Impacts of Energy Taxation on
Competitiveness of Denmark
Vibeke Andersen, Danish Ecological Council Denmark is an important case because of the extensive use of environmental taxes during two decades. Denmark was one of the first countries in Europe introducing a CO2-­‐tax on top of existing energy taxes in 1991. Several analysises1 have been conducted in Denmark in order to show how environmental taxes affect the Danish economy and the competitiveness. Three important studies are from the Danish Ministry of Finance, The Ministry of Taxation and Denmark’s National Bank respectively. The well-­‐documented COMETR-­‐project also includes Danish experience. Inter-­‐ministerial evaluation of the taxation -­‐ Ministry of Finance 1999 An inter-­‐ministerial committee chaired by the Ministry of Finance evaluated in 1999 the impact of the sulphur and CO2 taxes on competitiveness, especially the tax package, which was implemented in 1995. The committee was composed of senior officials from the Prime Minister’s Department, the Ministry of Finance, Ministry of Taxation, the Ministry of Economic Affairs, the Ministry of Food, the Ministry of Foreign Affairs, the Ministry of Environment and Energy and the Danish Energy Agency. The tax package from 1995 was crucial, since it contained a new sulphur tax and increased carbon dioxide taxes for the business sector. After 1995, only energy-­‐intensive processes had access to a partial reimbursement of the CO2 tax, whereas there was no reimbursement of the CO2 tax on energy used in light processes in the business sector or for space heating. There were additional reimbursement options, if the energy-­‐intensive enterprises reached an agreement with the Danish Energy Agency on energy management and energy savings. On top of that, the business sector could apply for grants for investments in energy efficient technologies or industrial cogeneration of heat and power. The additional tax revenue from the business sector due to the sulphur and CO2 taxes was fully recycled to the business sector. In the evaluation own calculations were used together with the modelling tools: ADAM (developed by Copenhagen University and maintained by Statistics Denmark) and Emma 1 Exact quotes and links can be found in References. (developed by the UNEP Risoe Centre, Statistics Denmark and DCE -­‐ Danish Centre for Environment and Energy). The evaluation showed that the sulphur and the CO2 taxes, grants and contracts had the same effects on the emissions as predicted. The various models differed somewhat in their ability of calculation and performance, however, the committee considered this assessment as both realistic and conservative. The macro-­‐economic negative effects of green taxes, if existing at all, were assessed as extremely limited. According to model calculations, the business sector's energy costs were increased by approx. 0.2 per cent of GDP. Overall, the sector’s cost was not affected significantly by the increased energy taxes, for the very reason that the additional tax revenue was returned to the sector. Twenty percent of the additional tax revenue was used for subsidies for investments in energy efficient solutions and in corporate owned combined heat and power plants. The Parliament also reduced the labour tax, the so-­‐called Labour Market Contribution – the most important instrument to compensate the business sector for the increased environmental taxation. In fact, the evaluation found that the recycling to the sector eventually became greater than the additional revenue due to the development of the total payroll, which determined the Labour Market Contribution. It meant that the reform was slightly under-­‐
financed and had an overall positive effect on employment, especially in labour-­‐intensive sectors. The evaluation made it clear that some enterprises were hit harder on competitiveness than anticipated, especially some enterprises in the food and beverage industry as well as the chemical and plastic industry. The evaluation also described that a part of the agreement and support scheme for the business sector were considered administratively burdensome for the Danish Energy Agency. The Danish Ecological Council agrees on the overall positive evaluation of the influence of environmental taxes on competitiveness. Maybe part of the agreement and support scheme was a bit labour intensive for the state administration, but it gave a strong incentive to invest in energy efficient technologies, which was important. This administrative effort may be the price to limit the number of those receiving tax reductions and a way to recycling the revenue to the ones who really consider investments in energy efficiency necessary in terms of maintaining their current competitiveness. COMETR Project – Competitiveness Effects of Environmental Tax Reform, 2007 