5. Assessment of selected Danish measures

In Denmark, two measures have been aimed at directly lowering electricity prices: (1) A temporary relaxation of the general electricity tax for the first half of 2023 to EU's minimum rate of 0.8 øre per kWh (from 69.7 øre per kWh), as well as a lowering of the electricity tax in the final quarter of 2022; (2) A cancellation of announced increases in electricity tariffs in 2023, amounting to a 3.1 øre/kWh. The reduced revenue from the relaxation of the general electricity tax amounts to DKK 3.5 billion in 2023, and the costs of the reduced tariffs amount to DKK 1 billion. Moreover, Energinet expects to repay bottleneck revenues of additional DKK 1.9 in 2022, and 3.8 billion in 2023, to consumers (Forsyningstilsynet, 2023).

It is estimated that the reduction of energy taxes can explain a 20% reduction in electricity prices: From Q3 2022 to Q1 2023 consumer electricity prices fell by 21.6%, according to data from The Danish Utility Regulator (Forsyningstilsynet, 2023). They also estimated that if the general electricity tax and tariff had not been reduced, the electricity prices would only have fallen by 2.2%.

Low-income households use a larger share of their disposable income on electricity (Skatteministeriet, 2020), hence they receive a larger relative benefit from these measures, but not in absolute benefits.

Lowering the electricity price, all other things equal, disincentivizes energy saving activities, hence there can be a negative effect on GHG emissions (European Scientific Advisory Board on Climate Change, 2023; Amaglobeli et al., 2022), the effect-size dependent on the energy source used for producing electricity.

Using a short-run price elasticity of -0.35 (following Espey & Espey, 2004), the effect of the price drop caused by a reduction of electricity taxes amounts to 7% increase in electricity use, compared to a scenario without reduced tariffs and taxes on electricity. 

The policies with which there is most coherence are the current redistribution measures. The effect is small as it is only a temporary measure.

Eight compensation measures have been made in the form of direct money transfers to targeted specific, disadvantaged groups.  The most prominent of these measures are: (1) a DKK 1 billion programme of 'targeted heat cheques', which delivers a cheque to households with a gross annual income below a fixed threshold, and which have heating sources exposed to price hikes, (i.e., gas and oil. Note: unrelated to actual consumption) (2) DKK 1.1 billion to a tax-free lump sum transfer to recipients of the elderly cheque (around 290,000 public pensioners), amounting to a total of DKK 5,000 per recipient in 2022 and 2023; (3) DKK 1 billion to a temporary relaxation of the maximum employment deduction in 2022 and 2023; (4) a DKK 600 million fund, delivering a one-off increase in the child and youth allowance in January 2023 by DKK 660 per child.

These four one-off payments have been directly targeting exposed groups, as also recommended by several experts (references in Chapter 1 recommending the same. In addition, direct money transfers are supported by more efficient use of public resources (European Scientific Advisory Board on Climate Change, 2023).

The measures were based on ex-ante income and installation measures. Therefore, it creates no incentives to act for inclusion. If there are expectations for similar measures in the future, this could disincentivise actions, such as converting heating sources. The other measures are purely income related.

As energy prices are only affected indirectly, a pass-through of increased international energy prices to consumers and businesses encourages demand response. Hence, the only environmental effect comes from implicitly increased income leading to increased consumption in general. Furthermore, as low-income households generally have lower emissions of greenhouse gases, this effect should be relatively small.

The only one of these four measures directly related to energy is the heating cheque, which is contingent upon the existing heating source. As it is a one-time payment, it should not create a disincentive to invest in greener heating. However, if there are expectations that similar schemes will be applied in the future if gas prices are high, it could create speculation. Nevertheless, with no clear precedent for such schemes, it seems a minor issue.  

As the measure is not targeting environmental aspects it is not working against, nor in favour of these.

Denmark has as a long-term goal of eliminating natural gas for heating, and to use electricity and district heating to a larger extent. For several years, it has been possible for private households with gas to apply for a subsidy for heat pumps. The fund was distributed according to a first-apply-first-served principle and typically depleted very quickly. As a part of the approach to the energy crisis, the allocated fund for the scheme was increased by 35 million DKK in 2023 (but no adjustment per household) (Finansministeriet, 2022). As a consequence of this and the increase in gas prices, a bottleneck for the delivery and installation of heat pumps arose, and at the point of writing this report, there was still a wait-time of a year for these heat pumps.

The measure targets households with natural gas directly, which includes both lower and higher income households. The subsidy is likely to drive up prices, with some of the economic gain harvested by plumbers and heat pump producers.

Heat pumps are more energy effective than natural gas, and to the degree that the electricity is green, it is also CO₂ neutral. Hence, it is a core component in Denmark’s long term climate plan, where district heating is not an option/is too expensive. The policy has mainly helped to speed up an already ongoing transition.

The subsidy is part of an existing policy for converting heating systems based on natural gas (and oil) into energy systems based on renewable energy and can be considered coherent with existing environmental policies.