Large risk of carbon leakage from Danish energy taxation

Large risk of carbon leakage from Danish energy taxation

April 13, 2015

A new study on the risk of carbon leakage shows that there is significant risk of carbon leakage through higher unilateral energy taxation in Denmark. Higher production costs for Danish energy intensive producers lead to losses of market shares to foreign firms not facing higher energy taxes. This shifts emissions from Denmark to other countries. 


The results of the study suggests that for each 100 tons of CO2 reductions in Denmark, emissions outside Denmark will increase by 88 tons, i.e. a net effect of only 12 tons and a leakage rate of 88 pct. A factor behind the high leakage rate is that Danish energy intensive producers are on average more energy efficient than their foreign competitors. Thus shifting production out of Denmark leads to reduced energy efficiency in global production of energy intensive products.


Moreover, the model used in the study is likely to underestimate the leakage as it does not capture long term effects. Indeed, models that look at longer term effects have found that leakage rates for EU as a whole could reach 130 pct. unless EU adapts measures to alleviate carbon leakage. Danish firms are by nature more exposed to international competition than the EU as a whole, which suggests that leakage rates in excess of 100 pct. are likely if Danish energy taxes are increased in a unilateral manner.


The study has been prepared by Copenhagen Economics for the Confederation of Danish Industry.


For more information, contact Partner Sigurd Næss-Schmidt


Read the report here


Read coverage of the report here and here