In this report, an analysis has been carried out on the economic effects of reducing the electricity tax. The analysis examines the economic effects of respectively reducing the electricity tax to the EU’s minimum rate of 0.4 øre/kWh (abolishment) and a reduction of the electricity tax so that it is put on an equal footing with energy dues on other fuels. The analysis was conducted on behalf of Danish Energy.
The main results of the analysis are:
- A reduction in the electricity tax to the EU’s minimum rate is estimated to result in a lasting loss of revenue of just under DKK 12 billion after mechanical loss and dynamic behavioural response, while the loss of revenue will amount to approx. DKK 7 billion if the electricity tax is reduced to a level on par other energy dues.
- If the electricity tax is abolished, all adults will achieve an average saving of approx. DKK 2,500 a year. This corresponds to just over DKK 4,700 per year on average per household.
Furthermore, a reduction in the electricity tax will lead to increased GDP. This reflects, among other things, that increased electricity consumption leads to better utilisation of other production factors, including higher labour productivity. Furthermore, a reduction in the electricity tax will lead to an increase in employment, because real wages after tax increase, and this also contributes to increasing GDP. For example, it is estimated that unfunded abolishment of the electricity tax will increase GDP by just over DKK 9 billion annually and increase employment by approx. 3,400 full-time employees.
- A reduction in the electricity tax also results in a more even distribution of income. This is because electricity consumption is growing proportionally less than income. For example, the abolishment of the electricity tax will lead to a relative saving of just under 2% of income for persons in the lowest income decile, while persons in the highest income decile achieve a relative savings of approx. 0.6% of their income.
- If the restructuring of the electricity tax is financed through a proportional income tax (e.g. the labour market contribution), this will continue to increase GDP. For example, it is estimated that GDP will increase by just over DKK 4.5 billion annually if the electricity tax is abolished. This is because a proportional income tax distorts fewer financial decisions than the electricity tax. Conversely, a restructuring from an electricity tax to a proportional income tax will only have a modest effect on employment. This reflects that the electricity tax has virtually the same labour supply effect as the income tax.
- Finally, the analysis finds that a reduction in the electricity tax is a relatively effective instrument in relation to increasing labour supply and GDP, compared with other tax cuts. This is because electricity tax also distorts the consumption decision.
The study is commissioned by Danish Energy.
Højbjerre Brauer Schultz (2017): "Økonomiske effekter ved at reducere elafgiften".