Danmarks Nationalbank’s analysis “Carbon taxes can be increased without affecting economic and financial stability” is based on calculations produced by DREAM using the GreenREFORM model. These calculations are documented in the memorandum “Risk scenarios for Danish climate policy towards 2035”.
The economic memo builds on the earlier study “Et risikoscenarie for dansk klimapolitik” (2024), which focused on the 70 per cent reduction target for 2030. The present analysis develops a risk scenario and two policy scenarios with a focus on an 80 per cent reduction target for 2035. With the longer time horizon, technical abatement options can now contribute to achieving the target.
The memo establishes a risk scenario in which greenhouse gas emissions in 2035 exceed the reduction target by 2.2 million tonnes. This shortfall is addressed through two alternative policy scenarios. In the first scenario, existing greenhouse gas taxes (and subsidies for negative emissions) are increased by an additional DKK 320 towards 2035. In the second scenario, emissions are reduced exclusively through support for the deployment of additional CCS technology.
In the first scenario, the impact on public finances is broadly neutral, as the additional revenue from higher greenhouse gas taxation is offset by increased support for negative emissions and lower revenues from existing energy and greenhouse gas taxes. In the second scenario, public finances deteriorate by just over 0.1 per cent of GDP due to the support for CCS.
Both scenarios lead to temporary increases in investment, which are largest in the second scenario due to the expansion of CCS facilities. In both cases, price increases remain very limited (below one per mille). In the first scenario, prices increase primarily as a result of the tax being passed on to production costs. In the second scenario, prices rise due to higher aggregate demand driven by investment subsidies.