I’m pleased to share with you newly published research by my colleague Luis Boscan on ways to implement residential electricity taxation in Denmark, and the impacts of doing so on a variety of important factors, including revenues, CO2 emissions, and the composition of the production mix. As you can see from the image above, Denmark has the highest electricity prices in the EU, so this is an issue that hits the home budget!
This paper investigates how to implement residential dynamic taxation in Denmark. To this end, it proposes three dynamic schemes that can be implemented by the Danish government. In particular, the paper studies one ad valorem and two different per-unit tax schemes, which respectively depend on electricity consumption and CO2 emissions. A second contribution of the paper is to perform a holistic impact assessment based on six different categories, which decision makers can utilize to evaluate taxation schemes. These are: CO2 emissions saved; the social cost of CO2 savings; revenue neutrality; the composition of the production mix; transparency and predictability of taxation schemes; and how much consumption can be shifted. Based on the findings, a recommendation directed at Danish decision makers in the energy sector is presented. Results stand in contrast to earlier findings in the literature and suggest that a per-unit (excise) dynamic taxation scheme that depends on the level of consumption is preferred over a per-unit taxation scheme that depends on CO2 emissions or an ad valorem tax on the retail electricity price. This assessment is based on the considerations that the preferred scheme: (1) incentivizes greater demand-side flexibility, (2) reduces CO2 emissions more efficiently, (3) depends on a predictable random variable, i.e. electricity consumption.