Will environmental taxes on industry reduce Denmark's competitiveness?

Lars Gårn Hansen, Jesper Munksgaard and Marianne Schiöpffe, June 2005

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When economists propose environmental tax regulation of firms the standard response is that this will damage Denmark’s competitiveness.

In this paper we survey existing theories that enlighten the concept of ’national competitiveness’ and our main conclusion is that environmental taxes do not reduce national competitiveness. It is possible to find arguments for exempting certain sectors or types of firms from environmental taxes, but in none of the surveyed literature have we found arguments for permanently exempting all industrial production. Thus the present Danish tax structure – with high environmental taxes on consumers and – by European standards - low taxes on industry does not find much support in economic theory. On the contrary economic theory predicts that the present policy of generally exempting industry from environmental taxes will result in lower overall welfare, a lower average wage and a lower general employment level then would a policy of equal environmental tax rates for consumers and industry.

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