How carbon pricing is gaining traction as the most efficient way to reduce emissions
From a government’s point of view, carbon pricing is both an instrument to reduce emissions and a source of revenue to finance the transition to lower carbon options. Businesses, on the other hand, use it to evaluate the impact of mandatory carbon prices on their operations and as a tool to identify potential climate risks and revenue opportunities. Investors, in turn, can find carbon pricing useful to assess the potential impact of climate change policies on their investment portfolios.
Carbon pricing is applied in different forms and as a part of different mechanisms. The most common forms are carbon taxes, the trading of carbon credits in an emission trading system, levies for carbon-heavy imports under a carbon border adjustment mechanism, and carbon credits traded outside a formal emissions trading mechanism. The present paper describes these four mechanisms of carbon pricing in more detail.
In the endeavour to increasingly burden the emitters of carbon dioxide with the true cost of their actions, the price of carbon is key. Per ton of CO2 emitted, it has moved from around EUR 7.50 in 2018 to more than EUR 50 currently and is expected by some market participants to be around EUR 100 in 2023. Such price increases will most likely have an impact on the production costs of carbon-intense products.
The principle of imposing a levy on goods with a high share of production-based CO2 emissions meets the endorsement of the G20 as well as the European Union as reflected in the Fit for 55 package proposals published by the European Commission in July 2021, including the planned introduction of a carbon border adjustment mechanism to reduce carbon leakage.
Although Switzerland rejected a law to reduce CO2 emissions in 2021, businesses domiciled in Switzerland still must follow the European and global trends and developments – both in terms of their operations outside Switzerland and for future pricing of goods affected by different carbon levies.
Therefore, businesses should assess the potential impact of the carbon price on their operations. While the impact of carbon pricing could be difficult to assess due to the lack of harmonisation across different jurisdictions, the general tendency is clear. Depending on the country and area involved, a company may have to comply with many different carbon pricing systems for different production sites and target markets.
«To get a holistic view of the impact of carbon pricing on the entire supply chain and to be able to support management in making accurate strategic decisions, companies will need a tax function that monitors what is happening in the various countries in which they operate.»
Director Tax and Legal & Member of the EMEA ESG Centre of Excellence, PwC Switzerland
Tel: +41 58 792 95 07
Head Sustainability & Strategic Regulatory, PwC Switzerland
Tel: +41 58 792 45 23
Senior Manager Customs & International Trade, PwC Switzerland
Tel: +41 58 792 56 96
Senior Manager Environmental Tax & VAT, PwC Switzerland