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Denmark's Climate Policy Objectives and Achievements

4. Analysis of the contribution of domestic measures and use of the Kyoto mechanisms

• 4.1 Evaluation of projected progress in emissions reduction by measure
  • 4.1.1 The Effort Analysis
• 4.2 Achievement of targets under the Kyoto Protocol in terms of overall greenhouse gas “with measures” projections

4.1 EVALUATION OF PROJECTED PROGRESS IN EMISSIONS REDUCTION BY MEASURE

The result of the latest baseline projection of Denmark's greenhouse gas emissions and removals – “with (existing) measures” projection – is shown in section 3.2 of this report. The conditions and assumptions underlying this baseline projection include estimates of the effects of existing measures on greenhouse gas emissions. The result of the baseline projection is thus the result of combined quantitative estimates of the effects of existing policies and measures on greenhouse gas emissions.

Prior to this analysis, quantitative estimates of the effects of individual measures on greenhouse gas emissions were often limited to exante estimates prior to adoption of the measures. In a few cases, the implementation of a measure was followed by an ex-post evaluation. A major reason that only a few ex-post evaluations of individual measures have been carried out is that it is often difficult to clearly attribute an observed greenhouse gas reduction to a particular measure, since many areas (sectors/sources) are affected by several measures at the same time.

Despite these difficulties, Denmark has in 2005 completed an analysis of the impact of selected initiated measures on greenhouse gas emissions as a result of Denmark's efforts between 1990-2001. The analysis was published in the report “Danmarks udledning af CO₂ – indsatsen i perioden 1990-2001 og omkostningerne herved” (Denmark's CO₂ emissions – the effort in the period 1990-2001 and the associated costs) from the Danish EPA, no. 2, April 2005²⁰. In this analysis (hereafter referred to as the Effort Analysis), the effects of a number of measures have been estimated

– both for 2001 and the period 2008-2012. The latter case, is a socalled “without measures” projection without the effect of measures since 1990 – i.e. estimates of what the volume of average annual greenhouse gas emissions would have been in 2008-2012, if the measures initiated prior to 2001 had not been initiated.

Please note that the statistical base for the Effort Analysis has included the emissions inventory submitted to the EU and the UN in 2003 (covering 1990-2001) and the “with measures” baseline projection (2008.2012), i.e. without additional measures, published in February 2003 together with the Government's Climate Strategy.

The Effort Analysis also includes estimates of the costs of some of the individual measures. The analysis is described in more detail in the next section.

4.1.1 The Effort Analysis

Since 1990, a broad range of national policies and measures have been implemented in Denmark that have impacted on emissions of greenhouse gases. Some initiatives have been implemented with CO₂ reduction as the primary aim, while other initiatives have been motivated by other aims.

The Effort Analysis reports on Denmark's effort related to the reduction of greenhouse gas emissions undertaken on national level in the period 1990-2001, and the costs of this effort.

Under the Kyoto Protocol and the EU's subsequent Burden Sharing Agreement, Denmark has undertaken to reduce greenhouse gas emissions by 21% in 2008-2012, compared to 1990 levels²¹.

One of the additional requirements of the Kyoto Protocol is that the use of flexible mechanisms has to be supplemental to domestic action. The calculation of the total Danish effort is relevant in this connection.

It is therefore relevant to consider the effects of Denmark's efforts both in relation to the Kyoto accounting, and in relation to the total effect - regardless of whether the emissions reductions have been in Denmark or abroad.

In relation to the Kyoto accounting, which is based on the CO₂ impact associated with the specific emissions in Denmark, it is expected that part of the effect of the energy sector initiatives will be offset by increased electricity exports. This means that the CO₂ emissions linked to the exported electricity component have a negative impact on Denmark's Kyoto accounting, rather than on that of the electricity importing country.

Choice of measures

The Effort Analysis report aimed to include the most important environment and energy policy measures implemented in the period 1990.2001 that have had a significant effect on greenhouse gas emissions.

Please note that many of the measures have not been planned and adopted with the aim of contributing to the fulfilment of Denmark's Kyoto obligation, but derive from the political objective from 1990 (in the “Energy 2000” action plan) of reducing CO₂ emissions from Denmark's energy consumption by 20% between 1988 and 2005. Thus the Effort Analysis does not evaluate the implemented initiatives against their original objective, but rather in relation to reducing greenhouse gases, and how much the implemented initiatives will contribute to the binding Kyoto objectives that exist today.

