1998: 5 DKK/m3 (= 15-20% of the average price of water inclusive of sewage fees and taxes) (DEPA 1999, pp65)
Private properties obtaining water from a private well are also taxed, based on an average household consumption of 170 m3/annum. (DEPA 1999, pp65) Refunds
Industry and agriculture are exempt due to concerns over international competitiveness. These sectors pay the tax, but receive a rebate upon payment of their VAT. (DEPA 1999, pp11, 65)
Institutional Arrangements
The tax is collected by the Customs and Tax Agency and its regional offices.
The tax is specified directly on the annual water bill, along with sewage treatment, VAT etc. There are about 300 public (municipal) water works and 2700 privately managed water works; while the former are common in urban areas, the latter are predominant in rural or formerly rural areas.
Regarding water supply from individual wells, the tax is collected by the local municipality, but the revenue is then paid to the Customs and Tax Agency. A standard consumption of 170 m3/year is assumed where no metering takes place. However, metering of water was already common before the introduction of the tax, and has been extended even more (Ecotec, 2001).
The administrative costs of the scheme are minor. The identification of households without a supply of piped water was done by the municipalities. They compared customer registrations of the water works with the local building register.
Water consumption is regulated by a concession system. The 14 regional Counties and the municipalities of Copenhagen and Frederiksberg are responsible for granting concessions. The tax can be seen as a kind of natural resource payment for the use of these concessions.
Monitoring and Enforcement
From January 1999 all households were required to have a water meter installed. Apartments are exempt from this regulation, although they can be installed, but usually a meter is installed for the whole building and bills distributed accordingly. Prior to January 1999, households without meters were taxed based on a high rate of water consumption (170 m3/annum), so as to create incentive to install a meter. Buildings remaining empty for parts of the year, and without a meter are taxed at 70 m3/annum (DEPA 1999, pp67)
Expectations (Ex ante Analysis)
The current rate of the tax is 5 DKK (EUR 0.67) per cubic metre of water supply of piped water. The implementation was phased in gradually with a successive increase of 1 DKK (EUR 0.13) per year from 1994 to 1998. Value Added Tax (VAT) which is charged at 25 % is imposed on the tax, so that the effective full rate of the water supply tax is 6.25 DKK (EUR 0.84).
The tax is expected to generate a revenue of about 1,6 billion DKK (EUR 214 m) at its full rate, which is less than the 2,3 billion DKK (EUR 208 m) originally expected. The Ministry of Taxation did not seem to foresee the decline in water consumption and to have produced its forecast on the basis of rather dated figures. In the first four years of operation the tax produced 25-30 per cent less revenue than expected. The revenue goes to the general Government budget.
The tax mainly applies to households (including individual wells which are common in rural areas). The tax does not apply to the agricultural sector because water used for irrigation (the vast majority of water used by the sector) is abstracted directly from the ground and does not use the normal water supply infrastructure.
Performance
The tax creates an incentive to reduce water consumption, thus reducing quantities of sewage (DEPA, pp11). Due to the specified levels of concentrations permitted from sewage treatment plants, reduced quantities of sewage result in reduced discharge of treated sewage. (DEPA, pp11).
In 1991-1995: tap water supply declined by 13%:
Year | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 |
Water Supply. m3 | 551 | 540 | 513 | 493 | 481 | | |
Liable amounts of water. m3 | | | | 295* | 327 | 323 | 320 |
*based on revenue information that covers 11 months of the year
(DEPA 1999, pp67)
Revenue:
1994: 295 MDKK (based on a collection of revenues for 11 months-the registration of payments is one
month behind)
1995: 654 MDKK
1996: 970 MDKK
1997: 1279 MDKK
1998: 1544 MDKK
(DEPA 1999, pp66)
Although the environmental rationale for the tax may be weak (see drawbacks below), there are some environmental benefits:
Increased consumer awareness of environmental problems.
Reduced sewage amounts (i.e. less tap water use = less sewage).
‘It can be seen as a preventative measure that contributes to prevent increased tap water use.'
