New European CO2 tax law to have limited impact on Swiss companies

Switzerland is second only to Sweden when it comes to high carbon taxes. Keystone

From July 14, the European Union will present a new CO2 law which aims to levy a carbon tax at its borders. This should have a limited impact on Swiss companies. Switzerland currently has one of the most expensive rates per ton of CO2 in the world.

The proposed CO2 tax at EU borders will officially be presented by the European Commission on July 14. It aims to impose a duty on imports from countries with low climate and environmental standards in order to protect European companies from competition deemed unfair. It will be implemented from 2023.

The CO2 tax, one of the main instruments in the European Green Deal, would initially cover imported products from sectors that generate a high level of emissions, such as electricity, concrete and steel. “We need to equalize the carbon price between domestic production and imports to prevent relocation to countries where carbon is cheaper than in the EU”, the former director of the World Trade Organization and one of the instigators of the new European tax, Pascal Lamy, previously explained to French-speaking Swiss radio and television RTS.

The border tax would prevent companies from bypassing the EU system, where they have to pay a price for CO2 emissions, he explains. Introduced in 2005, the EU’s Emissions Trading System is based on the polluter-pays principle and involves over 10,000 companies in the electricity, manufacturing and civil aviation sectors.

Limited impact for Swiss companies

“This is a sensible and necessary measure,” according to Philippe Thalmann, professor of environmental economics at the Federal Institute of Technology in Lausanne, in an interview with SWI swissinfo.ch.

The new law mostly targets countries with lower environmental thresholds such as China, and would have little impact on Swiss companies. Switzerland has levied an incentive tax on fuels (only heating oil and natural gas) since 2008. And since 2020, the Swiss emissions trading system, has been linked to the European one. The goal of the Swiss tax is to encourage companies and individuals to cut back on consumption of fossil energy for heating – for example, by replacing oil boilers with heat pumps – and thus reduce CO2 emissions.

The rate today in Switzerland is CHF96 ($105) per ton of CO2, one of the highest in the world. This is set to increase to CHF120 in 2022, the maximum foreseen by current legislation, as emissions have not yet dropped sufficiently.

“The EU does not need to protect itself from Switzerland if the country applies the same prices on CO2”, says Thalmann. “This is the case for a part of Swiss industry, that is, for companies participating in the Swiss emissions trading system”. Currently, the price of an emission allowance in the EU is around $50 (CHF46).

The EU could however decide to tax companies and sectors that are exempted from the Swiss CO2 tax. Companies in Switzerland can currently choose not to pay the tax, but must instead commit to reducing emissions.

“Switzerland is closely following developments within the European Union. A first exchange with the EU Commission to implement an adjustment mechanism at the border took place. It is still too soon to say what consequences this will have for Switzerland”, said Robin Poëll, spokesperson for the Federal Office for the Environment.

According to Thalmann, Switzerland should also introduce a similar tax as the EU, to prevent Chinese products from entering the EU after transiting through Switzerland.

Effective measure?

Carbon can be priced in two ways: through emissions trading systems and CO2 taxes. The choice depends on individual countries and sectors. Beyond the EU and Switzerland, some dozen countries around the world have adopted one or both models, according to World Bank data. These include Canada, China, Mexico and South Africa.

In 1990, Finland was the first country in the world to introduce a CO2 tax. Sweden currently imposes the highest rate, at USD 137 per ton, followed by Switzerland (USD 105).

In place for several decades, how efficient are carbon taxes at reducing emissions?

“In the sector where it is applied, namely fossil fuels used to produce heat, the tax has proved effective,” Thalmann says. Indeed, Switzerland has recorded the greatest emissions reduction in its construction sector, he notes. “The tax is also effective for industry, as it obliges companies that want to be exempted to reduce their emissions.”

“Some countries set a relatively low tax rate, but apply it to a wide range of emissions. Others, like Switzerland, opt for a very high, but not so extensive, tax. The Swiss CO2 tax covers around 40% of emissions,” states Thalmann. Sweden, he adds, can be considered as a model, since it not only has the highest tax in the world, but it has also managed to increase and extend it gradually.

The EU border tax is not without its critics. In April, during a video conference with Emmanuel Macron and Angela Merkel, Chinese President Xi Jinping voiced his opposition, denouncing the “trade barriers” being erected in the name of combating climate change.

Translated from Italian by Julia Bassam; edited by Virginie Mangin.