European Semester 2015 Environmental taxes in Country Specific Recommendations for Denmark During the last years, environmental taxes have not been the focus in EU Commission s country specific recommendations for Denmark. Maybe, because Denmark has been ahead of Europe in this field for years and the Commission has not been aware of the development since 2000. Since 2000 however, tax revenues on corporate and private incomes have increased much more than tax revenues from environmental taxes in Denmark. This is an alarming development in relation to climate and environment. It is also opposed to recommendations from OECD and several universities and scientists, who recommend shifting the tax burden from corporate and personal income taxes towards environmental taxes, because of the positive effects on innovation and because of environmental taxes having less of a negative effect on investment and labor supply. Danish Ecological Council strongly encourage EU Commission to focus on taxation of energy, transport and environment and include recommendations for necessary changes as part of the Country Specific Recommendations for Denmark in 2015. It is important to restore the importance of environmental taxes, especially in business sector. Dramatic shift in Danish tax system since 2000 The figure below shows, how total taxes (direct and indirect taxes) was around 49 % of GNP in 1995 and 20 years later a little closer to 50 % of GNP in 2014. In between there have been minor fluctuation around 49 % due to shift in tax policies and due to economic trends.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Taxes per GNP in percent 52 51 50 49 48 47 46 Sources: Danish Statistical Agency Direct and indirect taxes/gnp Total tax burden is rather stable in Denmark. However, there has been changes in the tax composition during the last 20 years. In 1990 ies, the revenues from environmental taxes were growing faster than revenues from corporate and private income taxation. This development changed in the beginning of the century. Over the last 20 years period corporate and private income taxation has increased more than taxation related to energy, environment and health. Development in different part of the taxation since 1995 (index 1995=100) 250 200 150 100 50-1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Tax on private and corporate income and social contributions VAT Taxes in relation to energy, environment and health Tax on properties and wealth Source: Danish Statistical Bureau The tax revenues in Europe from taxation of energy, transport and pollution have increased every year from 2003 to 2012 except in a few years strongly affected by the financial crisis. The increase in - 2 -
revenues from taxation of energy, transport and pollution in Denmark is only around half the size of the average increase in EU 28, and much lower than in countries, Denmark is usually compared to. The figure below shows, how the growth in revenues from taxation of energy, transport and environment. While the growth is considerable in many European, the growth in revenues from taxation of energy, transport and environment is limited in Denmark, which is marked with a thick black line. Even though Denmark in 2002 had higher taxes on energy, transport and environment compared to rest of Europe, this development is a problem, because Denmark loose the dynamics related to increased use of environmental taxation. 250 Development in tax revenues from taxes on energy, transport and polution (index 2003=100) 200 150 100 50-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Belgium Czech Republic Denmark Germany Ireland Greece Spain France Italy Netherlands Austria Poland Portugal Finland Sweden United Kingdom Norway Source: Eurostat, environmental taxes - 3 -
In 2003 Denmark was one of the countries in EU with the biggest share of total tax revenues from energy, transport and pollution surpassed only by countries like Malta, Cyprus and Croatia. In 2012, the picture was different. As seen in the figure below. Denmark was in 2012 surpassed by nine countries in EU (Estonia, Greece, Ireland, Slovenia, Latvia, Bulgaria, Netherland, Malta and Croatia). Denmark was still collecting a bigger share of tax revenues from energy, transport and pollution than countries like UK, Germany, Sweden, France, Spain and Poland. Comparing the revenues from environmental taxes with GDP, Denmark is still ahead of other European countries because of a high tax level in Denmark in general. Situation has worsened since. In 2013, the Danish Parliament decided to reduce taxation of energy for business use with effects from 2014, where the tax rates on energy for business use are equal to EU minimum rate (except on energy for room heating and room cooling). In 2009, Denmark had one of the highest excise duty rate related to electricity for business use (EUR per MWH). In 2014, five years later, Denmark had one of the lowest excise duty rate related to electricity for business use. Danish taxation of electricity for business use is below the level of both Germany, Italy, Netherlands, Poland and Finland (except for water heating and room cooling). A similar trend applies to other kind of energies for business use. This development is highly regrettable. - 4 -
Excise duty rate on electricity for business use in 2009 Excise duty rate on electricity for business use in 2014-5 -
Actual tax development do not support further green growth The high taxes on energy for household and the former relatively high taxes on energy for business use is a major reason for Denmark being one of the most energy efficient countries in the world with one of the most energy efficient business sectors. With this position, Denmark was well prepared to CO2-reductions, also in periods with considerable economic growth, and high Energy efficiency makes the transition to a fossil free society in 2050 much cheaper. Besides of that, relatively high taxation of energy for business use has pushed development of new energy efficient technologies. For instance, Denmark is a frontrunner in developing energy efficient refrigerators and cooling systems for supermarkets and industrial processes. It has created new export possibilities. By reducing taxes on energy for business use, the incentives for energy efficiency are not as strong, as they were before. As a result, the transition to a fossil free society risk being more expensive, and earlier competitive advantages risk disappearing slowly. This development is a serious challenge to have in mind in an assessment of Danish economy and growth potential. According to OECD, expanding use of environment related taxes might be an important part in a growth