Economic Instruments in Environmental Protection in Denmark

9. Subsidies

9. Subsidies
9.1. Principles and strategies
9.2. An overview of Danish environmental subsidies
9.3. The environmental subsidies
9.3.1. Water and the aquatic environment
9.3.2. Cleaner technology and waste recovery
9.3.3. Energy
9.3.4. Subsidies to promote CHP
9.3.5. Subsidies to promote the utilisation of renewable energy sources
9.3.6. Promotion of energy savings/reduction of CO₂
9.3.7. Transportation
9.3.8. Agriculture
9.3.9. Environmental research & development programmes
9.3.10. Other environmental subsidies

9. Subsidies ^[1]

This chapter provides an overview of the environmental subsidy schemes that are in effect in Denmark. The chapter includes also a brief description of the principles that govern the use of subsidies and their historical developments.

Definition

In a narrow sense, subsidies may be defined as the provision of financial assistance to producers. In this sense, subsidies may either aim to encourage producers to reduce their environmental pressure, or they may contribute to reduce compliance costs related to a specific direct environmental regulation. The latter would thus lead to enhanced compliance.

In a wider sense, subsidies may also be granted to a wide range of public and private organisations and institutions. In this sense, subsidies also have a broader scope, where they can be said to aim to promote an environmentally sound development throughout society. Some receivers of subsidies may thus act on a broad societal basis in terms of fulfilling a role as catalysts for an environmentally sound development. The range of subsidy schemes and their scope is thus quite broad. It ranges from small-scale local awareness building activities carried out by NGOs, to comprehensive subsidy schemes offered to specific firms.

Delineation

The Danish use of subsidy schemes has a wide scope. Subsidy schemes serve many different purposes, and are targeted at different groups of society. This chapter describes the major schemes applied in Denmark. The chapter, however, does not consider two specific groups of subsidy schemes:

Categorisation

Some subsidies relate to environmental media directly. This includes, for example, subsidies that aim to improve the state of the aquatic environment. Other subsidies are targeted at specific economic sectors such as agriculture. Further, there are several more general subsidies. For example, subsidies that aim to promote cleaner technology.

This chapter will be organised around the following grouping of the subsidies:

9.1. Principles and strategies

No formal subsidy policy

There is a wide range of programmes that authorise the use of subsidies. There is, however, no overall formal policy to provide the general principles and overall guidelines to use. Still, environmental subsidy schemes have been in use in Denmark for almost three decades. During this long period of time, principles have evolved on a more pragmatic and ad-hoc scale. An overview is provided in Table 9.1.

Table 9.1
Core features of the Danish use of environmental subsidies

From general compensation towards strategic subsidy schemes

New environmental regulations are often accompanied by the launching of subsidy schemes. The schemes typically aim to offset part of the negative financial implications of the regulations in question. This has been a typical feature since the very beginning of environmental regulation in Denmark. For example, several subsidy schemes were approved immediately after the enactment of the Environmental Protection Act (1973). Further, the adoption of the CO₂ tax in the mid 1990s was followed by the launching of a comprehensive subsidy schemes (see section 9.3).

However, a trend can be observed where subsidy schemes are increasingly used in a pro-active manner. While many still provide a general compensation, schemes are increasingly being launched, which can be characterised as strategic tools. Such schemes are typically implemented independently from other actions. They may aim to promote, for example, cleaner technology, innovation, and environmental awareness. Other examples of strategic schemes are subsidies to promote ecological agriculture and environmental friendly lifestyles.

Temporary use of subsidies depending on actual problems

In most cases, subsidies are of a temporary nature, and tend to have a lifetime of 5-10 years. The use of a time constraint is often important to accelerate the effects from the schemes.

Subsidies may relate to macro economic objectives

In some cases, an environmental subsidy scheme can have dual environmental policy targets, as well as macro economic objectives. Some subsidies to promote energy efficiency and cleaner technology are thus motivated by a number of concerns. These concerns relate to the provision of a sound environmental development, the encouragement of Danish energy self-sufficiency, and support to the development of a strong and competitive Danish environmental industry. Another example is the subsidy scheme for “Green Jobs” (see section 9.3), which explicitly addresses both environmental and labour market concern.^[2]

Simultaneous introduction of subsidies and environmental taxes

Policy-packages are well known in Denmark. The concept implies that environmental taxes are introduced simultaneously with related subsidy schemes – a stick-and-carrot approach. Typically, such packages will include the new environmental tax and the subsidy scheme. They may also provide for the funding of research & development, and may include certain regulatory components as well. Policy packages have been used to reduce the use of ozone depleting substances and of pesticides. The CO₂ tax is also part of a policy package. Earmarking has, however, never been applied, thus there is never any direct and legally warranted relation between the revenue from the tax, the funds available for subsidies, and for research and development.

