Department of Environmental, Social and Spatial Change (ENSPAC)
at Roskilde University
Green Budget Europe – Copenhagen September 15-16 2011
Greening industries without loss of
competitiveness - some lessons
from Danish designs
Green taxes on industry -> energy efficiency gains
-> competitiveness loss?
Energy cost share and competitiveness gains
Full recycling principle: Neutralising short term competitiveness loss
Danish lessons
Anders Chr. Hansen
06-10-2011
1
Energy use reductions due to
energy related taxes 1975-2006
Industries
Transport
fuels
Households
Total
PJ
16%
21%
18%
45
Electricity
Other
fuels
4%
21%
10%
14
3%
12%
6%
29
Total
7%
16%
10%
Source: Økonomi- og erhvervsministeriet (2008): Vækst, klima og konkurrenceevne
Anders Chr. Hansen
87
2
06-10-2011
The Danish economy gains
competitiveness
when energy prices rise
Per cent cost
advantage over
competitors
compared to year
2000
Cost advantage over competitors
US$/bbl
crude oil
International oil price
Pedersen & Riishøj (2009): Energieffektivitet og konkurrenceevne. Nationalbankens Kvartalsoversigt 2 kvt. 2009. Anders Chr. Hansen
3
06-10-2011
Sensitivity to energy prices of
Denmark and her trading partners
Pedersen & Riishøj (2009): Energieffektivitet og konkurrenceevne. Nationalbankens Kvartalsoversigt 2 kvt. 2009. Anders Chr. Hansen
4
06-10-2011
Where does the
energy efficiency come from?
• Geography and history
• No mountains – no basis for coal, iron and steel
• Little forest cover left – no basis for paper
• Advanced economies generally let emerging economies
take over the energy intensive basic industries
• No automotive industry – maybe irrelevant to Danish
military security?
• But far from only
• High energy efficiency in all industries
Anders Chr. Hansen
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06-10-2011
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06-10-2011
Sensitivity to energy prices of
DK & trading partners by industry
Pedersen & Riishøj (2009): Energieffektivitet og konkurrenceevne. Nationalbankens Kvartalsoversigt 2 kvt. 2009. Anders Chr. Hansen
Real crude oil price development
1990 - 2035
Anders Chr. Hansen
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06-10-2011
Energy cost an important
competition factor
• Increasing energy prices
• Competition: Race to reduce energy loss before
competitors
• First mover advantage
• Short term
• Best use of idle labour and capital during recession and
crisis
• Longer term
• Incentives and infrastructures supporting these efforts
• Government long term policies more than taxes
Anders Chr. Hansen
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06-10-2011
Energy related taxes - and
many other policy instruments
• Reduction of conversion losses in the energy sector
• CHP enabled by distributed plants
• Windpower: No heat loss from combustion
• Energy prices
• W orld
market – increasing competition for dwindling resources
• Energy taxes and quasi taxes
• Energy using capital: standards, taxes,
• Boilers and engines
• Buildings and infrastructure
• Information and decision support
• Labelling, awareness, consulting services, …..
Anders Chr. Hansen
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06-10-2011
Ecological-economic production
possibility frontier
Cleanness of
production and
consumption
Possible maximum
Economic value
e.g., net value added
Anders Chr. Hansen
10 06-10-2011
Adverse side effect:
Green tax
Anders Chr. Hansen
11 06-10-2011
Lesson #1
• 1993-95 CO2 tax (degressive in CO2 intensity)
• Lower tax at higher levels of intensity
• Energy intensity calculated at firm level
• Flaws in definition of value added CO2-intensity
• Counter productive result:
• ”Incentives to extra CO2 emissions and market
distortions” (Ministry of taxation evaluation)
Anders Chr. Hansen
12 06-10-2011
Full or partial exemptions
• 1996 and following years
• Energy used for ”energy heavy” processes fully
or partly exempt
• Still degressive taxes, but industry branch rather
than individual firms
• Counter productive to exempt industries with the
largest volume of energy use and CO2
emissions
• State aid: Maximum 10 years
Anders Chr. Hansen
13 06-10-2011
Lesson #2
• Exemptions must be temporary for the tax to
serve its purpose:
• Facilitating the transition towards renewable
energy and energy efficiency with a minimum of
market distortions
• State aid rules: Exemptions temporary (max 10
years)
• Necessary to develop other arrangements to
avoid loss of competitiveness
Anders Chr. Hansen
14 06-10-2011
Wage bill related recycling
State
budget
Labour
market
fund
d
fun
Re
x
Ta