The chronological definition of the initiatives is not always straightforward. Some initiatives were introduced prior to 1990, but the implementation (and associated reduction in greenhouse gas emissions) has taken place after 1990. This is the case, for example, for the conversion to natural gas and for Action Plan for the Aquatic Environment I. The calculations in the Effort Analysis only include the CO₂ reductions that have taken place after 1990.

Denmark's effort in the period 1990.

The Effort Analysis evaluates the effects of measures implemented in the period 1990-2001 in relation to the actual emissions in 2001, and in relation to the expected average annual emissions in 2008-2012, as laid down in the baseline projection used as a basis for the Danish Climate Strategy from February 2003 (i.e. the previous `with measures' projection, which only took into account the effects of measures implemented or adopted before the Climate Strategy). Initiatives adopted after 2001 are therefore not included in the results of the Effort Analysis, and hence these results cannot be used as a total status report for the Danish efforts in relation to the Kyoto target.

The Effort Analysis reports on and calculates the Danish initiatives by considering their total effect, regardless of whether they have resulted in reductions in emissions in Denmark or abroad. However, the analysed initiatives have also been assessed in relation to Denmark's international obligations under the Kyoto Protocol, based on the CO₂ impact associated with the specific emissions in Denmark. Figure 4.1 illustrates how much greater Denmark's CO₂ emissions would have been in 2001 and in 2008-12 if the initiatives analysed had not been implemented.

As the Figure 4.1 shows, the initiatives under consideration are estimated to give rise to CO₂ reductions of approx. 20.6 million tonnes per year in the 2008-12 period. This expresses the total effect of Denmark's effort in the 1990-2001 period. It also shows (see below) that part of the effect of energy sector initiatives is expected to be offset by increased electricity exports, such that in relation to the Kyoto emission accounting, the initiatives under consideration are estimated to lead to CO₂ reductions of approx. 15.6 million tonnes per year in the 2008-12 period.

FIGURE 4.1: DEVELOPMENTS IN TOTAL CO₂ EQUIVALENT EMISSIONS, WITH AND WITHOUT THE MEASURES UNDER ANALYSIS (PRODUCTION-BASED CALCULATION)

1 The reduction requirement in the figure has been calculated as Denmark's legal obligation. i.e. the figure has not been corrected for the particularly large electricity imports in the 1990 base year. However, in 2002 the (Environment) Council and the Commission adopted a political declaration stating that the calculation of the assigned amounts (measured in tonnes) in 2006 shall take into account Denmark's statement in connection with the Burden Sharing Agreement in 1998, e.g. stating that Denmark's reductions shall be seen in relation to an adjusted 1990 level. When this factor is taken into account, the reduction requirement would be reduced by up to 5 million tonnes annually.

2 The reduction calculated in 2001 includes the full effects, i.e. it includes the CO₂ reductions that domestic actions have led to in other countries.

A number of the initiatives implemented have been aimed at reducing CO₂ emissions from Danish electricity consumption. However, Danish electricity production is integrated into the Northern European electricity market, and the effect of initiatives in the electricity sector are – and are expected to continue to be – partially offset by increased exports of fossil fuel electricity production from Denmark. Estimation of the size of this effect is subject to extreme uncertainty. Based on a rudimentary assumption that 50% of the effects of the electricity sector initiatives will be offset by electricity exports, approx. 5.0 of the 20.6 million tonnes of CO₂ will be offset by increased electricity exports. This estimate is subject to significant uncertainty and depends, for example, on the future expansion of production capacity in the Scandinavian countries (cf. the background report, “Energipolitiske tiltag i 1990'erne -Omkostninger og CO₂-effekt (Energy policy initiatives in the 1990's: Costs and CO₂ effects) from the Danish Energy Authority, 2005²²).

The Effort Analysis' `without measures' calculation of CO emissions per sector is shown in Table 4.1 (below). In Denmark's Fourth National Communication on Climate Change, the estimated effects of all of individual measures analysed, can be found.