(DEPA 1999, pp67)
The effects on pipe maintenance and repair are unknown, but it is believed any costs would be covered by savings achieved (DEPA 1999, pp68). The administration is reactively straightforward since ‘the tax has been implemented solely through the use of existing systems.' (DEPA 1999, pp68).
Reducing household water consumption is the main environmental aim of the tax. It increased through the 1980's, but reached a peak in 1989. Since then it has been steadily decreasing. From 1989 to 1998 consumption decreased from 360 million m3 to 266 million m3, i.e. about 26 per cent. About half of the reduction took place prior to the introduction of the water tax, the remaining half since its inception. There are no studies which explore the precise effect of the tax, but it is likely to represent less than a 13 per cent reduction since 1994.
Environment Daily (1538, 24/10/03) reported that Danes have cut their consumption of groundwater by nearly 40% during the past ten years, largely in response to green taxes, the environmental protection agency (EPA) reports. Noting that groundwater supplies more than 99% of the nation's drinking water, the agency links a continuous year-on-year decline in private consumption to the price of water, which has risen 150% since 1993. The numbers "support and document [the fact] that green taxes are an effective measure to induce the Danes to conserve water", the EPA says in a statement. See press release (http://www.mst.dk/default.asp?Sub=/presse/13420000.htm).
Leakage from water works has decreased from 43 million m3 in 1993 to 33 million m3 in 1998, i.e. about 23 per cent. This is generally seen as a result of the tax.
The tax has a positive influence on employment, in particular for sanitary engineering companies, which renovate water installations. New products have been developed and are being marketed such as new types of water-saving sanitations, in particular low-flush toilets. However, the impacts cannot be quantified. And no analysis is available on the net effects of the employment effects of the tax, i.e. taking into account losses in employment related to "old" technology production.
The tax seems to have fostered some behavioural change among households. The use of water saving appliances is now common among Danish households. 45 per cent of Danish households have installed water saving taps, and 39 per cent of households indicate that they have invested in low-flush toilets (3- and 6-litre flush versus former 10-litre flush). 53 per cent indicate that they have a modern water saving washing machine (Ecotec, 2001).
Consumers mention both environmental reasons and the increased price of water as reasons for saving water. While 60 per cent of the consumers find that the influence of environmental reasons is significant or very significant, 40 per cent of them indicate a similar importance of the price. These answers may represent more of an altruistic than their actual behaviour.
This relative distribution between price and environmental reasons (40%/60%) can also be applied to the household water consumption reductions which have taken place since and because of the introduction of the tax. From the 13 per cent water consumption reduction achieved since 1994, about 40 per cent of the reduction may be due to the price increase - while about half of the price increase is due to the tax. In other words, 20 per cent (or 10 million m3) of the water savings can be attributed to the tax. This saving corresponds to the 10 million m3 leakage reduction, which also resulted from the tax. All in all, the tax has reduced (in gross terms) water consumption by about 20 million m3.
Drawbacks
‘The environmental rationale for the tax is fairly weak' (DEPA, pp11). This is due to the fact that groundwater is relatively plentiful in most areas, and to reflect this, the tax should be lower in these areas.
If industry were liable pay the tax then this could result in significant water savings, but this would impact competitiveness and so is not the case. (DEPA 1999, pp67). As illustrated by the table above reductions in water use were mainly achieved in the period prior to the introduction of the tax on tap water. (DEPA 1999, pp67).
Related Instruments
- User-based cost recovery tax, (DEPA, pp4)
- Awareness building (DEPA, pp11)
- High water use fees: where water meters are not installed estimates are high creating incentive to install meters and thus reduce water consumption since ‘this is immediately reflected in the total water costs for the individual households.' (DEPA, pp11)
References
Economic Instruments in Environmental Protection in Denmark, Danish Environmental Protection Agency, Ministry of Environment and Energy, 1999, pp4, 10-11, 65-68
Statistics Denmark, 1999
Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States. In association with CESAM, CLM, University of Gothenburg, UCD, IEEP http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm
http://www.mst.dk/default.asp?sub=/presse/13420000.htm Environment Daily 1538, 24/10/03
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