What is a CO2 tax?

Oskar Dahl Hansen

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What is a carbon tax - and could it affect your business? Find out here.

There has long been political talk of extending the CO2 tax. Will the tax include your company and what is the price of a possible CO2 tax? We explore this in this article.

What is a CO2 tax?

A carbon tax is a tax levied on individuals, companies or nations that emit CO2. Everyone emits CO2, and this has a cost not only for those who emit, but for 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.

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

Why does it work?

We have actually had a CO2 tax in Denmark since 1993. However, it is primarily aimed at energy consumption in industry. More recently, there has been talk of introducing a comprehensive CO2 tax on all Danish companies. In other words, it applies to all company activities that emit CO2, including production, which is often the largest item in a company's CO2 footprint.

Such a tax would therefore cover the largest emitters in Danish industry. Experts believe that emissions from industry in Denmark could be reduced from 6.8 million tonnes of CO2 per year to 3.4 million tonnes of CO2 per year by means of CO2 taxes.

What are the options?

However, there is still political disagreement on how comprehensive the CO2 tax should be. The government has therefore set up an Expert Group, which has drawn up three different scenarios for a CO2 tax.

A tax on greenhouse gas emissions is the most effective and targeted measure that can be taken to reduce Danish emissions. This point has been underlined in several analyses, including those of the Economic Council and the Climate Council. A higher CO2 tax would send a clear signal. It would clearly place responsibility on the actors emitting greenhouse gases. It will enforce the polluter pays principle.

In the first instance, the recommendation will cover companies in industry, but subsequently other sectors such as agriculture should also be addressed.

What is the price?

The delicate balance lies somewhere between modelling the tax strictly enough to motivate emitters to reduce, and at a level that does not make the cost to companies so high that emissions are simply shifted abroad if companies are forced to downsize or close.

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

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