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Denmark´s Second National Communication on Climate Change

Annex H: Description of the Danish energy-, fuel- and vehicles tax system

Energy price levels have a significant impact on the efficiency improvements and the substitution possibilities between fuels that the economic agents of the economy will enter into voluntarily, or may be stimulated to enter into, by various government policies.

Energy taxes

In Denmark, especially in the residential sector, energy taxes have been implemented on fossil fuels through fuel taxes and on electricity through taxes levied on consumption. The ensuing energy savings in the residential sector, relative to other sectors, is a strong indication of the efficiency of high energy prices as an instrument for reducing energy consumption.

Consumer prices

When international fuel prices fell in the middle of the 1980s, consumer prices for private consumers were kept high in Denmark by fuel tax increases in order to sustain the long-term energy policy. Despite this, most consumer prices have in fact been declining in real terms, since the beginning of the 1980s.

Until the beginning of the 1990s, industry and the commercial sector have largely been exempted from energy taxes, mainly for reasons of international competitiveness.

Energy and CO₂ taxes

After the energy taxation reform in 1993, a rather elaborate system of taxes was replaced by a combined energy and CO₂ tax. The level for private households is USD 14,000 per Gg CO₂, or approx. USD 5.7 per GJ. Industry and the commercial sector only paid the CO₂-tax, and received a 50% tax reduction. Due to special reimbursement for energy-intensive enterprises, the average tax burden on industry was effectively USD 5,000 per Gg CO₂. This tax reform was replaced by two subsequent reforms - a Green tax reform and Green taxes in Industry.

Green tax reform

The general tax reform, which is being phased in over the period 1994 - 98, will gradually shift the balance in the tax system away from income taxation towards environmental taxation. As a result, the energy taxes related to coal, electricity, diesel and petrol are increasing during the period.

All in all, the reform will increase the average tax for heating and power in the residential sector from a level corresponding to approx. USD 64,000 per Gg CO₂ to approx. USD 86,000. Industry and the commercial sector are not affected by the increased energy taxes.

Since the energy and CO₂ taxes are subject to VAT (25%) , a 1% increase in energy or CO₂ taxes will consequently increase the price by more than 1%.

The rather high level of Danish taxes is as the equivalent CO₂ tax illustrated in Fig. H.1 for some central energy types. Note the relatively high weight of the energy taxes as compared to the CO₂ taxes.

Fig. H.1. Some central Danish energy and CO₂ taxes in 1996 expressed as the equivalent CO₂ tax.

Green taxes on commerce and industry

In 1995, the energy tax on commerce and industry was revised. In the new legislation, green taxes on energy consumption by commerce and industry will be phased in during the period 1996 - 2000. In addition a SO₂ tax amounting to USD 2.9 per kg SO₂ was introduced on all sectors.

A tranche of CO₂ and SO₂ taxes is combined with recycling of revenue through investment subsidies aimed at promoting energy efficiency and a reduction in other company taxes. Overall, the package is intended to be revenue neutral.

In 1998, the tax on space heating will reach a level corresponding to USD 86,000 per Gg CO₂, i.e. the same level as in the residential sector.

For reasons of competitiveness, taxes on energy used in production are lower and differentiated depending on the type of process. Light processes, mainly prevalent in the commercial sector, reach a level of USD 13,000 per Gg CO₂ in the year 2000. Heavy processes, i.e. energy-intensive processes mainly in industry, are taxed at USD 3,600 per Gg CO₂. Approx. 700 companies with the most energy-intensive processes have the option to enter an agreement with the authorities concerning energy-saving measures. In return, lower tax rates are levied on these companies, i.e. USD 9,700 and USD 430 per Gg CO₂ in year 2000 for light and heavy processes, respectively.

The green taxes in the industrial and commercial sectors will contribute to a narrowing of the tax gap between residential and commercial energy consumption. All in all, the energy and CO₂ taxes have occupied an increasing influence in the Danish energy policy. The development in some energy and CO₂ central taxes is shown in Fig. H.2.

Fig. H.2. Development in some central Danish energy and CO₂ taxes (current prices).

Recent development in taxation of vehicles and fuels in Denmark

In May 1997 the Danish Parliament passed a package of changes in the existing taxation system for motor vehicles and fuels. Three of these changes are directed towards improvement of energy consumption and air pollution.

Passenger cars

In the existing system the car owners have to pay a yearly tax based on the weight of the car. 7 different classes are defined. A typical vehicle in Denmark belongs to the group 801 - 1,100 kg with a yearly rate of USD 323 for petrol cars and USD 496 for diesel cars. From 1st July 1997 the yearly tax will be based on energy consumption measured according to directive 93/116 in stead of weight. 24 classes are defined for both petrol and diesel cars. Examples of selected classes (basis 1997) are given below (the figures will be increased with inflation plus 1.5% every year):

Class Km pr. litre Yearly tax (USD)

It is estimated that the new system will give approximately the same income as the earlier one.

Petrol

To day the taxation of unleaded petrol is fixed to USD 0.47 pr litre (excluding 25% VAT). For leaded petrol the figure is USD 0.57 pr litre. As a result leaded petrol has been removed from the market since March 1994. Since 1995 incentives (USD 0.004 pr litre) have been given to petrol delivered from stations equipped with vapour recovery systems. From 1st of January 1998 (or after approval from the Commission) differentiation will be introduced according to the content of benzene. The following figures have been decided:

Light commercial vehicles

In the new system incentives will be given to light commercial vehicles for which it can be demonstrated that they meet the proposed future EURO 3 (2000) or EURO 4 (2005) standards. The reference is the figures given in the Commission proposal COM(97) 61, dated 20th of February 1997.

The Danish system operates with 4 classes based on gross vehicle weight. Examples on the reduction in the yearly taxes for class 1 and 4 are given below:

The system will enter into force 1st of January 1998 (or after approval from the Commission). It is the intention to introduce the same system for passenger cars at a later date.

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