Matterhorn goes Paris: Emission Pricing and Policy Reforms in Switzerland

Sunrise hitting the peak of Matternhorn in Switzerland

In April, managers from several EU industries cried out in terror when faced with the rising carbon price in the emission trading system (ETS). At the same time, participating Switzerland is set to make that look cheap in comparison to their own carbon fee.

Currently, the “Confederates” return 2/3 of domestic fee revenues to citizens and businesses in money, with the final 1/3 in domestic energy efficiency. After parliament’s approval last year, the electorate will soon decide on a new price range that would allow for fees to more than double in order to come closer to their Paris obligations and 2050 net zero goal. An interesting case study for the rest of Europe regarding how successful Climate Income Systems (CIS) could work.

What is the environmental situation in Switzerland?

In 2020, Switzerland sadly missed its target to reduce CO2 emissions by 20% compared to 1990. A significant margin of 5% was left, while the EU already achieved a reduction of 24% in 2019. However, CO2 emissions per capita in Switzerland are much lower than in most industrialized EU member states. Together with media-effective youth protests and landslide election victories for both the green(-left) and green-liberal parties that same year, political pressure to sharpen the existing Swiss climate policy framework has increased remarkably.

Parliament and the Federal Council reacted with a complete revision of the existing CO2– Act in order to align Swiss policy with the Paris Agreement (aiming to reduce CO2 emissions by 50% in 2030 and achieve net zero by 2050). In 2008, Switzerland enacted a levy on thermal fuels (“CO2-Lenkungsabgabe”) and a separate emission trading system that was linked to the European ETS in 2020.

Photo by Boris Baldinger on Unsplash

How does the new Swiss CO2-Act price carbon?

The bill enacts the federal government to settle a carbon fee between 96 and 210 CHF (€79 and €192) per ton of CO2 emissions from thermal fuels (including oil and natural gas) that enter the Swiss economy. The levy is charged on the production, extraction and importation of those fuels, with the last channel being the most relevant in Swiss reality.

Besides that, high-polluting operators from specific economic sectors have to participate in the Pan-European emission trading system (EU ETS). Operators subject to emission trading, others legally committed to reduction targets and a range of public institutions are eligible to get a reimbursement of the carbon fee. In the spotlight of current political discussions stands the introduction of an aviation ticket fee for regular and private flights departing from Swiss ground, between 30 and 120 CHF (€27 and €110) per passenger, or 500 to 3000 CHF ( €457 to €2743) per take-off. 

Besides pricing emissions, the renewed CO2-Act comes with a multitude of technical regulations around emission reduction targets and benchmarks across sectors, e.g. for vehicles and buildings. Motor fuel importers, who are required to compensate a substantial fraction (75% by 2030) of the emissions resulting from their imports with domestic and foreign abatement projects, may not pass on customer surcharges higher than 0,12 CHF (€0,11) per litre.

How is the carbon fee aligned with emission trading?

Firms in specific industries (including aviation) that exceed a given emission level are required to participate in the Swiss emission trading system, which is linked to the EU system. This means they need to buy emission rights (EUAs) on auctions by the Federal Office for the Environment (BAFU) or from other European market participants, equaling the recorded emissions at the end of the reporting period. If operators do not deliver the required allowances for their given emissions (“non-performance”), they pay a penalty fee of 220 CHF (€200) per ton of CO2.

Facilities that operate subject to the ETS are exempt from the fee duty and can reimburse paid levies at the end of a fiscal year. Entities generating power from levied fuels, however, can only rebate their expenditures on CO2 levies and ETS allowances combined if they are higher than a scientific reference price for one ton of CO2. 

Some businesses as well as all airlines can receive free allowances. In contrast, thermal power plants are excluded from this possibility. 

How does Switzerland’s government distribute carbon fee revenues to Swiss citizens?

As both individuals and businesses are bearing effective price increases from the CO2 levy, every Swiss resident and company is entitled to receive the Swiss “Climate Income”.

The Swiss government distributes 67% of the carbon fee revenues from either group directly. For individuals through rebates on the premia of their mandatory health-insurance policies in equal amounts, while for businesses the disbursement is based on their mandatory contributions to the public pension scheme (AHV). Furthermore, at least 50% of the collected aviation fees is disbursed to the population in the same way.

Youth sitting in Zurich, Switzerland
Youth sitting by the water in Zurich. Photo by Wyron A on Unsplash.

Does the Swiss government earmark carbon fee revenues for other purposes?

Previous to the scheduled vote, there has been one other funding purpose other than direct disbursement: a fund for co-financing real-estate efficiency improvements and a technology fund. 

The possible reform, however, would bring the establishment of a climate fund, which addresses, besides real-estate efficiency improvements and infrastructure investments, mitigation measures and investments into innovative technologies. The parts of the CO2 fee and the aviation fee that are not disbursed (33% and up to 50%), as well as various non-performance fees (for instance from car importers that do not meet their targets), will flow into this climate fund.     

What lessons has Switzerland learned from the existing emission pricing policy?

The exclusive focus on thermal fuels at inception of the first Swiss CO2 levy was for a reason: the biggest historic polluter in Switzerland is the building sector. This is mostly because the sector has historically relied on heating oil. Since 1990, emissions there have dropped by 34%. In contrast, transport and agrifood remain the problem sectors of Switzerland; emissions have actually increased since 1990. If we compare this with the economy-wide 20% emission reduction over the same period, the Swiss policy on thermal fuels can be seen as relatively successful.

Ten years after the inception of the CO2 levy, the Federal Office for the Environment (BAFU) published an evaluation based on three different studies. The agency came to the conclusion that the levy alone avoided between 4,3% and 9,6% of emissions in the affected sectors, with households contributing 2/3 of the reduction. When drilling down into the policy mix, the researchers also found that the effect from carbon pricing overwhelmed the contributions from the real-estate efficiency programme and industry reduction commitments by a margin of 1.3 m tons of CO2 for 2015 alone—an amount equal to the annual carbon sequestration of 200 million mature pine trees.

In the near future, Switzerland will be able to provide invaluable data on further long-term effects of their Climate Income policy, including changes in industrial investment behavior or household income effects.

Young man standing out looking over a lake in Switzerland
Photo by Pavel G on Unsplash

Who supports the Swiss CO2 Act bill?

Almost all political parties that currently make up the legislative National Council are in favor of the revised CO2 Act, ranging from the Green Party (GPS) on the left to the center-right liberals (FDP). Moreover, many business associations and lobby groups, among which the highly influential umbrella business association Economiesuisse, support the bill.

However, the largest Swiss party—the right-wing populists (SVP)—rejects the proposal with vocal support from other political groups and associations, such as oil importers. The opponents argue predominantly with the expected price increases for the middle class and the high regulatory burden for small and medium enterprises. Some political agents also refer to the relatively low emission level of Switzerland, presenting stricter climate policy as a bad economic trade-off. 

What has clearly changed over the last years is that former voices of blunt climate-change skepticism or even denial have been pushed away from the front seats. Leading advocates of the right wing emphasize the environmental potential of technological development and innovation. As part of the ongoing debate around the revised act, the opposing parties do not openly demand the abolishment of the existing policy framework. Instead, the Swiss way has persuaded the majority of influential stakeholders that charging and sharing the common CO2 budget is fair to both nature and society.

References

Featured photo by Dominic Spohr on Unsplash