A project consortium including among others Aarhus University (Denmark), Cambridge Econometrics and PSI (UK) analyzed the competitiveness effects of environmental taxes. This report is to a large content covered by the UCL paper (a literature review on experience with Environmental Fiscal Reforms (EFR)). The report is included in this paper because of its focus on competitiveness and because Denmark is used as one of the important cases in the report. Since 1996 (the year ETR was introduced in Denmark with impact on industry), most energy intensive sectors in Denmark have decreased energy input in relation to output according to the COMETR studies. Hence, ETR led to higher energy efficiency. -­‐ 2 -­‐ It is mentioned in one of the conclusions in the COMETR report, that there is no doubt that energy taxes may have an impact on the competitiveness of energy-­‐intensive Industries, although, the competitiveness depends on more factors than energy taxes.2 Firstly, other price factors such as energy prices, transmission and distribution tariffs as well as ex-­‐
change rates. Secondly, non-­‐price factors, such as production methods, infrastructure and education are important as well. Thirdly, it is necessary with a detailed analysis of the tax burden versus the recycling measures introduced as part of an ETR. Apart from earmarking, some of the additionally generated revenues for specific investment programs to promote energy efficiency (Denmark, Germany and UK), the major part is being used for reduction of the taxes and charges levied on labor (income tax rates and social security contributions).3 The table below shows how the revenue was recycled 100 % to the business sector in the first version of ETR in Denmark. Danish Environmental Taxation Reform, phase II (the 1995 package) Mio. euro
1996
1997
1998
Additional tax collected from
Industrial and commercial sector
94,7 164,0 230,7
Households
27,3 28,0 30,0
Revenues recycled to industry
Investment subsidies
40,0 66,7 66,7
Small business Fund
24,0 28,0 34,0
Reduction of Social Security Contribution 26,7 65,3 126,0
Reduction in administrative costs
4,0 4,0 4,0
1999
2000
253,3 276,7
42,7 50,0
66,7
34,0
148,7
4,0
-­‐
39,3
233,3
4,0
No studies before COMETR had investigated the effects of ETR on location decisions. In the COMETR report it is described how recent studies using more extensive records and panel data were able to control econometric problems, and these typically found some evidence of a minor “pollution Havens” effect – enterprises looking for cheaper solutions in countries with less stringent environmental regulations -­‐ when they chose location for a given industrial production. The COMETR report also concludes that this evidence does not necessarily apply to an environmental tax reform. The governments can avert the described tendency, if the revenue is carefully recycled. 4 One of the studies in the COMETR report shows that higher energy taxes will lead to a moderate increase in unit energy costs and a small increase in total unit input, which again lead to an even smaller reduction in economic output. The calculations show strong indications that energy taxes have different (less) effects on competitiveness than an increase in market energy prices of same size. Taxes promote greater efforts within the industries to raise the demand for their products. It is not possible from the calculations to conclude if these effects can be ascribed solely to the energy taxes, or if they are a result of energy taxes going hand in hand with subsidies for energy-­‐
2 Stefan Speck, NERI, University of Aarhus: Overview of Environmental tax reforms in EU member state, the conclusions. 3 Mikael Skou Andersen, NERI, University of Aarhus: An introduction to the Environmental Taxes Reform and the competitiveness issue. 4 John Fitz Gerald, Mary Keeney and Sue Scott, Economic and Social Research Institute, Ireland: Price setting and vulnerability of energy intensive industries. -­‐ 3 -­‐ savings, public information and marketing campaigns and compensation of the industries with respect to the other taxes or social contribution. 5 The COMETR-­‐report identified a number of potential vulnerable sectors by the share of value added coming from energy expenditure and labor expenditure and a number of other factors. By analyzing eight potential vulnerably sectors, there is little evidence that the business sec-­‐
tor in ETR countries, including Denmark, suffered any widespread or significant loss of com-­‐
