Title of the measure: CH2 CO 2 Levy (CO 2 -Abgabe / Taxe sur le CO 2 / Tassa sul CO 2 ) General description. Development of the CO 2 Levy

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1 Title of the measure: CH2 CO 2 Levy (CO 2 -Abgabe / Taxe sur le CO 2 / Tassa sul CO 2 ) General description The CO 2 levy is a key instrument in order to achieve the statutory CO 2 emission targets as defined in the CO 2 Act (Federal Act on the Reduction of CO 2 Emissions). By 2020, the domestic greenhouse-gas emissions must be reduced by 20% compared to the 1990 level (Art. 3). Since 2008, a CO 2 levy is imposed on the production, extraction as well as the import of thermal fuels (Art. 29). This incentive tax applies to fossil compostable fuels such as oil, gas and goal but is not imposed on motor fuels. The tax creates an incentive to use fossil fuels more economically and/or switch to more carbon-neutral or low carbon energy sources by increasing their price. Energy-intensive companies have the option to apply for exemption of the CO 2 levy (see MURE measure Emission Reduction Target Agreements) and large energy-intensive companies that participate in the emissions trading scheme are automatically exempted. The revenues of the CO 2 levy are partially (two-thirds) redistributed to the public and the economy independently of consumption every year (see redistribution). Development of the CO 2 Levy When the levy was introduced in 2008, the level was set at 12 Swiss francs per ton of CO 2. The level increased step-wise to 96 Swiss francs per ton of CO 2 as of 1 st January The CO 2 tax for extra-light heating oil and natural gas were also increased over time and are currently set at Swiss francs and Swiss francs respectively per ton of CO 2 (see Table 1) (Federal Customs Administration n.d.). The drafting of the third CO 2 Act which defines the Swiss Climate Policy after 2020 is still ongoing. The draft of the Swiss Federal Council foresees the continuation and strengthening of the main instruments and with this the CO 2 levy will remain an important pillar. The maximum level of the CO 2 levy on heating and process fuels can be increased to 210 Swiss francs per ton of CO 2. However, the automatic augmentation when emission targets are not reached as in the current CO 2 Act (see Table 2) is envisaged to remain (Swiss Confederation 2018, p. 88). Table 1: Swiss CO 2 levy development over time CHF / ton CO Extra Light heating oil CHF / kg Natural Gas CHF / kg Source: (Federal Customs Administration n.d. & own calculations) Table 2: Chapter 8 of the CO 2 Ordinance (Federal Office of the Environment [FOEN] 2013). Ordinance on the Reduction of CO 2 Emissions (CO 2 Ordinance) of 30 November 2012 (Status as of 1 January 2017) Chapter 8 CO 2 Levy Section 1 General Provisions Art. 93 Subject to the levy The production, extraction and import of the following are subject to the CO 2 levy: a. coal;

2 b. other thermal fuels listed in Article 2 paragraph 1 of the CO 2 Act insofar as they are subject to a mineral oil tax under the Mineral Oil Tax Act of 21 June Art. 94 Rate of the levy 1 The levy shall be increased as follows: a. from 1 January 2014: at 60 francs per tonne CO 2, if the CO 2 emissions from thermal fuels in 2012 exceed 79 percent of 1990 emissions; b. from 1 January 2016: 1. at 72 francs per tonne CO 2 if the CO 2 emissions from thermal fuels in 2014 exceed 76 percent of 1990 emissions, 2. at 84 francs per tonne CO 2 if the CO 2 emissions from thermal fuels in 2014 exceed 78 percent of 1990 emissions; c. from 1 January 2018: 1. at 96 francs per tonne CO2 if the CO2 emissions from thermal fuels in 2016 exceed 73 percent of 1990 emissions, 2. at 120 francs per tonne CO2 if the CO2 emissions from thermal fuels in 2016 exceed 76 percent of 1990 emissions. 2 The CO 2 levy is imposed in accordance with the tariffs listed in Annex 11. Art. 95 Declaration of payment of the levy Any company or person that trades in thermal fuels in accordance with Article 93 must declare the applicable rate of the levy on invoices submitted to buyers. Figure 1 shows the development of the CO 2 emissions from thermal and motor fuels (these are not covered by the CO 2 law) according to the CO 2 Act ( ). As outlined above, the CO 2 levy is increased whenever the targets as outlined in the law are not achieved. Because the consumption of thermal fuels depends on weather conditions, the CO 2 emissions are corrected for these before a decision about an increase of the levy is made. In Figure 1 the red line is adjusted for weather conditions and the red crosses mark the points, where the CO 2 levy must be increased in case the emissions are at a higher level. Figure 1: Evolution of CO 2 emissions from thermal and motor fuels according to the CO 2 law ( ) (FOEN 2018a).

