Regional Energy Consumption and Income Differences in Denmark

Abstract

Internationally a debate on the distributional impact of energy taxation has focused on the tax burden relative to income. The general conclusion is that taxes are regressive, but at a varying degree for different countries. This study examines the relationship between location, income, heating technology characteristics and the energy tax that households pay. The article aims at identifying general implications of energy taxes with respect to different impacts on population groups depending on location and income. Tax payments associated with energy use are considered relative to total disposable income of households grouped in income deciles and by other characteristics. The impact of environmental taxes depends on income levels in rural areas compared to income in urban areas. In Denmark, the income difference is found to be quite small, but energy consumption and, therefore, also the burden of energy taxation, is higher in rural areas. Furthermore, the low-income households in rural areas consume much more energy than low-income households in urban areas. Low-income households in rural areas are, therefore, a group that is specifically exposed to increased energy taxation. Households living in rural areas have the disadvantage of not having access to public heating grids and natural gas grids, which is adding to the risk of high welfare losses from higher taxes. Apart from higher energy costs, the rural households also pay considerably higher taxes on transport by private cars. This article documents that rural populations have higher energy bills also compared to income, but there is no income inequality between rural and urban areas in Denmark. In countries with higher inequality in income distribution and a higher proportion of low-income households in rural areas, the impact of energy and transport taxes might be more uneven. In such cases, the environmental tax structure should compensate the low-income rural households. For countries with a high proportion of low-income households living in urban areas and little income inequality, this issue might, as in the Danish case, not be a problem in the design of energy and environmental taxes.