Why is it essential to put a price on CO₂ emissions?

Carbon dioxide (CO₂), the main greenhouse gas emitted by our current energy system, is today considered a worthless waste. According to the polluter pays principle, the most direct way to make the costs of environmental impacts be borne by those who cause them is to make them pay the price, which in this case means putting a price on CO₂ emissions.

Putting a price on fossil CO₂ increases the market price of fossil fuels (coal, natural gas, petrol, diesel). If the price of fossil CO₂ emissions is sufficiently high, the renewable kWh (photovoltaic, wind, etc.) becomes comparatively cheaper than the fossil kWh, providing an incentive to reduce CO₂ emissions. This has an important side effect: it stimulates innovation in clean technologies.

All countries in the world use fossil energy agents and therefore emit CO₂. The consequences (including climate change) are also global. But there is no global government that can put a global price on fossil CO₂ emissions. Since 1990, all the countries of the world have been engaged in climate negotiations, with limited success for the time being. Nevertheless, several industrialised countries have introduced voluntary CO₂ taxation systems, including the European Union and Switzerland.

There are two main options for putting a price on CO₂ emissions: a quota trading system and a CO₂ tax. Switzerland has implemented both at the same time. A tax of CHF 96 per tonne of CO₂ emitted is currently levied on fossil fuels, i.e. around 26 centimes per litre of heating oil and 19 centimes per cubic metre of natural gas. Two-thirds of the revenue from this tax, amounting to around CHF 1.2 billion, is currently redistributed to the Swiss population and companies, and one-third is earmarked for the Buildings Programme (so it is not a new disguised tax). Transport fuels remain exempt from the CO₂ tax for the time being, as it is estimated in particular that it would have a disproportionate impact on rural or mountain regions that are poorly served by public transport, while at the same time having a limited impact on their consumption. This situation may change with the planned introduction of the environmental tax in 2021 [→ Q84] .

To avoid penalising companies exposed to international competition, energy-intensive companies can be exempted from the CO₂ tax if they commit themselves to reducing their greenhouse gas emissions in return. The largest of these companies participate in an Emission Quota Trading System (EQTS). It is based on the principle of cap-and-trade: for each company concerned, the public authorities determine a maximum quantity (an allowance) of emissions allowed during one year, based on industry benchmarks. These allowances are allocated to companies participating in the EQTS, and are reduced year by year in order to bring about a gradual reduction in emissions. Some companies exceed their allowances, while others do not fully use them. The latter can then trade them, selling them to those that need them, through an auction system, the EQTS. Switzerland is currently negotiating the coupling of its EQTS (which covers only 55 companies) to the EU Emissions Trading System (ETS), which currently covers more than 12,000 companies.

For the time being, the European ETS market plays, a priori, a minimal role in the decarbonisation of the industrial and energy sectors. Previously stabilised at around 5 euros (i.e. 12 times lower than the price of emissions in Switzerland), the price of a tonne of CO₂ has risen significantly in the space of 18 months between 2017 and 2019, currently reaching a value of 25-30 euros, which is still too low to allow a boom in renewable energies. In the past, this penalty was so low that coal-fired power plants benefited from it and continued to produce electricity at uncompetitive prices, jeopardising in particular the economic viability of Swiss hydroelectric power plants (which do not emit fossil CO₂). This was mainly due to the fact that the European Commission had allocated very generous emissions allowances by industry, so that companies had little need to use the ETS. The economic crisis had also contributed to a decrease in energy consumption and thus CO₂ emissions. It is possible that, without promoting a surge in renewable energies, these new values for the price of a tonne of CO₂ on the European market will help to promote the substitution of coal by less polluting natural gas in the power generation sector.

But sooner or later, the price of fossil CO₂ emissions is likely to rise significantly if the European Union is to meet its ambitious greenhouse gas emission reduction targets [→ Q89]. For Switzerland, this increase in the price of CO₂ on the European ETS market is an almost indispensable condition for the implementation of the energy transition.