The Danish Parliament, in late June 2024, introduced a new CO2 tax on fuels (natural gas, coal, oils, etc.). The new tax introduces significant changes to existing legislation, aiming to enhance sustainability and green industrial practices.

The main changes to the current legislation include:

• Increasing the existing CO2 tax on fuels by 400%
• Cutting the existing excise duty on fuels in half
• Adding a new CO2 equivalent (CO2e)-emissions tax for companies covered by the European Union's Energy Trading System (ETS-1)

Overall, the new legislative proposals mean that there will be a significantly higher CO2 tax on fuels, lower excise duties on fuels and a new CO2e-emissions tax for ETS-1 companies.

The reform's impact is multifaceted:

• Energy for space heating/district heating
• The tax level on natural gas used for space heating is not significantly affected.
• However, taxes on oil and coal are raised substantially from 2025.
• Energy for processes in the Danish industry
• The CO2 tax on fuels is gradually increased from 1 January 2025 to 2030.
• Certain industries are significantly affected already from 1 January 2025.

Going forward, even more complex Danish Energy Tax regulation is anticipated. A summary of the changes follows.

CO2 tax on fuels

The existing CO2 tax on fuels continues but is significantly increased.

Value-added tax (VAT)-registered companies that are not a part of the ETS-1 can obtain a partial reimbursement of the CO2 tax on fuels for the period 2025–2029, if the use of the fuel and heat is refundable under the rules in the energy excise duty laws. From 2030, obtaining reimbursement of the CO2-tax on fuels will no longer be possible.

Excise duties on fuels

Changes in the excise duty structure result in a general decrease in excise duties on fuels.

Fuels used for processes

If CO2 tax on fuels is paid, and the fuels are used for certain processes, it will be possible to obtain full reimbursement of the excise duty for companies not covered by the ETS-1. Companies covered by the ETS-1 can obtain reimbursement of the excise duties used for processes except for 1.2 DKK per gigajoule (GJ).

Non ETS-1 companies

For non ETS-1 actors, the reform will result in a change in the tax structure, so the CO2 tax increases while the excise duty on fuels correspondingly decreases. Such companies will be able to obtain partial compensation for the CO2 tax on fuels used for process purposes in the period 2025–2029.

Companies that are covered by the rules on mineralogical process will be exempt from excise duties on fuels but will still be required to pay the CO2 tax. Here, partial compensation for CO2 tax on fuels for process purposes can also be obtained in the period 2025–2029.

ETS-1 companies

For ETS-1-covered companies, the CO2 tax on fuels will become more complex as a new "CO2e" emissions tax for companies covered by ETS-1.

This new CO2e-emissions tax will be gradually phased in from 2025–2030. There is no possibility of obtaining reimbursement for CO2e-emissions tax regardless of whether the fuel is used for space heating, processes or electricity production.

ETS-1-covered companies to which the rules on mineralogical process apply will be exempt from excise duties on fuels but will still be required to pay the CO2e-emissions tax. There will also be a lower CO2e-emissions tax on emissions from mineralogical process.

Special compensation for CO2 excise duty on space heating and hot water

As something new, companies that are ETS-1 actors can obtain partial compensation for the CO2 tax applicable to producing space heating and hot water. The compensation will be 10% in 2025 and increase to 50% by 2030.

In summary

The tax reform leads to a more complex regulation and a gradual increase in CO2 tax on fuels used in companies' processes up to 2030, with some companies experiencing significant increases from the beginning of 2025. Despite these increases, the excise duty level for space heating and district heating remains unchanged. The reform also offers a deduction in CO2-tax excise duty for companies that invest in carbon-capture plants.