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(http://blogs.ubc.ca/vyow /)
In 2010, the Swiss Confederation implemented the greenhouse gas emission trading systems (ETS) along with the other European Union countries. Overview of the ETS The ETS is basically a cap and trade system which provides a quota or cap on the overall level of emissions. This market allows participants to trade permit to pollute. In effect, the permits or allowances serve as a currency with the ETS carbon market. Each one gives the permit owner the right the emit one tonne of CO 2. This system is effective in a sense that the cap is imposed on the total number of allowances, which allows market scarcity to drive incentives to reduce emissions to an optimal level. The ETS involves over 10,000 individual installations with heat excess of 20 megawatts in energy-intensive sectors, such as electricity and heat generation, meal production and chemicals. In aggregate, this is approximately half of EUs CO 2 emissions and 40% of total green house gas emissions. ETS in Switzerland Switzerland operates as a voluntary alternative to a domestic fuel tax with 40 companies that covers 6.9% of Switzerlands 52 Mt of annual CO 2 emissions. From 2012 and onwards, the ETS has been extended to the aviation industry. Switzerlands carbon emissions and tax policy Main sources of CO2 emissions: oil used in transportation and space heating (40%), combustible and renewable waste (7%), and fossil fuel (53%) as of year Policy to curtail emissions: CO2 tax is implemented to have polluters to finance for decarbonisation efforts in space heating Counter-factual environmental taxes: consumption of final and intermediate carbonintensive inputs, which is also adopted in Finland and Norway Back in 2009, the European Union and Switzerland set a target of a 20-30% reduction in emissions relative to 1990. The result shows that Switzerland is on the sensible lower bound of the pledged target reduction in CO 2 emissions relative to the world.
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Tax on CO 2 intensive inputs
In regards to inputs, Switzerland has introduced such form of carbon tax under the Copenhagen Accord. Factors causing major shortfalls in the Copenhagen Accord: 1) The agreement between nations is not legally binding. Rather, it is through voluntary, unilateral measures (ie: domestic tax). 2) Heterogeneous targets for emission levels across countries
Tax rates are necessary to achieve targets on a variable basis. In fact, tax brackets are identical across the European Union member countries in which the members implemented a coordinated environmental policy.
(http://blogs.ubc.ca/vyow /files/2013/02/unconditional-taxrates-CopenHagen-bmp.jpg)
Thus, the European Union has a uniform target of a 25% reduction in CO2 emissions and a uniform tax rate of 30.5% across all member countries. The worldwide impact is that there is a cutback in level of emissions of 6.4% reduction in cost of the European Unions total welfare, though the welfare effect varies within individual countries. Note that Welfare Cost, Wn is denoted as the % change. It is calculated as follows:
(http://blogs.ubc.ca/vyow /files/2013/02/Welfarecostbmp1.jpg)
Where Y n denotes the changes of nominal GDP in response to the imposition or the change in carbon tax. In this case, we deflate the change in nominal income of consumers in n by the aggregate prices normalized by consumption share parameters.
(http://blogs.ubc.ca/vyow /files/2013/02/CO2-WelfareCost-changes-EU-World-bmp.jpg)
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(http://blogs.ubc.ca/vyow /files/2013/02/changes-in-CO2-emissions-bmp.jpg)
Without coordinated efforts, the consequences of aggregate carbon emissions would not be taken into account. Result: Geographical reallocation of polluting industries, in which efforts in energy use reductions in some countries are partially offset by carbon leakage Thus, it is important to have policy alignment across countries in order to reduce effort of individual countries relative to uncoordinated implementation. This is due to the fact that domestic tax policies only provides second order indirect effect on the rest of the world. Switzerlands case as a small open economy (S.O.E.) Firms Options for abatement activities and carbon emissions: 1) Participate in Switzerlands cap and trade program, given that firms are committed to cleaner environmental technologies Advantage: exempts firms from environmental taxes, which was 36 Swiss Franx per ton of carbon back in 2011 2) Pay for the carbon tax as specified in the federal law on the reduction of carbon emissions The Swiss government implements a direct carbon tax and distributes annual tradable permits throughout the year. According to the Copenhagen accord, Switzerlands unconditional target of reduction in CO 2 emissions is 23% relative to 2000.
