Deadweight losses and shadow prices in Danish energy politics

The taxes imposed on greenhouse gas emissions differ sharply between different types of energy consumption. The result is that reductions do not occur at the lowest socio-economic costs possible. The cost is something referred to as a deadweight loss. A certain deadweight loss is unavoidable in order to achieve a given reduction. But the unequal taxes, etc. (shadow prices) result in a large, unnecessary deadweight loss. Given the greenhouse gas emissions from energy in Denmark, the unavoidable deadweight loss is 14.3 billion DKK, while the unnecessary deadweight loss is 10.8 billion DKK. The energy policy is, therefore, nearly 11 billion DKK, or 75 percent, more costly than is necessary.

However, Denmark is only obligated to reduce emissions in the so-called non-ETS sector (ETS is the EU Emission Trading System). If we consider the unchanged non-ETS emissions, the unnecessary deadweight loss grows to 17.0 billion DKK. Lastly, the unnecessary deadweight loss can be measured in relation to an optimum shadow price which corresponds to the global damage cost of greenhouse gases. The average shadow price is roughly double the cost of the damage, resulting in an unnecessary deadweight loss of 19.8 billion DKK.

This large deadweight loss, first and foremost, could be of the registration tax on motor vehicles, as well as the phasing out of the electricity tax. In addition, Denmark should make maximal use of the available flexible instruments in the EU, as well as working to increase flexibility in the EU; e.g., by strengthening the ETS system.