oriented tax reform, shifting the burden from corporate and personal income taxes towards environmental taxes, which will have less of a negative effect on investment and labour supply. Danish Government has for years used experience-based multipliers in economic modelling showing same trend 1. However, Denmark has moved the opposite direction during the latest years. The figures above show how revenues from corporate and private income taxes is growing faster than revenues from taxes related to energy, transport, pollution and health. It is regrettable. In a country like Denmark, aiming for a fossil free society and higher employment, a visionary tax policy will raise taxes on use of fossil fuels and reduce taxes on employment. It is true that Denmark has lost market shares during the latest decade, but according to several reports from Danish National Bank and the Danish Economic Councils 2 the reason why is low productivity and high salaries. The revenues from energy and environmental taxes were fully reimbursed to the business sector. That is the reason why, the relatively high taxes on energy for business use did not affect the overall competitiveness. However, in spite of successful reimbursement schemes there were a few energy-intensive manufacturing companies with competitive difficulties. However, it had been a better solution to solve this kind of problems in targeted ways instead of exempting the entire business sector from ordinary taxation, including the majority, who was not affected negatively by the former taxation. Problems and solutions to be examined Danish Ecological Council has several proposals to adjustments of the Danish Tax System. Below are three high priority proposals, which could be included in the Country Specific Recommendations in 2015. Taxes on Energy used in Trade and Service Danish Ecological Council strongly invites the EU Commission to recommend full taxes in Trade and Service sector. Energy taxes on energy used in Trade and Service only influenced the competitiveness marginally or not at all. Many enterprises are operating in Denmark and nearly all competitors have equal tax conditions, and lower taxes on energy in Trade and Service have no significant impact on the 1 Economic reporting, December 2011 no public known changes since 2011. 2 A Council of Economic Advisors appointed by the government - 6 -
competition with an ever-growing internet market. When reducing taxes on all energy for business use to EU minimum rates, a great part of the lost revenues were due to the tax reduction in Trade and Service. It is a silly price to pay, when the tax reductions in the Trade and Service sector do not reduce consumer prices nor increase growth or employment of any significance. It is an example of a tax initiative pushing Denmark in direction of more income taxation instead of more environmental taxation. An enterprise or sector should only be able to achieve reduced taxes on energy, if it is able to demonstrate real competitiveness problems, clearly related to energy taxes. Danish Ecological Council proposes to reintroduce ordinary taxation of energy used in Trade and Service. A governmental working group has calculated that full taxation in Trade and Service would reduce the electricity consumption in Trade and Service by 20 %. Revision of car taxation In 2007, Denmark got a new taxation of cars, reflecting the energy efficiency of the car. Both registration tax (a purchase tax) and the yearly green owner tax (an annual tax) was included. Both registration tax and green owner tax are small, when the car is highly energy efficient, while they are high, when car is big and driving few kilometers per liter. This regulation boosted the sale of small and energy efficient cars and reduced the sale of big and inefficient cars. Since 2007, the average energy efficiency of new cars sold has increased considerably, and the average CO2 emission per kilometer from all the cars is still going down. In this way, the 2007 regulation was a remarkable success. However, the regulation is not prepared to follow the technological development, as it has a static tipping point at 16 kilometers per liter petrol and 18 kilometers per liter diesel. Today most small cars run longer than these limits, due to the technological development and EU requirements for new cars. As accidental consequences there is no longer a strong incentive to buy the most energy efficient cars based on new technologies, the average registration tax per new car is nearly 50 % below the 2007 level, the total fleet of cars has increased by nearly 10 % since 2007 and the revenues from registration tax has been reduced by 35 % since 2007. It is not a desirable development for neither environment nor economy. The tipping point in the car taxation must be continuously adjusted, reflecting the technological development and CO2 emissions from best vehicles on market. The surcharges on the least energy efficient cars should be the same size as the deduction for the most energy efficient cars. The annual green owner tax, which is more price inelastic, should be used to adjust revenues from taxes on cars to avoid, that an unintelligent car taxation is one of the reasons for less environmental taxation and more income taxation in Denmark. Tax on PVC and phthalates Denmark has only few examples of taxes on hazardous chemical substances and products. One is the tax on PVC and phthalates from 2000. The purpose was to increase the economic incentive to use other softener than phthalates and to reduce the quantity of PVC to be burnt in combined heat and power plants. There are different tax rates per kg PVC depending on the product, for instance flexible pipes, gloves and rainwear, and cables. The tax rate per kg PVC for a product depends on whether the product is produced with or without phthalates. The tax on PVC and phthalate has been a great success because it has considerable reduced the use of phthalates in Danish industries. The use of phthalates has lowered to less than one third. - 7 -
The contribution to total tax revenue is negligible, but the tax on PVC and phthalates is of great importance to the environment and health. However, the value of the tax has been considerable reduced, as it is not adjusted to inflation. The inflation adjustment was abandoned for taxes on energy, transport and environment in 2002. In 2009 it was reintroduced for energy taxes, but never for environmental taxes. The substitution from classified phthalates to other softeners was most remarkable in the first ten years. Danish Ecological Council proposes a considerable tax increase to get phthalates out of medical equipment where it is especially harmful. - 8 -