Firms
Co
bu ntr
tio i n
Refund
• Fund abolished 2008
• No understanding of
recycling
Anders Chr. Hansen
15 06-10-2011
Lesson #3
• Recycling schemes must be real, visible and
transparent
• Hypothetical schemes do not deliver the
necessary fairness and tax payer consent
Anders Chr. Hansen
16 06-10-2011
Exemption in return for energy
management arrangemen
• Energy intensive industries (process list)
• Energy tax > 4% value added
• Energy management plan
• Energy efficiency plan
• High impact of small tax
Anders Chr. Hansen
17 06-10-2011
Lesson #4
• Even small taxes with exemptions can become
important instruments
• if coupled with agreements of energy and eco
management and energy efficiency plans
Anders Chr. Hansen
18 06-10-2011
Free allocation of EUAs and
• Industries in Danish process list largely included in
the ETS
• EU Process list
• Energy > 5% of gross value added
• Exposure to international competition
• EUAs are financial assets - fully convertible
• Industry subsidies as much as any other financial assets
• Free allocations lifts the return to investments in fossil
fuel boilers, but not their competitiveness
• Not the right incentive
Anders Chr. Hansen
19 06-10-2011
Bottom allowance
• Introduction of bottom allowance for CO2 taxes
cf. EUA ”grandfathering”
• Two problems
• Bottom allowance too high – processes effectively
exempt
• No incentives for emission reduction below bottom
allowance
• If permanent, same problem as free allowances:
subsidy to most fossil energy intensive industries
Anders Chr. Hansen
20 06-10-2011
Lesson #6
• Free emission allowances and emission tax
bottom allowances based on previous emissions
or energy use can become ”perverse incentives”
in a long term perspective
• Emission tax bottom allowances remove
incentives to reduce emissions below the bottom
allowance
Anders Chr. Hansen
21 06-10-2011
Lesson #7
• Revenue recycling to agricultural land owners by
lowering land taxes
• No contribution to competitivenes
• Only asset balance of land owners at the time of
tax reduction
Anders Chr. Hansen
22 06-10-2011
Lesson #8
• Recent 2008 tax reform:
• Recommendation from the Government Tax Commission:
• Industry energy tax without recycling:
• Used for reducing marginal income tax
• Adopted in the tax reform
• (provided that a 2011 review would document that it would not reduce cost
competitiveness)
• Half of it abandoned in 2011
• Economic concerns
• Taxing for revenue on consumption raises costs of living
• Taxing for revenue on production raises cost of living and reduces employment
and value added
• Lessons
• Revenue recycled back to industries is politically acceptable and economically
defendable
• Revenue spend for other purposes is not acceptable and economically
questionable
Anders Chr. Hansen
23 06-10-2011
Quasi-taxes for financing transition
• Electricity companies’ obligations to include
renewable electricity and other priorities
• Allowed to finance cost by a PSO charge added to
the electricity bill (DKK/kWh)
• Energy companies’ obligations to undertake
energy savings (energy sector and customers)
• Allowed to finance cost up to DKK0.5/kWh saved
energy by an extra charge per sold kWh
• Both paid for by industrial consumers as well as
households
Anders Chr. Hansen
24 06-10-2011
Taxing fossil energy capacity of
boilers, engines and buildings
• General lesson from car transport
• Getting the price right on fuels is not enough
• The price of buying and owning a vehicle graduate
according to energy efficiency and future emissions
• High registration and circulation tax for ”gas guzzlers”
automatically recycled to buyers of energy efficient cars
• All fossil fuels are combusted in boilers and engines
• Registration and owner tax for all boilers and energines a
very useful instrument to guide the transition to
renewables, electricity and energy efficiency
Anders Chr. Hansen
25 06-10-2011
A durable alternative to exemptions
• Not only the tax, but also recycling of its revenue
should give incentive according to EU policy
principle:
• Delink energy use and emissions from the creation of
economic values
• Taxing emissions, recycling revenue according to
net value added
• VAT declaration and tax declaration contains most
of the information needed for calculating net value
added
• Recycled within groups of firms producing
substitutable products
Anders Chr. Hansen
26 06-10-2011
Thank you for your attention!
Anders Chr. Hansen
Department of Environmental, Social and Spatial
Change (ENSPAC) at Roskilde University
[email protected]
+45 6167 0592
Anders Chr. Hansen
27 06-10-2011