3 Redistribution of the revenue from the CO 2 Levy The revenues of the CO 2 levy are partially (two-thirds) redistributed to households and companies through health insurers and the OASI (old-age and survivors insurance) compensation offices. The level of consumption is not relevant in determining the amount redistributed to the groups households and businesses, however, the proportion of their contribution to the levy are taken into account (FOEN 2017). Redistribution to households The redistribution to the households is carried out by health insurers over the premium and is designed uniformly, meaning that every person receives the same amount independent of their actual consumption level. Redistributing over health insurers is efficient as they have the most current address list of Swiss residents (à basic insurance is compulsory) (FOEN 2017). Redistribution to companies The redistribution to companies is carried out by the OASI compensation offices on behalf of the Federal Office for the Environment (FOEN). The funds are settled against the respective contributions of the company or by a pay-out. The revenues are redistributed in proportion to the salaries of employees that qualify for OASI (FOEN 2017). The remaining one-third of revenues (max. 450 million Swiss francs) are made available for the buildings programme (see MURE measure Buildings Programme) which aims to promote CO 2 reductions through efficient renovations or the use of renewable energies. Another 25 million Swiss francs are provided to the technology fund (see MURE measure Technology Fund) (FOEN 2016, 2017). Financial Volume of the CO 2 Levy As pointed out in the above sections, one third of the revenue flows into the buildings programme and another CHF 25 million is transferred to the technology fund. Around two thirds of the levy revenues are available annually for redistribution. Table 3 summarizes the corresponding numbers. Table 3: Evolution of the Revenues and Expenditures from the CO 2 Levy Year Revenue CO 2-Levy (Mio. CHF) '065 Revenue CO 2-Levy (Mio. EUR) Expenditures Building Program (Mio. CHF) Expenditures Building Program (Mio. EUR) Expenditures Technology Fund (Mio. CHF) Expenditures Technology Fund (Mio. EUR) Redistribution CO 2-Levy (Mio. CHF) Redistribution CO 2 -Levy (Mio. EUR) Exchange Rate CHF/EUR (European Commission n.d.; Federal Finance Administration n.d.) Impact evaluation (methods and results) The FOEN analyzed the impact of the CO 2 levy in three different studies by addressing the question from different perspectives. The major challenge of the analysis lies in measuring the impact. As the CO 2 levy