(http://blogs.ubc.ca/vyow /files/2013/02/carbon-emissions-targetVSactual-bmp.jpg)
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In general, the effect of Switzerlands domestic policies has a relatively small impact to the world since it is a small open economy. Based on the analysis from the Economic Suisse Journal, to achieve a 23% reduction in carbon emissions, Switzerland would need to set carbon tax at 28% in 2000 which translates to 57.2 Swiss Francs per ton of tax (as in 2011). Normalizing using the real GDP deflator for 2000 and 2011: Taxn = 0.28 * (Y nCO2 / CO 2)* deflator If the Switzerland and the EU countries comply with their target reduction in which the European Union member countries implement a carbon tax of 30.5%, Switzerland will be able to meet its target of CO 2 reductions using a slightly lower tax of 53.1 Swiss Francs than implementing alone (57.2 Swiss Francs as in 2011 terms). It is important to note that if both the European Union countries and Switzerland implemented their environmental policies, this would be beneficial for the world through lower CO2 emissions. Data in Egger, and Nigais Energy Reform Switzerland suggests that the world level of carbon emissions of the OECD would fall by 8.6%. Switzerland and the European Union would have a change in welfare costs of -1.7% and -2.8%, respectively. See graphics and tabulation below. In Switzerland`s case, it has higher welfare costs relative to the European Union. Since it is committed to more severe reductions in the Copenhagen Pledges, and as a small open economy, the competitive effects of tax policies have more adverse impacts than other large open economies. Kyoto Protocol At the 2012, Doha Climate Change Talk, Switzerland entered the second round of commitment in which they agreed to reduce emissions in 1 January 2013 to December 2020. By signing the Kyoto Protocol, it guaranteed that the nation would reduce emission of CO2 by an average of 8%. The Swiss government took an innovative approach in terms of implementation of carbon incentive tax. There are three pillars involved from the carbon incentive tax scheme: 1) The collected carbon tax revenue flows back to the industry and the households to finance energy saving projects. 2) All carbon projects are driven by local initiatives with a decentralized approach which serves as an important feature of the scheme. 3) Energy intensive sector can ask for a tax exemption if they contract a reduction of CO2 emissions. However, by having this tax benefit, these energy-intensive businesses are ineligible to obtain financial assistance from the energy fund. If we look at the distributional effects, all of the three pillars above contribute to a greater incentive among workers, industry, and all other polluters in general to cut back on emissions.
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For several years, the government has worked on improving the standard of public transit system. There were successful efforts in changes of freight traffic from road to rail. In addition, heavy vehicle fee has been levied to the emitters.
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Figure 1 Current carbon prices from EU emission trading scheme or clear development mechanism
(http://blogs.ubc.ca/vyow /files/2013/02/CCS-tradingscheme-europe-bmp.jpg)
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2) Determine how the CCS costs can be covered (partially through carbon price and support from a certain private/public sector) which involves implicit financing with subsidies. From the government: CO 2 contracts From the private sector: portfolio standards Through optimizing the cost distribution, it helps develop lowest-cost supply of CO commercial usage. 3) Maturity stage involves long term infrastructure development through stable economy-wide carbon price Figure 2 Possible Gateways within a CSS policy framework
2
for
Motivations behind the CCS incentive (Reasons for policy intervention) 1) Externality: when a firms action causes impacts on others which it fails to take into account. ie: releasing excessive amounts of CO 2 from fossil fuel combustion. As more countries to join the CCS incentive, it helps increase economies of scale by improving cost effectiveness .. thereby reducing negative externalities 2) Public good: intervention helps incentivize the implementation of CCS policy which explicitly enable the diffusion of knowledge and from R&D demonstration projects throughout various nations 3) Imperfect competition: when the market is too concentrated with power where a few firms dominates, it affects price by having a few firms dictating output supply decision in the market. In the case of CO 2 pipeline networks, one firm maybe unwilling to offer access to other firms on fair and reasonable terms. Consequently, with a restrictive access, the network would become too small of an extent and capacity, thereby driving up pipeline and storage prices. 4) Information asymmetry and imperfect information: investors are unable to discern good projects from bad projects. Given that information on CCS costs and performance is most probably unequally distributed, this would hold back investments in good
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projects.
