Denmark aspires to become one of the most climate-friendly countries in the world. In June, its Parliament overwhelmingly passed a new climate law that aims to reduce greenhouse gas emissions by 70 percent below 1990 levels by 2030, with net zero emissions targeted for 2050.
This is an even more ambitious goal than the EU's target to cut emissions by 55 percent over the same time period.
A new IMF staff paper takes a closer look at Denmark's green strategy and proposes a few adjustments to help the country realize its ambitious goals. In line with earlier IMF recommendations, the paper proposes a comprehensive strategy with enhanced carbon pricing, reinforced by fiscal incentives across different sectors. It also urges using revenues from carbon pricing to cut labor taxes.
The package proposed in the paper would provide powerful incentives for climate mitigation, while shielding households and firms from higher energy prices. Crucially, the paper argues, spreading measures to different sectors is a good way to avoid carbon prices that are too high, capping them at half the level currently suggested by the Danish Council for Climate Change. The economic cost from this lower carbon price would be fairly low—estimated at about 0.2 percent of GDP.
"Feebates"—fees on products with high emissions combined with rebates on products with low emissions—are recommended for sectors with high emissions. They could be especially useful to curb Denmark's large agricultural emissions from the country's huge number of farmed animals. Because feebates raise the costs of producers who farm unsustainably but reward them as they shift to sustainable farming, this program can deliver a fair low-carbon transition that preserves profitability and jobs.
By crafting an effective climate policy that protects the majority of people, Denmark's strategy to make large cuts in its emissions could be more attainable.
Nicoletta Batini is a scholar of innovative monetary and fiscal policy practices .
Miguel Segoviano is Denmark Mission Chief and co-leader of the financial sector analytical working group of the IMF's European Department.
Disclaimer: This article first appeared on IMF Blog and is published by special syndication arrangement.