The Effort Analysis estimates that Denmark's “without measures” COemissions in 2008-12 would have been 95.7 million tonnes CO₂ annually. Denmark's legal reduction obligation of 21% in relation to 1990 levels corresponds to emissions in 2008-2012 being reduced to approx.

54.9 million tonnes CO₂ annually20. Denmark would have therefore fallen short of this goal by 40.7 million tonnes CO₂ annually in 2008-2012 if the initiatives under consideration had not been implemented.

TABLE 4.1: OVERVIEW OF TOTAL GREENHOUSE GAS EMISSIONS AND THE TOTAL REDUCTIONS DIVIDED BY SECTOR (FOLLOWING THE SECTOR DIVISION OF THE CLIMATE STRATEGY) IN MILLIONS OF TONNES OF CO₂ EQUIVALENTS PER YEAR

1 1990/95 indicates the emissions in the base year. CO₂, CH₄ and N₂O emissions have 1990 as the base year, while the industrial gases have 1995 as the base year. No corrections have been made for electricity imports/exports.

2 Source: Emissions figures (base, current in 2001 and projections for 2008-12: Danish Ministry of the Environment 2003)

3 These 16.7 million tonnes CO₂ per year include the full effects, i.e. they include the CO₂ reductions that domestic actions have led to abroad.

4 For the energy sector measures the full reduction is specified. The Danish Energy Authority estimates that approx. 5.0 of these 20.6 million tonnes CO₂ annually will be offset by increased electricity exports based on the calculation assumptions of the climate strategy.

In summary, the effect in 2008-2012 of the initiatives analysed would be 15.6 million tonnes annually, after taking into account that 50% of the electricity sector initiatives are expected to be offset by electricity exports.

As mentioned above, the total reduction effects, in Denmark and abroad, from the implemented domestic initiatives can be estimated at 20.6 million tons annually. One can therefore conclude that Denmark has already made significant progress domestically.

Extensive Danish electricity imports from Norway and Sweden in the 1990 base year led to unusually low Danish emissions. If the effects of these imports are compensated for, it would allow Denmark to reduce Danish emissions by approx. 5 million tonnes less than specified above.

Please note that in 2002, the (Environment) Council and the Commission adopted a political declaration stating that the calculation of the permitted emission volumes (measured in tonnes) in 2006 shall take into account Denmark's statement in connection with the Burden Sharing Agreement in 1998, i.a. stating that Denmark's reductions shall be seen in relation to an adjusted 1990 level.

Costs of measures

The costs of the CO₂ reduction have also been estimated in the Effort Analysis, but only for selected measures. The choice of these measures has largely been governed by which measures CO₂ costs had previously been calculated for.

The estimate is based on a cost-benefit analysis of the total costs and benefits for each measure, excluding the value of the reduction in CO₂ emissions.

An expression of the total socio-economic costs per tonne of reduced CO₂ emissions (also called the initiative's CO₂ shadow price) can be found by comparing the total net costs of the initiative against the estimated resultant CO₂ reduction. The total CO₂ reduction has been used,

i.e. regardless of whether this CO₂ reduction took place in Denmark or abroad (consumption-based calculation).

This corresponds to the method used in previous analyses carried out by the Danish Ministry of Finance and others in 2001, by the Economic Council in 2002, and in cost estimations used in the Government's Climate Strategy from 2003.

Please note that the introduction of the EU's CO₂ quota scheme from 2005 changes the framework conditions for large parts of the energy sector and energy-intensive industry. Therefore, the calculation method cannot be used to assess future measures within these areas where quotas have been imposed. The introduction of the quota scheme means that CO₂ emissions from the sectors subject to quotas, including electricity production, will be unequivocally determined by the total quota measured in accordance with Kyoto accounting. The calculations of the shadow values for the areas subject to quotas, up until the 2008-12 period where the new Kyoto regime will have entered into force, thus serve purely illustrative purposes.

The introduction of the open international electricity market since the late 1990's means it is no longer certain that for example such as the expansion of renewable energy will reduce CO₂ emissions from Danish electricity producers correspondingly, as it may be an advantage for producers to export electricity rather than reduce production. Where this is the case, CO₂ emissions will be reduced in other countries instead. This is a major issue in relation to calculating how great an effect the measures will have in relation to the baseline projection.

Please note that the CO₂ allowance system will increase the European electricity price and thus increase the profitability of electricity savings compared to the situation today.