Policy-packages have proven efficient to enhance the acceptability and effectiveness of specific taxes and other actions.

No earmarking of revenue

Revenues from environmental taxes always enter the general budget. Consequently, funds for subsidy schemes are always allocated from the state budget.

9.2. An overview of Danish environmental subsidies

For the sake of simplicity, this overview seeks to categorise the Danish subsidy schemes according to the categories listed in the previous section. It should be noted though, that the categorisation is, to some extent, a rather rigid presentation, because many subsidies actually serve more than one purpose.

By late 1998, there were a total of 36 environmental subsidy schemes in effect in Denmark. The majority of the schemes are directed at the energy sector and towards cleaner technology objectives. More than DKK 3 billion were allocated to the environmental subsidies in 1998. 67% of those funds were allocated to the energy sector.

Table 9.2

Number of subsidies within different categories

Figure 9.1

Total subsidy sum allocated to the seven categorises of subsidies

The high share of subsidies to the energy sector to some extent reflects that the sector is also heavily burdened with environmental taxes, including energy taxes. For many years, Denmark has given a high priority to the need to reduce the environmental pressure from energy use.

Some of the agriculture subsidies are motivated by an intensified political effort to improve the state of the aquatic environment. This effort has resulted in both stricter direct regulations and in the pesticides tax. The subsidy schemes aim, among other things, to encourage organic farming in Denmark.

A relatively large share of the subsidies is allocated to cleaner technology and waste recovery purposes. This can, among other things, be explained by an increased political focus on prevention and cleaner technology. These issues are, for example, highlighted in the Environmental Protection Act. Furthermore, the enforcement of the waste tax was accompanied by a subsidy scheme to promote waste recovery, although the tax and the subsidy were not formally tied to one another.

9.3. The environmental subsidies

9.3.1. Water and the aquatic environment

There are four subsidy schemes that aim to improve the state of waters and the aquatic environment. The monetary allocations amounted to a total of MDKK 83.3 in 1998. All four schemes are administered by the DEPA; either solely or in co-operation with other bodies.

Table 9.3
Subsidies in the areas of water and the aquatic environment

The Water Fund is the largest single scheme, and supports small water works. The Fund is motivated by a desire to ensure that the small water works will continue to be able to supply tap water in sufficient amounts in the future. In most parts of Denmark, ground water is used as tap water. During recent years it has become apparent that the quality of the Danish ground water may be threatened by pesticides and nitrate. This will burden the small water works substantially, because substantial investment might be needed to respond to such problems. The Water Fund is targeted at waterworks that face such unforeseen costs as a result of polluted ground water.

9.3.2. Cleaner technology and waste recovery

Cleaner technology and waste recovery^[3] constitute important elements of a preventive environmental policy. Currently, nine subsidy schemes are in effect in this area. Most of the schemes support the priorities laid down in the Government Programmes for Development of Cleaner Technology and Waste Recovery. A total of MDKK 202.7 was allocated to these schemes in 1998.

Table 9.4
Subsidies in the areas of cleaner technology and waste recovery

There are numerous possible applicants (such as enterprises, research institutions, consultants, and industry organisations) to these subsidies. However, projects within the Technology Scheme may only be initiated by DEPA.

Cleaner technology and waste recovery are specific policy areas within the Ministry of Environment and Energy. Hence, it becomes natural that most of the subsidies are the sole responsibility of the DEPA.

9.3.3. Energy

Subsidies are used extensively in the Danish energy sector. Chapter 11 on the energy sector provides a more comprehensive description of this area.

The first subsidy scheme was introduced in 1977. This scheme promoted energy savings in the residential sector, and offered assistance in terms of partial financing of the investment costs. This could, for example, be for the insulation of houses.

A major focus of the initial schemes was to reduce Denmark’s dependency on imported fuels. The major objectives of the subsidies that are currently in place are to promote cleaner fuels, to encourage energy savings in general, and to reduce CO₂ emissions.