petitiveness. In 45 of 56 cases analyzed, there is no consistent evidence of any changes in competitiveness between 1990 and 2002. Only in nine cases do the indicator movements indicate a loss in competitiveness.6 Implementation of Environmental Tax Reform on EU level should give less cause for concern about loss of competitiveness. Report from Denmark’s National Bank, 2 quarter 2009 Denmark is one of the most energy efficient economies in the world, because of an economy structure with few energy intensive enterprises, and because high energy and emissions taxes have given a strong incentive to invest in energy efficiency. In the figure below from Denmark’s National Bank compare the energy used per unit produced in several industrial countries (energy consumption/GDP). Energy efficiency per unit produced in industrial countries The energy used per unit produced has been reduced since 1995 in many industrial countries, but slowly. Higher energy efficiency requires investments in new technology, and technology development takes time. In Denmark, the energy expenses represented 1.8% of the total production value in 2005, while the energy expenses represented 3.1% of the total production value in the world. There 5 Martin Enevoldsen, Anders Ryelund and Mikael Skou Andersen, NERI, University of Aarhus: The impact of energy taxes on competitiveness – output and export. 6 COMETR, the working paper: An Assessment of the impact of environmental taxes on the competitiveness in selected industries. -­‐ 4 -­‐ are remarkable differences in the energy supply sector. In manufacturing industry, the energy efficiency is also much higher in Denmark compared to the world. The energy expenses represent 3.7% of the production value in the manufacturing industry in Denmark, while the corresponding figure worldwide is 6.0% according. The energy efficiency gives the Danish industry a competitive advantage according to the Bank, especially when the energy prices going up. The table below compares the energy expenses as a percent of the total production value in the whole economy and in industry, respectively. It is an indicator of price sensitiveness. Sensitivity to energy prices 14
Energy-­‐price sensitivity , whole Economy
10
Energy -­‐price sensitivity, industry per cent
12
8
6
4
2
0
In industrial countries, public and private services represent a larger share of the economy, and it affects the energy intensity. If China had the same economic structure as Denmark, the Chinese energy expenses would be 7.6% and not 8.5% of total value. This case illustrates, that economic structures do not explain all. Investments in energy efficient technologies are of great importance, and it makes industry less vulnerable to price fluctuation. In the manufacturing industry, Denmark has the second lowest sensitivity to energy prices among the countries, we normally compare ourselves. According to Denmark’s National Bank and the figures above, the Danish price competitiveness in the manufacturing industry will be improved by 2.3%, if energy prices increase 100%. This corresponds to a saving in wages of 15 DKK (2 euro) per hour. The competitive advantages of being a first mover in terms of energy efficiency will depend on the price development. Ministry of Taxation “Energy taxation of industry and competitiveness”, 2011 The Danish Ministry of Taxation in 2011 drafted a report on the energy taxation and competitiveness of the business sector in Denmark. It is an assessment of the effects of the Danish energy taxes on competitiveness after the adoption in 2009 of the so-­‐called Spring Package 2.0, which meant considerably higher energy taxes for the business sector – stepped up over many years. -­‐ 5 -­‐ Only a small part of the 2009 package was implemented, when the energy taxation in Denmark was evaluated. The evaluation emphasised that Denmark is an open economy. Around 38% of all production is exported. For agriculture, fishing, mining and industry 70% of the production is derived from export. Agriculture is more export-­‐dependent compared with industry. Eighty percent of Danish foreign trade is with other European countries. Calculations in the report showed that the tax revenue from electricity and fuels used in the business sector after a full phase-­‐in of Spring Package 2.0 would be four times higher, compared to a situation where the average taxation rates in EU were implemented in Denmark. It was mostly manufacturing industry, which was affected by the increased taxation. Agriculture and fishing were not really affected due to exemptions. The table below illustrates the difference in the taxation of the business sector in Denmark and in the EU. The predicted total revenue, when Spring Package 2009 would be fully implemented compared with the revenue achieved if Denmark had average EU tax rates. Tax revenue if Spring Package 2009 was fully mio. euro
Total revenue
Revenue from business sector
Transport
Electricity
implemented Fuels
If Spring package 2009
was fully implemented, incl. PSO
6.340
2.565
1.169
792
604
Revenue if Denmark
had EU average rates
2.968
1.397
1.075
215
107