4 aims to change the consumption behavior of households and businesses by increasing the price of thermal fuels, the impact can only be estimated indirectly. One the one hand, the overall impact is estimated through models ( top-down perspective) and on the other hand interviews (4 000 companies) are conducted on the business-level ( bottom-up perspective). All studies are conducted by third parties on behalf of the FOEN (FOEN 2018b). The top-down perspective (Ecoplan, EPFL & FHNW 2015) is based on two mutually complementary models: econometric analysis (time-series) including the medium- and long-term perspective as well as a general-equilibrium model focussing on the short-term impact (FOEN 2018b, p. 2). The analysis includes the two sectors households and businesses (industry and services) and is based on the counterfactual emission development (how would the emissions have developed in absence of the levy?) as well as the actually observable amount. The impact is then given by the difference of these two. The bottom-up perspective (Jakob et al. 2016) focusses on the impact on the business level and analysed the emissionsreducing measures that have been implemented since the introduction of the levy in It is further taken into account how the levy changed and influenced strategic decisions and why or why not companies have applied for an exemption levy. All three studies on behalf of the FOEN indicate that the CO 2 levy lead to the reduction of emissions (FOEN 2018b, p. 2). The findings of the study conducted by Ecoplan, EPFL and FHNW (2015) for the industry, service and household sector lead to a lower and upper bound of the reduced emissions. This bandwidth is given by the differences in the results from the time-series and the general-equilibrium analysis. The authors estimated that by 2013 between 2.5 and 5.4 million tons of CO 2 emissions were reduced due to the levy. Also, in the short to medium term, there is a substitution effect away from heating oil towards less CO 2 intensive energy sources. The second study, which includes the impact until 2015 (Ecoplan, EPFL & FHNW 2015) indicates an overall impact of 4.1 to 8.6 million tons of CO 2 between 2005 and 2015 (including the period of notification). In 2015 the impact was between 0.8 and 1.8 million tons of CO 2. Measured against the 2015 level of CO 2 emissions (approximately 17 million tons) this equals to a reduction of between 4.3 and 9.6% (FOEN 2018b, p. 2-3). Around two-thirds of the reductions took place in the household sector - and onethird in the business-sector. This is due to the fact that the thermal fuels included in the levy make up a higher proportion of consumption in the household sector. The empirical results show that the emission reduction potential is not yet reached and there is further potential for an increase of the tax in the future. In the bottom-up study conducted by Jakob et al. (2016) the results on the company-level are complemented. The authors use online interviews with companies and assume that the decision-making process of companies involves two steps (Jakob et al. 2016, p. 9-10). In a first step, companies decide whether they pay the CO 2 levy or apply for exemption (including a negotiated emission-reduction agreement). The second step includes the implementation of emissions-reducing measures due to increased costs for thermal fuels. Some companies might not react to this change in costs. The results show that the introduction of the levy triggered various reactions on the company-level (FOEN 2018b, p. 3). Energyintensive companies were likely to enter into negotiated reduction agreements and thus to implement measures that reduce emissions or increase energy efficiency. The levy did not in the majority lead to measures with smaller and low energy consumption companies. However, there is an increase in reactions to the levy over time. It can therefore be assumed that the amount of emissions-reducing measures will increase together with future step-wise increases of the levy. Krysiak and Oberauner (2010) theoretically assess the implications of giving companies the choice of being regulated by either a CO 2 tax or by an emission trading scheme, taking asymmetric information between regulator and companies as well as uncertainty on actual abatement costs into account. They show that when both instrument types are offered simultaneously, it will never be optimal for all firms to participate in emissions trading but for the tax there exist multiple optimal equilibria. Thus, the usual price-versusquantity criteria does not apply for companies which are indifferent regarding the policy options. Kiuila and Rutherford (2013) analyze with two techniques, a traditional and a hybrid (discrete technology modelling) an abatement function explicitly in a computable general equilibrium model. They suggest that the current climate policy in Switzerland will not be able to move the economy towards the required 10% CO 2 reduction.

5 Böhringer and Müller (2014) use a computable general equilibrium (CGE) model, calibrated to empirical data for Switzerland, in order to quantify the economic impacts of environmental tax reforms. Their key findings are that compliance with the CO 2 reduction targets requires high CO 2 taxes on economic activities that are not eligible for international emissions trading. To achieve the CO 2 emission reduction targets in the non-ets sectors of the Swiss economy, CO 2 emissions must be taxed at around 210 CHF/t CO 2 (equivalent to CHF 0.50 per litre of gasoline or CHF 0.55 per litre of heating oil) in the case of POM (Political Measures) and 1150 CHF/t CO 2 (equivalent to CHF 2.75 per litre of gasoline or CHF 3.05 per litre of heating oil) in the case of NEP (New Energy Policy). Likewise, electricity consumers are burdened with substantial electricity taxes. Environmental tax reforms are not likely to generate welfare gains without accounting for the benefits of improved environmental quality. Summary of climate policies and measures In line with the continuous reduction, the CO 2 ordinance sets interim targets for are ex ante target estimations. If developments suggest that the targets will not be reached, the Federal Department of the Environment, Transport, Energy and Communications (DETEC) will propose additional measures to the Federal Council. Name of policy or measure Estimate of mitigation impact, by gas (for a particular year, not cumulative, in million tons CO 2 equivalent) Year CO 2 levy n.a. n.a. n.a n.a.: not applicable (Swiss Confederation 2016, 2018). In Switzerland s Seventh National Communication and Third Biennial Report under the UNFCCC (Swiss Confederation 2018, p. 90), the proposed increase to a maximum levy of 210 Swiss francs per ton of CO 2 is estimated to reduce an additional 1.3 million tons of CO 2 in 2030 compared to a scenario where the levy is held constant at the current 96 Swiss francs per ton of CO 2. Interaction of measures Swiss emissions trading scheme CH ETS, Emission Reduction Target Agreements, Building Program, Technology Fund.

