What is a carbon tax

There has long been political talk about expanding the carbon tax. Will the tax be extended to your business and what is the cost of a potential carbon tax? We take a closer look in this article.

What is a carbon tax?

A carbon tax is a tax levied on individuals, companies or nations that emit CO2. Everyone emits CO2, and it not only has a cost to those who emit, but also to everyone else. The idea of a carbon tax is to make those who emit the most CO2 pay the price and hopefully motivate them to shift their consumption in a greener direction.

Simply put, a carbon tax will make it more expensive to emit greenhouse gases like CO2, methane and nitrous oxide, which cause global warming. Ultimately, the more CO2 a product has emitted, the more expensive it will be. Conversely, goods that have emitted less will be cheaper. The hope is that the higher price will encourage both producers and consumers to choose more green.

Why does it work?

We have actually had a CO2 tax in Denmark since 1993. However, it is primarily aimed at energy consumption in the business sector. In recent years, there has been talk of introducing a comprehensive CO2 tax on all Danish companies. This would apply to all company activities that emit CO2, including production, which is often the largest item in a company's carbon footprint.

Such a tax would therefore include Danish industry's largest emitters. Experts believe that emissions from industry in Denmark can be reduced from 6.8 million tons of CO2 per year to 3.4 million tons of CO2 per year through carbon taxes.

What are the options available?

However, there is still political disagreement about how extensive the carbon tax should be. The government has therefore set up an Expert Group that has developed three different scenarios for a carbon tax.

A tax on greenhouse gas emissions is the most effective and targeted measure that can be taken to reduce Danish emissions. This is a point that has been emphasized in several analyses from the Danish Economic Council and the Danish Council on Climate Change, among others. A higher CO2 tax will send a clear signal. It will unambiguously place responsibility on the actors who emit greenhouse gases. It will enforce the polluter pays principle.

Initially, the recommendation will cover companies in industry, but then other sectors such as agriculture should also be addressed.

What is the price?

The fine balance lies somewhere between creating a model for the tax that is strict enough to motivate emitters to reduce, and a tax at a level that does not make the cost so high for companies that emissions are simply moved abroad if companies are forced to scale back production or close down.

The latest news suggests that the government will phase in a carbon tax on industrial companies from 2025-2030 of DKK 750 per ton of CO2 emitted. Companies that already pay for the EU ETS will get away with half that amount, DKK 375 on top of the allowance price.