The Ministry of Taxation estimates that for every billion DKK (134 million euro) business costs are burdened because of energy taxation the employment is affected negatively equivalent to 0.1% of the total private employment. The adopted tax increases on process energy in the Spring Package 2009 reduced the employment equivalent to 0.2% of the employment in private sectors. In the calculations, the production would decline by 2% when costs rise by 1% in those businesses that compete internationally. In the long term, competitiveness is restored due to increased energy efficiency and pressure on wages and land in a downward direction. It is the general view of the Ministry of Taxation that increased energy taxes can be introduced without employment impacts in times of favorable economic conditions, when taxes are stepped up over a longer period, because it gives the enterprises a possibility to adapt and maintain the competitiveness by different actions. The Ministry of Taxation estimated that the tax increases in Spring Package 2009 did not constitute a separate problem for the overall competitiveness. They see, as mentioned above, no problems in the long term for the overall competitiveness, and a simultaneous short-­‐term tax relief through a substantial reduction in personal income taxes offset the short-­‐term impact. The Spring Package from 2009 was slightly under-­‐funded in the short-­‐term, which in theory improves the competitiveness and the employment further in the short-­‐term. -­‐ 6 -­‐ Compared to the sector's competitiveness, the problem is primarily the imbalance of energy consumption, according to the report from the Ministry of Taxation. The 5% most energy-­‐
intensive enterprises account for 40% of the energy consumption. A number of energy-­‐
intensive enterprises would not be able to restore the competitiveness through a pressure on wages. In the energy intensive part of the business sector, energy tax increases may be crucial for a decline of production in Denmark. This means that tax increases may have a permanent impact on the structure and employment in these enterprises. Increased energy taxes might change the structure in the business sector promoting enterprises with moderate energy consumption. Calculations show, that Spring Package 2.0 would reduce the energy consumption by 5.5 PJ. Twenty-­‐five percent of the reduction was due to the changed structure in the industrial sector. Spring Package was adopted in 2009, when the shortage of labor was on the political agenda. It explains, why there was nearly no awareness of the risk of a minor reduction in the number of employees in few sectors. However, the financial crisis led to a substantial industrial unemployment and the political focus changed, especially in areas with particular high unemployment. Some of the most energy intensive enterprises in Denmark are located in such areas. Ministry of Taxation comments in their report, that relocation of production for example to Asia does not reduce the global climate challenges. Changes of locations of production are not an objective of Danish tax policy. The Ministry of Taxation examined alternative solutions, which affects the competitiveness of the energy intensive enterprises less. In this context the report examine, how it would affect the employment, if the most energy-­‐intensive enterprises (comprising one third of the energy consumption) were exempted from the higher energy taxes. Assuming that the tax revenue was to remain unchanged, but spread over the remaining enterprises it would according to the Ministry of Taxation lead to a similar reduction of the number of employees as the Spring Package 2009 – but now in other parts of the industry. However, in both cases it is a negligible decline in the employment. In Spring Package 2009, the decline is concentrated in few energy intensive sectors. Another discussion in the report was about the process list, which has existed in Denmark since 1996. The process list was an annex to the CO2 tax law and listed a great number of processes, which could obtain 75 % reimbursement of the CO2 tax. The list mitigated the negative effects on the competitiveness of energy-­‐intensive enterprises according to the evaluation. However, a few problems turned up. There were variations in energy intensity within the same sectors, and a few enterprises with high energy-­‐