Note that no attempt has been made in the Effort Analysis to incorporate any positive effects on security of supply, technology development and commercial development, nor has it been possible to include the value of all environmental impacts. This is due to the difficulty of quantifying and valuing these effects, which in principle should be included.

The value of the reductions in SO₂ and NO_x emissions resulting from the measures has been included, but the valuation of these physical reductions is very uncertain. This report uses the same valuations as the Climate Strategy. Since the calculations were carried out, the National Environmental Research Institute, Denmark (NERI) has published new, higher valuations for the cost of the negative impacts of SO₂ and NO_x emissions. Using these new, up-dated assumptions from NERI – and with nothing else changed – the calculations would have resulted in lower CO₂ shadow prices for several measures.

Table 4.2 shows that the shadow costs for the selected measures vary substantially, and for most of the measures are higher than the indicator of DKK 120 per tonne CO₂ specified in the Government's Climate Strategy. In the energy sector, the “Grant for conversion of apartments for the aged to cogenerated heat and power”, “Grants for solar heating, heat pumps, and biomass” and “Building labelling” measures are estimated to have been associated with the highest costs in relation to their CO₂ reduction, while the “Grant to cover CO₂ tax (agreement scheme)” and “Expansion in decentralised cogeneration of heating and power” have been associated with the lowest costs.

TABLE 4.2: HISTORICAL CO₂ SHADOW PRICES FOR SELECTED MEASURES (CONSUMPTION-BASED CALCULATION)

1 The shadow price has been calculated based on the total CO₂ reduction.

2 This measure has also lead to improved comfort for those who have changed to CHP. This is believed to have been part of the political motive for the measure. However, no attempt has been made to value this gain.

3 Weighted average. This shadow price covers three initiative areas with very different shadow prices. Solar heating (DKK 5,700 /tonne CO₂ ), Heat pumps (DKK 650/tonne CO₂) and Biomass (DKK 600/tonne CO₂).

4 The effect and the shadow price have been estimated for 2001 based on the nominal tax increase from 1990 to 2001. Assuming there are no changes in demand, and constant real prices and taxes, it will also be possible to use this estimate for the 2008-12 period. Note that these assumptions are not fully compatible with the assumptions about changes to fuel prices associated with the energy measures.

5 The CO₂ reduction has been calculated for all fuel consumption, i.e. fuel consumption for both passenger cars and trucks. However the shadow price has only been calculated for fuel consumption in passenger cars, corresponding to the calculations carried out in connection with the Government's 2003 Climate Strategy.

6 Industrial gases are used for many purposes. The illustrated shadow price has been calculated, as an example, for the costs of replacing HFC gases with more environmentally-friendly refrigerants in industrial refrigeration plant, the biggest consumption group within the affected industrial gases.

Note that the calculations are generally subject to significant uncertainty and it has not been possible to include all the socio-economic effects in the calculations. For example, the benefit of increased comfort associated with the transition to CHP has not been included in the calculation of the net costs for the “Grant for conversion of old dwellings to cogenerated heat and power” initiative. Many of the measures will also have a positive effect on the security of the energy supply, which has not been valued.

Please refer to the annex report to the Effort Analysis and to “Energy policy measures in the 1990’s: Costs and CO₂ effects” for further description of the conditions and assumptions underlying the calculation of the shadow price for each measure.

Uncertainty and sensitivity analyses

Both the CO₂ reductions and shadow costs for the analysed measures are subject to significant uncertainty due to the complexity and scope of the calculations alone. The following key issues in relation to the uncertainty of the results should be highlighted:

• It is not unequivocally clear how the demarcation of an initiative should be carried out. This applies both to choosing which measures to include and, in certain cases, how to define each initiative. Demarcation influences both the CO₂ reduction and shadow cost.
   
• The CO₂ reductions have been calculated separately for each initiative. There may be certain consequential effects from an initiative that are not included in the analysis of another initiative. Caution should therefore be exercised when comparing the shadow costs of various measures and across sectors.

In addition to the uncertainty associated with determining the expected reductions, there is also significant uncertainty linked to determining the socio-economic prices for the various effects included in such an analysis. With regard to the socio-economic energy prices, the same fuel price assumptions have generally been used as were used in the Government's 2003 Climate Strategy.

