Global CO2 tax: What does this mean for Swiss consumer demand?
Climate change is here to stay. One possible countermeasure under discussion in Switzerland and around the world is higher taxation for CO2 emissions. Would higher prices for CO2 result in "greenflation"? The experts at Credit Suisse looked at four scenarios to determine the possible effects of raising the price of CO2 emissions on Swiss prices.
A CO2 tax would affect indirect emissions
Heating and driving generate direct emissions, but they account for just 27% of the total CO2 emissions from Swiss households. The remaining emissions are generated during the production of goods and are therefore indirect.
CO2 taxes are charged on these indirect emissions. Because nearly all economic and production activities result in CO2 emissions, a CO2 tax would increase general price levels.
It has been shown, however, that the average indirect CO2 level of Swiss consumption is low by international comparison. In fact, Swiss households spend relatively little money in sectors that generate large amounts of CO2 emissions. Only 0.15 kg of CO2 is generated for each Swiss franc spent. By way of comparison, China's rate is more than four times that amount, at 0.67 kg CO2 per franc; in Germany, it is twice the amount with 0.30 kg CO2. This shows that Swiss households would be less vulnerable to a global CO2 price increase than other countries would.
Various scenarios for a CO2 tax
The experts at Credit Suisse evaluated four different scenarios for a CO2 tax. The purpose of the analysis was to identify the effect throughout the global value chain. For this reason, it intentionally omitted contrasting scenarios and some extreme scenarios.
Introduction of a CO2 tax: Four scenarios
The world community decides to set a mid-term price of USD 75 per ton of CO2, as recommended by the International Monetary Fund (IMF) in order to comply with the Paris Agreement. Initially, the new price is USD 30 per ton of CO2. The tax applies to 100% of global emissions. As expected, this scenario results in the highest cost increases for businesses and households.
Similar to the "World" scenario, the largest industrial nations decide on a universal CO2 price of USD 30 per ton. This scenario covers about 27% of global emissions. Switzerland does not participate. In this scenario, energy prices rise in Switzerland by a mere 0.55%.
Price increase EU ETS
The price of emissions certificates in the EU Emissions Trading Scheme is driven up by the market in just a short time from EUR 80 per ton of CO2 at the start of 2022 to EUR 107 per ton of CO2. This scenario covers 6% of global emissions. As expected, the price increases in Switzerland affect sectors that are subject to emissions trading. But the price hikes are reflected even in downstream industries such as agriculture, construction, and transport.
While the world makes only slow progress in its emissions pricing, the Swiss voters decide on revisions to the CO2 law that provides for a unilateral increase and expansion of the CO2 tax. The tax is now levied in all CO2 emissions and the amount rises to CHF 148 per ton of CO2. Despite this very radical step, this scenario affects only 0.08% of global emissions.
Trade relations are not relevant here. Only the indirect emissions from Swiss value creation are affected and, according to our analysis, are quite low. The cost increases are felt mostly in agriculture, some sectors of industry, and construction. Overall, the "Swiss solo" is the best of the four scenarios, not only for domestic value creation but also for consumption by Swiss households and the government budget.
Advantages of a CO2 tax under the "Swiss solo"
All in all, the price increases remain modest in each of the four scenarios. Our study shows that the "Swiss solo" can provide effective incentives for reducing emissions in Switzerland, with relatively low costs for households. It is true that this scenario would not play a large role in fighting climate change. However, it would prepare the Swiss economy gradually for an increase in global CO2 prices that everyone will face sooner or later.