consumption, but with operations other than the ones on the list, paid disproportionately high taxes compared to enterprises with operations covered by the list. Finally, the Ministry of Taxation considered it an extensive work to develop a new process lists, and the EU's treatment under the state aid rules was considered too long. That is why the Ministry – “unfortunately” – did not recommend to maintaining and renewing the process list. Report from Denmark’s National Bank, 2012 Since 1995 Denmark has lost almost 30 % of the market share linked to export according to a report from Denmark’s National Bank published in 2012. The main reason is influence of the emerging economies on the world trade. However, the loss of market shares is bigger in -­‐ 7 -­‐ Denmark than in other European countries because of the level of production costs. 7 Denmark is bottom-­‐ranked when comparing prices competitiveness. Labor costs, which constitutes a third of the total production costs, have increased more in Denmark than abroad. It is according to the National Bank an important explanation of the bigger loss of market share together with a smaller productivity growth than abroad. Low-­‐tech products account for a significant share of the Danish export, but the level of technology in the low-­‐tech industry is relatively high. One out of four employees in Denmark is directly or indirectly dependent on export Energy taxation is not mentioned as a reason for loss of market shares in the report from Denmark’s National Bank. However, the high level of energy taxation of the business sector has been included in the political discussions of the Danish competitiveness. Despite the loss of market share is the economy according to Denmark’s National Bank in a favorable position with accounts surpluses and moderate structural unemployment. Danish Economic Councils – how to strengthen competitiveness, 2013 Danish Economic Councils did not consider Danish competitiveness as weak in a newspaper chronicle written by the Presidency in the beginning of the year, because there was a significant trade surplus. The low economic activity in Denmark was instead seen because of a weak demand for goods and services both in Denmark and abroad because of the consumers concern for the future. The Presidency also makes it clear, that the relatively high unemployment in Denmark helps to slow down the growth in wages, which will contribute to a better competitiveness and a higher employment. The weak competitiveness was therefore considered temporary. With a lower level of diplomacy from the Presidency, the signal could have been “there is no urgent need of doing anything”! Danish Economic Councils continues however: The last and probably only way to achieve a quick improvement of the competitiveness is to look at the taxation of the business sector. Energy and electricity taxes were mentioned as an example. No other solutions will have an effect immediately. Lessons learned in Denmark During the last 15 years Denmark has realized a number of Environment Fiscal Reforms, which were well functioning and included the industrial sector. Danish industry is one of the most energy efficient in the world, and there has been no serious competitiveness problem until recent years. The process list mitigated the effects on the energy intensive industries and the agreements and subsidies in the 1990s did have a positive effect on the investments in energy efficiency. The experience from Denmark has influenced the development in other countries. The Spring Package 2009 increased the environmental taxes considerably – stepping the energy taxes up over many years. It gave the enterprises an even strong incentive to innovation, energy 7 Illustrated in figure. 2.6 comparing the commodity quantities, in the Denmark’s National Bank, Quarterly Report, 2 quarter 2012, part 2. -­‐ 8 -­‐ efficiency and energy savings in the production processes and other business processes – and a long period to adapt. However, the Spring Package also accelerated criticism, especially since the financial crisis took off and new lessons are learned. One lesson learned from Denmark is, that it is possible to have a well-­‐functioning environmental taxes including the business sector if there exists a reimbursement system, which is stable, transparent and well known in the business sector. Another lesson learned is, that it is of great importance, that Environmental Fiscal Reforms do not harm energy intensive enterprises, which are deeply involved in the international competition. If not, competitiveness problems in few enterprises may lead to a serious setback for a well-­‐