6 Historical data Evolution of GHG Emissions in the Industry and Service Sector, (Sum of Emissions from Companies without and Companies with Exemption from the CO2 Levy) Emissions in Million Tons of CO2-eq Commitment Period I: CO2 Emissions from Fossil Thermal Fuels ( ) GHG Emissions in CO2-equivalents CO2 Emissions CO2 Levy (Non-exempted Companies) Emissions Trading Scheme (ETS) Non-ETS Exemption (Emissions Target) Year Commitment Period II: GHG Emissions ( ) Source: Swiss Federal Office for the Environment FOEN, Own Calculations (2016) Price Chart of Heating Oil 'extra light' and CO2 Levy, Category 3'001 6'000 l (January June 2016) CHF / 100 l CHF 0.00 / 100 l CHF 3.18 / 100 l CHF 9.54 / 100 l CHF / 100 l Price +/- Volatility (EWMA Method) Price less CO2 Levy Year CHF / 100 l Source: Swiss Federal Statistical Office FSO, Own Calculations (2016) 2017

7 References Böhringer, C., & Müller, A. (2014). Environmental Tax Reforms in Switzerland. A Computable General Equilibrium Impact Analysis. Working Paper V , University of Oldenburg, Department of Economics, revised January Ecoplan, EPFL & FHNW (2015). Wirkungsabschätzung CO2-Abgabe. Synthese. Bern: FOEN. European Commission (n.d.). Eurostat. Available at: (Accessed: ). Federal Finance Administration (n.d.). Data centre. Available at: (Accessed: ). Federal Office for the Environment [FOEN] (2013). Ordninance on the Reduction of CO 2 Emissions. Bern: FOEN. FOEN (2016). CO2 levy. Available at: (Accessed: ). FOEN (2017). Redistribution of the CO2 levy. Available at: levy/redistribution-of-the-co2-levy.html (Accessed: ). FOEN (2018a). CO2 statistics: Emissions from thermal and motor fuels. Available at: (Accessed: ). FOEN (2018b). Faktenblatt Wirkungsabschätzung und Evaluation der CO 2 -Abgabe auf Brennstoffe. Bern: FOEN. Federal Customs Administration (n.d.). CO 2 tax. Available at: (Accessed: ). Jakob, M., Rosskopf, Y., Kendall, I., Looser R., Forster, R., Reiter, U., Nathani, C., & Rütter, H. (2016). Wirkungsabschätzung CO2-Abgabe auf Brennstoffe. Direktbefragungen zur Abschätzung der Wirkung der CO2-Abgabe auf Unternehmensstufe. Study conducted by TEP Energy GmbH. Bern: FOEN. Kiuila, O., & Rutherford, T.F. (2013). The cost of reducing CO 2 emissions: Integrating abatement technologies into economic modeling. Ecological Economics, 83, p Krysiak, F., & Oberauner, I. (2010). Environmental policy à la carte. Journal of Environmental Economics and Management, 60(3), p Swiss Confederation (2016). Switzerland s Second Biennial Report under the UNFCCC. Bern: Federal Office for the Environment. Swiss Confederation (2018). Switzerland s seventh national communication and third biennial report under the UNFCCC. Bern: Federal Office for the Environment.