Today, there are fourteen different energy subsidy schemes in force. In total, more than 2 billion DKK are allocated to these schemes. The subsidies can be grouped into three main categories:

Table 9.5
Danish energy subsidies in 1998

9.3.4. Subsidies to promote CHP

The promotion of CHP is a cornerstone of Danish energy policy. Its prominent position is motivated by the fact that CHP yields higher overall energy efficiency.

During the 1990s, a number of subsidy schemes were implemented to improve the financial performance of combined heat and power production vis-à-vis other types of energy production. Some schemes are fairly general, such as the support to electricity production and to industrial CHP. Other schemes support more specific aims. Among those are the subsidies that support the marginal extension of existing networks, and those that support the connection of specific types of customers to existing networks.

Subsidy to electricity production

The single largest subsidy scheme is the one that provides support to electricity production at decentralised CHP plants when production is based on renewable sources of energy or natural gas. Initially, all plants that fulfilled these conditions received a subsidy equivalent to the CO₂ tax (0.1 DKK/kWh produced). However, the subsidy structure was changed in 1996.

Since 1996, the subsidy scheme has been differentiated. Natural gas fired CHP plants and industrial CHP plants are now entitled to a reduced subsidy amounting to 0.07 DKK/kWh. CHP plants based on renewable sources of energy are entitled to an increased subsidy amounting to 0.27/kWh.

All decentralised CHP plants are entitled to the subsidy. It does not, however, apply to large CHP plants. There is no time limit except for industry. Industrial CHP plants are entitled to the subsidy for a maximum period of six years.

The rationale for the scheme is to be found in the construction of the CO₂ tax. In the case of electricity, the CO₂ tax is imposed on production, rather than the inputs. The CO₂ tax rate for electricity has, however, been set on the basis of emission factors for coal-based electricity production. Consequently, electricity production based on renewable energy sources and natural gas is burdened with a CO₂ tax rate that is too high.

1996 changes in subsidy structure

The changes in 1996 were partly motivated by the fact that the previous level of 0.1 DKK/kWh actually overcompensated natural gas based electricity production, because the combustion of natural gas does emit small amounts of CO₂. Consequently, the level of 0.07 DKK/kWh was estimated to be a more appropriate level to achieve 100% compensation. The change was also motivated in a desire to provide a further encouragement to increase the use of renewable energy sources. Lastly, the change related to CHP should be seen in conjunction with the whole CO₂ package. Thus, the recycling scheme associated with the CO₂ tax allows for the provision of subsidies to investments in industrial CHP plants. The subsidy may amount to a maximum of 30% of the investment expenditures.

Subsidy to conversion of district heating plants

Subsidy schemes to support the conversion of district heating plants are a result of a decision in 1990 that the majority of Danish district heating plants should be converted to CHP. The subsidies allow for the provision of support to a number of identified coal-based plants. They aim to support the conversion to CHP and the construction of bio-fuels based CHP.

The decision in 1990 actually implies that the coal-based plants, some of which are fairly new, are forced to convert to energy production based on natural gas or bio-fuels. Consequently, the subsidy scheme had a strong compensatory purpose also.

Subsidies to extension of district heating networks

Subsidies are provided for the extension of heat distribution networks. These subsidies aim to support the efforts to extend district heating networks based on CHP.

9.3.5. Subsidies to promote the utilisation of renewable energy sources

There are two types of subsidies that aim to support the use of renewable energy:

9.3.6. Promotion of energy savings/reduction of CO₂

The last major group of energy related subsidies are the schemes that aim to promote general energy savings or to reduce CO₂ emissions. Subsidies are provided for investments that lead to energy savings. The schemes are mainly targeted at households or industry.

Energy savings in households

The aim of the subsidies is to support energy savings in households. The areas of subsidisation have been substantially narrowed, and today the subsidy only applies to retirement pensioners. The previous, much wider scheme, was quite successful. It has been one of the major driving forces behind the fact that most houses are very well insulated today. Another important fact is that building standards for new houses include insulation requirements. Consequently, there is no perceived need for a wide scheme to support the insulation of houses.

Subsidies are still provided to support the conversion of households’ heating systems. The subsidies mainly aim to support the conversion of electrically heated houses to other types of heating, and to support the conversion and connection of old houses to district heating networks.