5) Complementary markets: Imperfect coordination in output production and delivery could lead to an undersupplied capacity. This instance could occur if the verticallyintegrated chain for CO 2 capture and storage system are under different ownership such that investors are subject to numerous uncertainties and risk factors in the capture units and the storage space. They might be reluctant to commit funds into the CCS projects. Based on these five factors, it is critical to have a set of policies that can correctly anticipate and minimize market failures. References
Bruno, Zeller & Longo Michael. p.195 Carbon Reduction Legislation in Australia <<http://www.businessandeconomics.mq.edu.au/our_departments/accounting_and_corporate_governance/docs/publications/past_editions/volum Egger, Peter & Nigai Sergey. Energy Reform in Switzerland, a quantification of carbon taxation and nuclear energy substitution effects. <<http://www.economiesuisse.ch/de/SiteCollectionDocuments/20130130_Studie_ES2050_def.pdf (http://w w w .economiesuisse.ch/de/SiteCollectionDocuments/20130130_Studie_ES2050_def.pdf) >>. EU to link its Green House Gas Trading Permit System with Switzerland. Council of European Union. December 20, 2010. <<http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/envir/118632.pdf (http://w w w .consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/envir/118632.pdf) >>. IEA, OECD Report on Switzerlands electricity market reform, 2012. <<http://www.iea.org/Textbase/npsum/switzerland2012sum.pdf (http://w w w .iea.org/Textbase/npsum/sw itzerland2012sum.pdf) >>. IEA review of Swiss Energy Policies. International Energy Agency. July 3, 2012. <<http://www.iea.org/newsroomandevents/pressreleases/2012/july/name,28156,en.html (http://w w w .iea.org/new sroomandevents/pressreleases/2012/july/name,28156,en.html) >>. Switzerland challenging energy policy. WNN. July 3, 2012. << http://www.world-nuclearnews.org/EE-Switzerlands_challenging_energy_policy-0307124.html (http://w w w .w orld-nuclearnew s.org/EE-Sw itzerlands_challenging_energy_policy-0307124.html)
>>.
Switzerland moves to join carbon market. December 21, 2010. EurActiv. <<http://www.euractiv.com/climate-environment/switzerland-moves-join-europe-ca-news500813 (http://w w w .euractiv.com/climate-environment/sw itzerland-moves-join-europe-ca-new s-500813) >>.
You give me whole understanding of switzerland carbon policy.It is very detailed and easy to understand.
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vickiyow
(http://blogs.ubc.ca/m em bers/vickiyow /)
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realmelo
Nice data filled, informative blog! But I think the exercise wanted us to discuss the cost effectiveness of the policy as well. Do you believe their carbon policy is cost effective? And why do you say so?
Reply
vickiyow
(http://blogs.ubc.ca/m em bers/vickiyow /)
Thanks, Carmelo. The Switzerland carbon trading scheme is generally cost effective. Based on the three pillars previously mentioned, the dead weight loss is reduced as a portion of carbon tax revenue is returned to firms and consumers. The regulation regime gives flexibility to local projects to innovate in technology independently. In addition, businesses can get financial rewards for the abatement achieved. Overall, the Swiss government pays for results in terms of reductions achieved instead of dictating the methods by which they should be accomplished.
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