The European Commission announced it approved, under EU State aid rules, a EUR 724 million (DKK 5.4 billion) Danish scheme to lower the rate of new greenhouse gas (GHG) emissions tax for certain companies. The scheme offers a reduced tax rate for eligible companies at 33% of the standard rate.

The measure aims to prevent the risk of carbon leakage, where companies relocate production outside of the EU to countries with less ambitious climate policies, resulting in increased greenhouse gas emissions globally.

The Danish measure

As part of a broader “Green Tax Reform” agreed in 2022, Denmark decided to introduce a tax on GHG emissions from activities covered by the EU Emissions Trading System Directive (CO2 emissions tax) in line with the goal of reducing Denmark’s emissions by 70% in 2030 compared to 1990 levels.

The CO2 emissions tax is calculated based on the number of emission allowances that operators must surrender each year under the EU emission trading system (ETS1). The tax aims to further encourage the reduction of CO2 emissions in Denmark, boosting the impact of ETS1 by providing operators with a stronger financial incentive to cut their CO2 emissions.

Denmark notified the Commission of its plans to introduce an estimated EUR 724 million (DKK 5.4 billion) scheme to lower the CO2 emissions tax rate for certain companies to mitigate the risk of carbon leakage.

The measure will benefit companies that (i) are subject to ETS1, (ii) are active in sectors listed in the EU ETS Carbon Leakage List, and (iii) cause CO2 emissions through eligible production processes, namely mineralogical and metallurgical processes, chemical reduction and electrolysis. Eligible companies will benefit from a reduced tax rate which will be set at 33% of the standard rate. The scheme will run until 31 December 2033.

The Commission’s assessment

The Commission assessed the scheme under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union (TFEU), which enables Member States to support the development of certain economic activities subject to certain conditions, as well as under the 2022 Guidelines on State aid for climate, environmental protection and energy (‘CEEAG’), which allow Member States to grant aid in the form of reductions in environmental taxes and parafiscal levies.

In particular, the Commission found that:

• The measure contributes to the development of certain economic activities, namely the sectors deemed at genuine risk of carbon leakage due to a significant increase in their production costs. By mitigating the risk of carbon leakage, the reduced tax rate contributes to a higher level of environmental protection compared to the situation absent the measure.
• The scheme is necessary and appropriate to support only those companies incurring a significant increase in production costs due to the CO2 emissions tax.
• The scheme is proportionate as each company benefiting from the measure will still pay 33% of the standard tax rate and any negative effect on competition and trade in the EU will be limited in view of the design of the measure.

On this basis, the Commission approved the Danish measure under EU State aid rules.