functioning environmental fiscal reform, including the business sector, even if there is no significant problems in other parts of the business sector. High environmental taxes give a strong incentive to invest in energy efficient technology – the Danish industry is one of the most energy efficient in the world. The industry and whole economy are less sensitive to energy prices, which is a competitive advantage. The competitive advantage is bigger in periods with high or increasing energy prices. For the time being, the energy prices are low or lowering, and we need environmental taxes to maintain the inventive to invest in energy efficiency. Even if the environmental tax reform is well functioning and without negative impacts on neither economy nor competitiveness, the government may suddenly decide to reduce the energy taxation. A reduction of environmental taxes is an easy way to strengthen the competitiveness quickly. It is an important lesson learned from Denmark over the last years. Since 1995, Denmark has lost market shares – not because of the environmental taxes (the revenue has been fully reimbursed) but because of an excessive wage growth and low productivity. However, lowering salaries and increasing productivity takes time. The decisions to remove CO2 tax on electricity and reduce energy taxes to the EU minimum rate were made after a period with intensive lobbying by big, energy intensive industries. Some of these experienced problems in the international competition because of the environmental taxes. The association “Danish Industry” lobbied as well. A few, important Trade Unions, who earlier supported an Environmental Fiscal Reform, now advocated for tax reductions to avoid that production was moved abroad and maybe to avoid wage reductions as an alternative instrument to strengthen competitiveness. Many years of good experiences with energy taxation including the business sector were lost because a reduction of environmental taxes was the only way to strengthen the competitiveness in the short term. The government did not only bring the energy taxation of the business sector back to the situation before Spring Package 2009. In June 2013, the energy and CO2 taxation of energy used for business processes were reduced to the EU’s minimum tax rate. Both so-­‐called “heavy” and “light” processes in all part of the business sector will benefit. The minimum tax rate will even apply to electricity for lighting. The incentive to invest in energy efficiency is considerably weakened consequently. It is remarkable, that the NOx tax, which was highlighted as a huge problem by the lobbying industry, remains unchanged. Danish Ecological Council find it incomprehensible that the Danish government and the Parliament also reduced the taxation of electricity used for lighting, office equipment (computers, copy -­‐ 9 -­‐ machines etc.) and coolers in supermarkets to the EU minimum level. Taxes on this part of the electricity consumption are of no importance for competitiveness and incentives to energy efficiency are strongly needed. Energy taxes on electricity used in offices in all business sectors, including industries, shops and service activities should be raised to the previous level. An alternative solution is that trade sectors and private/public services pay full energy taxes on all energy consumption. Both alternatives will provide substantial tax revenues, which were lost in the recent legislative changes. The Danish business sector continues to pay full energy and CO2 taxes on energy for space heating and cooling, and the taxes will increase over the next years for both households and enterprises. The Danish Ecological Council fully agrees with this decision. Space heating and cooling constitute a large part of the total energy consumption in Denmark and it is an important instrument in the government’s strategy to increase energy efficiency in buildings. This lesson might also be useful in other countries with considerable energy consumption for space heating and cooling. The business sector in Denmark still pays the Public Service Obligation (PSO) Tariff, which also has increased during the last years because of more windmills and because of low electricity prices on the Nordic electricity market. The revenue from the PSO tariff is funding support for windmills, renewable energy and local combined heat and power plants. References Ministry of Finance: Evaluering af grønne afgifter og erhvervene, 1999, link:
http://www.fm.dk/publikationer/1999/effektive-offentlige-arbejdsprocesser-_vejledning/download/~/media/Files/Publikationer/1999/Download/hele.ashx
NERI, University of Aarhus (DK), Cambridge Econometrics and PSI (UK) and others:
Competitiveness of Environmental Tax Reform, COMETR Project, 2009, link:
http://www2.dmu.dk/pub/cometr_final_report.pdf
Denmarks National Bank: Kvartalsoversigt 2. kvartal 2009, del 1 og 2, link:
http://nationalbanken.dk/C1256BE2005737D3/side/F548F744A157B0F9C12575D10052F430/$file
/kvo_2kvt09_web.pdf
Denmarks National Bank: Kvartalsoversigt 2. kvartal 2012, link:
https://nationalbanken.dk/C1256BE2005737D3/side/6C9CB5D0B9B8AFADC1257A1B0038B52E
/$file/kvo_2kvt_2012_del1_web.pdf
Ministry of Taxation: Energiafgift for erhverv og konkurrenceevne, 2011, link:
http://www.skm.dk/public/dokumenter/lovstof/2011/konkurrenceevnerapport.pdf
Danish Economic Councils: How to improve competitiveness, chronicle in Berlingske Tidende, 16.
February 2013, link: http://www.dors.dk/sw10154.asp
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