined by the primary sector and then proposed to the Government by 2022, when the ICCC will review progresses. If progress is deemed insufficient to develop a mechanism to price agricultural emissions at the farm level, legislation includes a default provision that the pricing of agricultural emissions will be applied at the processor level under the NZ ETS before 2025 and at the farm level after 2025.

Source: (OECD, 2021[85])

Complementing with steps to encourage sustainable consumption

Changes in food consumption patterns in Denmark could further reduce global GHG emissions by 3 GtCO₂ in 2050 (Searchinger et al., 2021[71]), but the way to achieve this potential is still unclear. This effect will not be reflected totally in Denmark’s emissions, because of the share of imports in food consumption, but the country’s ambition to act at the international level and to lead the way for climate action justifies that this potential is not overlooked.

A first way to reduce the climate impact of food consumption in Denmark is to improve the climate efficiency of diets. This could reduce the carbon footprint of Denmark by 2.6 GtCO₂e a year in 2050. Partly shifting protein intake from animal to plant sources would not only benefit climate and the environment (Figure 3.14.), but also people’s health. The consumption of milk, animal fat, eggs, poultry and beef in Denmark far exceeds the planet’s boundaries, but also nutrition recommendations (Searchinger et al., 2018[86])). Beef consumption has the largest climate impact per protein intake. In contrast, the average consumption of vegetable oils is below requirement and could be increased to partly replace animal-sourced nutrients. However, this change is hard to impose on citizens: only 33% of Danes are willing to reduce their beef consumption (against 36% of French people and 38% of Americans), according to a recent OECD survey (Boone et al., forthcoming[87]) and the experience of campaigns for healthy diets showed that only a tailored policy mix is able to successfully shift diets, as shown by an OECD report on obesity prevention policies (OECD, 2019[88]). The government’s release of official dietary guidelines integrating health and climate issues is commendable. The city of Copenhagen showed the way by implementing the Organic Conversion policy through the training of kitchen staff in catering, increased use of seasonal fruits and vegetables, and the reduction of food loss and waste (Copenhagen House of Food, n.d.[89]).

Figure 3.14. Animal proteins, and particularly beef meat, have huge carbon footprint relative to plant proteins

Reducing food loss and waste is also an option to reduce the carbon and environmental footprint of Danish food consumption and has a global mitigation potential of 1.4 GtCO₂e in 2050 (Searchinger et al., 2021[71]) In Denmark, as in most developed countries, consumers are the biggest source of food loss, but the food industry is a major source of avoidable food loss and waste. Governments have implemented policy packages that reduced substantially food loss and waste during the last decade. A collective agreement with major food companies to reduce waste was also signed in 2020 to reduce their food loss by 50% (Searchinger et al., 2021[71]). An integrated strategy along the food chain with all stakeholders, including consumers and municipalities, could accelerate the current trend.

Main findings	Recommendations (key recommendations in bold)
Maintaining progress in the energy sector
Government support has contributed to significant reductions in the cost of wind and solar generation, but supply will need to expand further to meet increasing demand. Emerging technologies will be needed to meet targets and maintain security of electricity supply.	Continue to shift energy research, development and deployment support from mature to emerging technologies with substantial long-term potential in Denmark and abroad.
High taxation of household electricity use has impeded electrification and ad hoc exemptions for specific uses are inefficient, favouring some electricity uses over others and households with high base usage.	Gradually reduce electricity taxes as GHG pricing ramps up, while monitoring effects on energy efficiency. Remove ad hoc measures for specific uses as general electricity taxation declines.
Heavy reliance on woody biomass, for district heating in particular, reduces availability of scarce biomass for other uses.	Better align incentives for woody biomass use with its climate and environmental impact. Ease regulation of district heating to allow private investment to drive a shift towards new technologies, such as large capacity heat pumps.
The rate of renovation to improve building energy efficiency is too low to meet long-term targets. Energy renovations of rental properties are particularly challenging because landlords pay while tenants benefit from lower bills, yet tax deductions for energy saving renovations under the housing-job scheme are not available to landlords.	Reorient the housing-job scheme (BoligJobordningen) to support renovations to improve building energy efficiency, including by landlords, rather than other housework such as cleaning and gardening. Mandate minimum energy performance standards in rental properties. Replace the heating allowance for pensioners (varmetillæg) with targeted support that does not reduce incentives for energy efficiency.
Reversing the increase in GHG emissions in the transport sector
An accelerated uptake of low-carbon vehicles would substantially contribute to carbon neutrality.	Ensure the provision of charging stations and low-carbon fuels in rural areas and social housing, using public tenders and potentially subsidies in order to cover remote areas
Transport emissions remain high, in part because replacing the stock of conventional vehicles takes decades. Private car use has been increasing, with associated costs from high local air pollution.	Continue to encourage the shift towards low and zero-carbon vehicles, including with incentives to invest in recharging stations particularly in remote areas. Carefully anticipate and potentially compensate distributional effects. Provide and encourage the development of user-friendly and low-carbon alternatives to private car use, particularly outside city centres, by making active mobility, public transport, low-carbon shared mobility more attractive and adapt land management in order to reduce the need for private car use.
Ramping up mitigation in agriculture
Emissions from agriculture are disproportionally high relative to the share of the sector in the economy and are among the most cost-effective to reduce.	In the short term, maintain and step up ambitions for environmental and climate standards, improvement of emission monitoring towards farm-level assessment and restoration of carbon-rich lands. Build an ambitious national agriculture strategy making the most of the margins provided by the new EU Common Agricultural Policy (CAP) to enhance payments for ecosystem services.
The agriculture sector is embedded in an international and EU trade system and therefore particularly exposed to leakage.	Prioritise action at the EU level and support further reform of the Common Agricultural Policy to include ambitious climate (and environmental) measures, and more particularly a large shift of EU subsidies from agricultural land to ecosystem services. If needed, avoid emission leakage by temporarily providing rebates based on past outputs.
Postponing action in the agriculture sector would make climate objectives harder to reach in the longer term and increase the abatement burden for other sectors.	Accelerate action and discussions with stakeholders to reduce emissions in the short term through the agricultural national strategy due in 2021, with a focus on reducing N₂O and land restoration. Set up a pathway towards GHG emission pricing in the medium term by approving a plan with specified milestone and a clear time horizon, built together with stakeholders.
Dietary choices and the mitigation of food loss and waste are critical for mitigating global emissions.	Engage discussions with a broad range of stakeholders on means to reduce emissions, including labelling, school-based education, setting examples in public catering, agreements between local authorities and producers for food provision or waste management.

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Note

← 1. Including the costs of CO₂ emissions, air pollution, noise, congestion, accidents, wear and tear.

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