A tax revolution to fund the energy shift?

Switzerland's annual output of greenhouse gases totals more than 50 million tons, or 6.7 tons per capita Keystone

To reduce consumption of fossil fuels, a steep increase in fuel prices is needed: this is what Switzerland’s Liberal Greens are proposing with their initiative to replace VAT with an energy tax. But they are fighting a lone battle.

Climate change, atmospheric pollution, dangers to health and the environment – fossil fuels (petroleum, gas, and coal) are the source of serious problems for the world, many of which will burden future generations.

In Switzerland, debate on a new approach to energy policy has been going on for 30 years, but even today fossil fuels provide about 66% of the country’s energy needs, while the new renewable energy sources (sun, wind, and biogas) make up scarcely 2%.

After the nuclear accident at Fukushima in 2011, the Swiss government decided to develop a new energy policy for the next three decades. It involves phasing out nuclear power but also reducing consumption of fossil fuels by improving energy efficiency and developing renewable alternatives.

This package of measures, Energy Strategy 2050, – currently being studied by parliament – is moving in the right direction, but far too slowly, say the Liberal Greens. With their people’s initiative, the centrist party proposes to revolutionise the tax system in order to speed up Switzerland’s energy shift.

According to the proposal, valued-added tax (VAT) should be replaced within five years by an energy tax, collected either at the point of production or import of non-renewable energies.

This new tax would trigger a steep rise in the price of fossil fuels for heating and transport, favouring the energy-saving approach and making clean energies more competitive.

Wrong-headed tax

“With the [government’s] new energy strategy, a thousand proposed regulations, taxes and grants are under discussion,” says Martin Bäumle, president of the Liberal Greens.

“With our initiative we can solve all these problems at one go. An energy tax would need less bureaucracy to administer it than VAT, which is a burden not only on the government itself but on 300,000 businesses.”

In Bäumle’s view, the new tax would help to reduce our energy dependence on other countries.

Liberal Green initiative

According to the wording to be put before Swiss voters on March 8, VAT is to be abolished within five years. In its place, there is to be a tax on production or import of non-renewable energies. The new tax is initially to be fixed at a rate whereby it will generate an amount corresponding to the average of revenues generated by VAT in the five years preceding its abolition. Later the rate is to be calculated in such a way that the tax generates an amount equal to a fixed percentage of the GDP. To maintain a level playing field as regards competition with other countries, the legislation would contain provision for exceptions to be granted to industries needing a lot of power, and it would also introduce a tax on “grey energy” (the energy consumed in making and using a product), which would mainly affect imports. Some 5% of the tax revenue would be used to bring down health insurance premiums for lower income groups, or provide other such relief.

Every year Switzerland spends over CHF13 billion ($15 billion) on petroleum and gas, originating from unstable countries more often than not. The promotion of renewable energies would favour the cleantech industry at home, generating added value in Switzerland and thousands of jobs.

“VAT is a wrong-headed tax,” says Bäumle. “It hits the added value created by our businesses. It hits innovation, one of our economy’s strong points. It would be a much better idea to replace it with a tax that hits non-renewable energies imported from distant countries.”

Economic turbulence

The initiative has not met with favour from the government, which is calling on the voters to reject it. The cabinet concedes that a reduction of energy consumption and CO2 emissions cannot be achieved without increasing the price of fossil fuels.

But to make up for the shortfall from VAT, around CHF23 billion a year, taxes on fossil fuels would have to be set too high: petrol, for example, would go up at least CHF3 a litre, as Finance Minister Eveline Widmer-Schlumpf has pointed out.

The new tax regime would therefore penalise low-income households worse than VAT does, and would handicap Swiss industry in competing with other countries.

To avoid harming the nation’s competitiveness, the initiative does allow for exceptions to be granted to industrial sectors with a greater energy need.

But according to the government, the energy tax would be likely to cause “economic turbulence” in the short and mid-term. The government also opposes putting an end to VAT, which is in fact its main source of tax revenue (35% of all receipts) and ensures a stable budget.

To promote the hoped-for energy shift, by the year 2021 the government intends to introduce a system of incentives involving a tax on fossil fuels to be redistributed to households and businesses. This idea, as yet not fully specified, is sure to be a battle-ground between the parties in parliament.

Unstable funding

In parliament, the initiative of the Liberal Greens has received support only from their main environmentalist rivals, the Green Party, who already put forward a similar proposal, rejected in 2001 by 77% of the voters.

In the view of all the other parties, the energy tax would be an impracticable solution: it is impossible to ensure stable long-term financing for the state relying on a tax on a product (namely fossil-fuel energy) that is supposed to be eliminated bit by bit.

For the parties of the right and the centre, this energy tax would threaten the future of industry and stand in the way of mobility.

“Switzerland is already far ahead in terms of action to bring down CO2 as required by the Kyoto protocol,” says Albert Rösti, a Swiss People’s Party parliamentarian. “We cannot push ourselves further than other countries with new taxes on energy that would only weaken our economy, while having little effect on climate change.”

The left defends VAT by appealing to social factors.

“Rising costs for fossil fuels are indispensable for reaching an environmental change of energy policy, but this needs to be achieved by an incentive system,” argues maintains Social Democrat parliamentarian Eric Nussbaumer. “It would be dangerous to deprive the state of a solid revenue source like VAT, which also helps to fund social insurance.”

Penalising the energy guzzlers

“The time has come to act, but maybe we are 20 years ahead of the other parties,” says the Liberal Greens’ Bäumle, rejecting the criticisms. “An energy tax has the potential to provide a steady revenue stream for the state: if consumption of fossil fuels goes down, we just have to increase the tax rate.

And if in 100 years fossil fuels were to disappear, it would not be a problem to tax other energies, which also leave their mark on the environment, though to a lesser extent. We will always need energy.”

“Our initiative will not have a negative impact on businesses and households, since increasing prices of heating and motor fuels will be compensated by getting rid of VAT. The only ones penalised will be those who consume a lot of fossil fuels.”

Existing taxes

In Switzerland, some taxes are already levied to help reach goals of climate and energy policy. The government has put a CO2 tax on the production and importation of fossil fuels used for heating and other such purposes. A third of the proceeds is used to fund a programme of energy savings and the remaining two thirds is redistributed to the people.

A similar tax on fossil fuels for vehicle transport has been under discussion these many years, but up till now it has always been voted down by the centre and right-wing majority in parliament. A tax is also levied on the costs of transporting electric power, which encourages electricity from renewable sources to be added to the grid. There is a tax on heavy vehicles, and a tax on mineral oils.

(Translated from Italian by Terence MacNamee)