The subsidies to support the conversion from electricity based heating are motivated by electricity’s low thermal efficiency, compared with other forms of heating. There are still quite a few households in Denmark that use electricity based heat, and the conversion to other sources of heat necessitates fairly large investments, for example in radiators.

Energy savings in the industry

As a part of the recycling scheme of the CO₂ package, investments in energy saving measures are eligible for support. This possibility includes the previously mentioned investments in industrial CHP, but subsidies are also awarded to other actions such as consultancy services, and investments in equipment that increase the energy efficiency of the recipient.

9.3.7. Transportation

Two environmental subsidy schemes are in effect, in the field of transportation. In total, the budget for the two schemes amount to 97 MDKK.

The Traffic Scheme aims to reduce the environmental impact from transportation, through development and demonstration projects. The competent authority is the Ministry of Transport.

The integration of environmental concerns into Municipal Traffic Planning is a fairly small subsidy scheme. It aims to provide an incentive for municipalities to develop local actions plans in the field of traffic and environment. The competent authority is the Ministry of Environment and Energy.

Table 9.6
Subsidies in the area of transportation

In addition to these subsidies it should be noted that public transportation is heavily subsidised. The general budget for 1998 allocated MDKK 335 to be used for fare reductions in public transportation. However, this support is motivated in a number of concerns, including income distribution objectives.

9.3.8. Agriculture

Four fairly comprehensive subsidy schemes are in force in the field of agriculture. Their total budget is MDKK 256. This is more than 8% of the total budget for environmental subsidy schemes.

Almost all of the schemes are pro-active and strategic in the sense that they are not linked content-wise to corresponding taxation schemes. There is, however, some relation between the pesticides tax, and the subsidies to promote environmental-friendly cultivation practices and organic farming. However, the link is fairly weak compared to other schemes.

Table 9.7
Subsidies in the area of agriculture

The Ministry of Food, Agriculture, and Fisheries administers most of the subsidies. Only the scheme for “Activities concerning pesticides” is administered by DEPA. It aims to improve the state of knowledge on pesticides and their environmental impacts.

9.3.9. Environmental research & development programmes

Four subsidy schemes aim to support environmental research and development in general. Their annual budget is 168 MDKK.

Table 9.8
Subsidies to support environmental research and development

The Danish Environmental Research Programme aims to strengthen the state of knowledge underlying political decision-making processes. It is a co-ordinated programme. A number of ministries participate in the programme, such as the Ministry of Labour; the Ministry of Environment and Energy; the Ministry of Food, Agriculture and Fisheries; the Ministry of Health; the Ministry of Research; and the Ministry of Foreign Affairs.

The National Environmental Research Institute is an independent research institution under the Danish Ministry of Environment and Energy. As a research institute, NERI is, however, independent of the political/administrative system. This independence is warranted through legislation.

The Danish Urban Ecological Centre is a knowledge centre that is currently being established. The activities of the centre focus on development and demonstration projects, and aims to support the greening of everyday urban life. Likewise, the North-West Jutland Centre for Renewable Energy is a knowledge centre that is currently being established. The Centre will promote and develop the use of renewable energy sources.

In addition to the above, two other national research programmes – the Danish Energy Research Programme and the Danish Building Research Programme – attach quite a prominent role to environmental issues. However, their main focus is not environmental.

9.3.10. Other environmental subsidies

Three subsidies are placed in this category.

Table 9.9
Other environmental subsidies

There are some similarities between the Green Fund and the Fund for Creation of Green Jobs. They are both administered by the Green Secretariat in the Ministry of Environment and Energy, and they both aim to encourage institutions and individuals to initiate various environmental projects. The Fund for Creation of Green Jobs is specifically targeted at the creation of green jobs, whereas the Green Fund promotes the development of a sustainable culture and sustainable lifestyles in general.

Notes:

1. This chapter is based on various materials from the Danish Environmental Protection Agency on subsidies, 1999, materials from the Energy Agency on subsidies, various laws on subsidies, Danish State Budget, 1998; and AKF Rapport October 1997 on taxes and subsidies in the energy sector.

2. This approach of combining measures is in accordance with the theoretical literature on how to bring about an ecological modernisation of societies. See for instance “National Environmental Policies. A Comparative Study of Capacity-Building”, M. Jänicke & H. Weidner (eds.), Springer, 1997.

3. The use of the term “recovery” here does not include incineration with heat recovery, which is generally included in the concept.