Biomass is regulated by taxes, subsidies, requirements and rules
As a general rule, energy consumption in Denmark is taxed. Today that applies to coal, oil products, natural gas and electricity, but not to solid biomass. Biomass for energy production achieves tax-free status, whether it is used in combined heat and power (CHP) stations, by companies or by private households. It is considered to be a renewable energy, no matter its source. This means that biomass based electricity is subsidised, as is the case for electricity from, for example, wind turbines and solar panels. Biomass heat production, on the other hand, is not directly subsidised, but is supported indirectly by not being taxed.
Lastly, biomass falls within the general regulations governing district heating. These include the requirement for co-generation of electricity and heat, which in some cases prevents the production of heat only; fuel specifications that maintain natural gas in some district heating areas; and the net advantage of converting to biomass and avoiding taxes on fossil fuel (the net-advantage model), which provides large CHP installations with additional potential earnings in addition to the benefits of the so-called “non-profit” principle.
The regulatory framework should be based on sustainability criteria
Biomass comes in very different forms. Some types of biomass have a small carbon footprint and other types a large one, dependent on variables such as the type of wood, country of origin, forest management practices, and whether or not the raw material is considered a residual waste product. As described in Chapter 4, sustainability criteria can be used to identify biomass that, with reasonable certainty, has a relatively low carbon footprint.
The Danish Council on Climate Change proposes that the Danish regulatory framework is based on sustainability criteria. Biomass that can be documented as fulfilling these criteria with regard to the climate, referred to here as climate-friendly and sustainable biomass, will continue to be perceived as carbon neutral renewable energy, even though it has to be stressed that biomass is seldom in practice fully carbon neutral. In this way climate-sustainable biomass achieves the same advantages in the regulatory framework as other types of renewable energy. The remaining biomass, on the other hand, should be treated as fossil fuel energy based on an average CO2 content for the purpose of calculating taxes. The estimate for the CO2 content should, in principle, take into account factors such as forest management and climate regulation in the country of origin, but in practice it must be uniformly established for all types of biomass that cannot be documented as climate-sustainable, given that it is not likely to be possible to differentiate between the separate types. A natural step would be the inclusion of “size limits” in the regulation. These would, for example, exempt private people from the requirement to document the sustainability of using wood collected from their own property, but not sold elsewhere.
A reform of the tax system can remove the current preferential treatment of biomass
Biomass has an unjustified, advantageous position in the current tax and subsidy system for energy in Denmark. This preferential treatment is apparent, for example, in the tax saving attainable by replacing coal with biomass in CHP, measured per avoided tonne of CO2, which is larger than the reward attainable as a subsidy or avoided CO2 penalty when replacing coal with renewable energy in electricity production. Another example is seen in the total exemption of biomass from taxes in contrast to the situation of heat pumps today, which pay an electricity tax that exceeds the production subsidy granted on the consumed electricity when it is generated from a renewable source of energy.
The two examples demonstrate the need to reform the energy tax and subsidy system to prevent biomass attaining unjustified advantages. A reformed system should focus on encouraging CO2 reduction through a uniform tax on CO2 emissions and, in cases where a high tax is not expedient, through a subsidy that provides a uniform incentive for CO2 reduction. Such cases occur when a high Danish tax results in the production of emissions being transferred to another country, and where the aim to reduce CO2 emissions is not restricted to emissions originating in Denmark.
The Council’s proposal for an improved tax and subsidy system, which was first presented in an analytical work in April 2018, Future Green Taxes on Energy, gathers the current energy and CO2-tax into a single CO2-levy of a size that expresses the degree of political ambition for CO2 reduction. A discount is awarded on the CO2-levy on Danish electricity production, reflective of the CO2 content of imported electricity, to avoid encouraging imports of electricity from fossil fuel unnecessarily. In return, all electricity consumption in Denmark is taxed at a level equal to the discount on the CO2-levy, with the result that electricity produced in Denmark and imported electricity is taxed completely uniformly in relation to its fossil fuel content. Electricity from renewable energy receives a subsidy equal to the tax on electricity consumption, resulting in a net tax of zero on green electricity.
Only biomass that is not climate-sustainable is subject to a CO2-levy
Climate-sustainable biomass should continue to be exempt from the CO2-levy. Likewise, electricity produced from climate-sustainable biomass should attain an electricity production subsidy in the same way as other renewable energy sources. Conversely, biomass that does not fulfil sustainability criteria in terms of the climate is treated in the same way as fossil fuels, meaning that this type of biomass does not qualify for subsidy and must pay a CO2-levy reflective of the administratively established CO2 content. Taxes can also be used to promote energy efficiency activities by companies and households. Such an energy efficiency tax should in principle apply to all energy sources, including climate-sustainable biomass. Closer examination is required, however, to establish whether taxes are the right instrument for securing energy savings in an efficient manner, or whether other political tools are more effective.
Other regulation should ensure that all renewable energy technologies are treated equally
Fundamentally, energy regulation should strive to achieve a cost-effective green transition. This is done, among other things, by putting all energy technologies on a level playing field in order to avoid, for example, overinvestment in biomass. To do that requires easing some parts of the existing regulatory framework for district heating.
A number of proposals have already been presented for deregulation of district heating. With that in mind, the Council proposes that the requirement for co-generation both power and heat is gradually removed to prevent heat pumps from being unfairly discriminated against in competition with fuel-based technologies such as biomass-CHP. Likewise, existing restrictions on fuel use can be advantageously phased out to create uniform market conditions for all renewable energy technologies. In addition, the principles contained in the net-advantages model should be expanded to also include other renewable energies. Lastly, electricity tariffs should be revised in order to prevent high tariffs becoming a barrier to the utilisation of heat pumps.