TABLE 4.3: SENSITIVITY ANALYSES FOR SELECTED MEASURES – EXAMPLES

1 The CO₂ reduction has been calculated for all fuel consumption, i.e. fuel consumption for both passenger cars and trucks. However the shadow price has only been calculated for fuel consumption in passenger cars, corresponding to the calculations carried out in connection with the Government's 2003 Climate Strategy. This factor also applies to the sensitivity analysis for “Increases to fuel taxes.

To give an indication of the significance of central assumptions, Table 3 contains a few examples showing how much the shadow price varies in response to potential changes to the key background parameters. For a more complete and systematic presentation of the sensitivity analyses for the individual measures, please refer to “Energy policy measures in the 1990's: Costs and CO₂ effects”.

4.2 ACHIEVEMENT OF TARGETS UNDER THE KYOTO PROTOCOL IN TERMS OF OVERALL GREENHOUSE GAS “WITH MEASURES” PROJECTIONS

As shown in section 3.2.1 the base projection of Denmark's greenhouse emissions and removals in 2004.2030 was up-dated in May 2005. This up-date (”with (existing) measures” projection) builds on, e.g. an up-dated energy projection, which now includes expected effects of the implementation of the EU allowance directive (cost effects alone of the implementation of the directive– i.e. excluding the effect of the allowance itself, which for the period 2008.2012 will not be decided before 2006). The expected effects of the Action Plan for the Aquatic Environment III are also included in the base projection.

The outcome of this projection of emissions is shown in Table 3.2, together with expected effects of the allocation of funds to JI and CDM projects in 2003-2008.

As shown in Table 3.2, the Danish deficit is estimated on this background to be at approx. 13 million tonnes of CO₂ equivalents annually, based on Denmark's legal commitment according to the EU Burden Sharing Agreement. This is based on a situation where no correction has been made for the particularly large imports of electricity in 1990.

If this correction is made as assumed by Denmark, the deficit is reduced to approx. 8 mill. tonnes of CO₂ equivalents annually in 2008-2012, as shown in Table 3.2. The deficit of 20-25 million tonnes of CO₂ equivalents annually in 2008-2012 is based on a projection showing the expected development without implementation of the additional measures, which were presented together with the Government's Proposal for a Climate Strategy for Denmark in February of 2003. The new projection from May of 2005 of the mean annual deficit in 2008-2012 is approx. 12 million tonnes of CO₂ equivalents lower than the previous one.

With the choice of method, the deficit expresses the need to purchase allowances from abroad or to implement new measures outside the sectors subject to allowances. So, as a result of the introduction of the CO₂ allowance scheme, the deficit is in principle not directly comparable to the deficit in the government's Climate Strategy, since the cost effects of the allowances are included, whereas ultimately the allocation of allowances decides the climatic effects of the scheme.

Note that the projection, and therefore also the deficit, is based on model predictions, which are subject to uncertainty. This applies, not least, to expected developments in energy prises, prises of CO₂ allowances, and the developments in the Nordic electricity market, which have a direct influence on the size of exports of electricity. The implementation of the EU allowance scheme has, however, created a basis for greater certainty regarding the fulfilment of Denmark's climate commitments under the Kyoto Protocol and EU burden sharing.

The main instrument for fulfilling Denmark's climate commitments is secured with the allowance scheme.

Other measures will be implemented, if they can contribute cost-effectively. Additional cost-effective measures identified by the Measures Project and further allocation of funds for JI and CDM projects are expected to eliminate the deficit entirely.

Sector policy measures that can have climate relevance in the short or long term, including the long-term energy strategy towards 2025 and the action plan for increased energy saving, will also be implemented.

The “with measures” projection presented in this report is the most recent projection. It was finalised in May 2005 and it is in general based on expected effects of policies and measures implemented or adopted until the end of 2004. Due to the adoption of additional energy-savings initiatives in 2005, up-dated projections in the off-shore sector and new IEA projections of energy prices, an up-date of the May 2005 “with measures” projection has been initiated. However, results from this up-date will not be available until the beginning of 2006. Preliminary results suggests that the action plan on additional energy-savings initiatives could lead to a 2 mill. tonnes further reduction in annual CO₂ emissions 2008-2012.

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Version 1.0 December 2005, © Danish Environmental Protection Agency