FRE525 – Tax on Volatile Organic Compounds of Switzerland


Volatile Organic Compounds (VOCs), including Methane, Hydrocarbons, Ozone-depleting substances and other varied categories, is ubiquitous in both man-made and naturally system. Various products contain VOCs, for instance, paints, varnish as well as detergents. It is also used in many industries for different reasons. Dangerous to human health also damage the circumstances, VOCs mainly interact with nitrous oxides, which causes the low altitude of Ozone.


Policy – OVOC of Switzerland

on the Incentive Tax on Volatile Organic Compounds (OVOC) is based on the document from The Swiss Federal Council – Environmental Protection Act. It is also an indicator of the changes occurring in Swiss environmental policy. The tax was introduced in January 2000, with an aim of achieving efficient environmental protection by offering price-based financial incentives and supplements the traditional command and control instruments.

  • To reduce VOCs emissions.
  • To achieve the minimum target of the Confederation’s Air Pollution Control Strategy for VOC emissions (145,000 tonnes of VOCs per annum), emissions must be reduced by about 70,000 tonnes in relation to the 1995 figure.
  • Without the incentive tax, the shortfall in the year 2000 would still amount to some 27,000 tonnes.
  • High levels of photochemical smog prompted the Swiss government to announce the tax.

Coverage and Exemptions

The tax levies by the Federal Customs Administration on imported Swiss-made VOCs, covers all kinds of VOCs’ emissions in Switzerland – both in the production and the consumption of products, which contains VOCs. However, the Federal Council may exempt part of companies that have already reduced VOCs’ emissions well beyond the legal requirements. In addition, which those products content less 3% VOCs and those VOCs not included in the positive list are not going to be taxed.

How it works

At the first (introduction) stage, CHF 1 was charged per kilogram. At 1st January, 2000, the tax was levied with a rate of CHF 2 per kg, increased, as what it is planned to be, to CHF 3 per kg at the beginning of 2003. Since the excessive administrative burden for customs clearance, tax actually does not apply to all products classed as VOCs. Therefore, there is both a “positive list of substances”, for instance, ethers, benzene and butanes, as well as “positive list of products”, including paints, perfumes and beauty products.

However, eliminated and exported VOCs are not going to be charged, in a way of tax refund.


Due to the measurement difficulty on emission, VOCs are taxed on entry into production and on imports into Switzerland. Products manufactured in Switzerland are taxed indirectly by taxing on the purchase of VOC substances. Imported products that contain VOCs are taxed on importation based on the quantity level of VOCs in the products.

Firms who produce VOCs are required to report and firms are required to keep a VOC balance sheet in order to account for all imports, exports, and uses of VOCs. (OECD, 2010)

Distribution of Revenue

The revenue from the VOC tax is distributed to the population by deducting it from their health insurance premiums. It states that the revenue will be distributed in equal parts to all those who, in the year of distribution:

  • Are required to insure themselves in terms of the Health Insurance; and
  • Are resident in Switzerland

It appears that only people who pay insurance premium get a part of distribution through the deduction of premium. Since it is redistributed only through the insurance premium, the entire revenue does not get paid back to its population.

We could not find any information if the tax revenue will be used for a particular project except that the implementing authorities will receive 1.5 per cent of the total revenues. Consequently, the tax revenue is not revenue neutral.

Tax Rate

Since 2003, the tax rate has been 3 Swiss francs/kg (1 Swiss franc is approximately equal to 1.1 U.S. dollars as of 2012 April 1).

According to the OECD case study, few firms have suffered economic difficulties on account of the tax and no firms has moved or changed their business due to the tax. The study finds that the VOC tax contributed to reduce emissions; however, the amount of tax seems very small in relation to the product cost or price, particularly for large firms. (OECD, 2010)

A reason that makes us to think that the tax rate is small is that the OECD case study shows that printing industry still prefers VOC-based products. In the interview for the case study, all of the printing industries agreed that a minimum level of alcohol is still necessary in printing to guarantee high quality and to keep presses productive. If they still prefer using VOC-based products, it implies that the tax rate may be less than the benefit of having good quality of printing or the marginal damage that can bring to human health. It is not certain if the marginal damage is lower than the benefit of good quality printing or the tax rate is too low to capture the marginal damage, based on our findings.


The VOC tax in Switzerland charges products that contain VOCs more than 3 per cent of the product weight and VOCs substances themselves. Exports are exempted to have competitiveness in the international market. Because it is difficult to measure the emissions, firms who produce VOCs are required to report and they need to keep a VOC balance sheet.

Since the VOC tax introduction, the emission has been reduced. However, it is not clear how much was reduced due to the tax. Increasing awareness of the environment effect from the VOCs has been also contributed to the emission reductions.

The tax revenue is designed to be redistributed to its population through the deduction in health insurance premium. However it is uncertain if the total revenue is paid back to the population. It does not indicate if the tax revenue is used for any relevant environment projects.

The tax rate has been 3 Swiss francs/kg and it is difficult to discuss the appropriateness of the tax rate from our findings. The OECD case study finds that there are industries that still prefer VOC-based products after the tax being effective, and from their findings we can say that the tax rate is not larger than the marginal damage from the VOCs products.


The environment performance of Switzerland always has the world’s pride. According to Yale University EPI Ranking 2012, Switzerland got the first ranking over 132 countries. The government of Switzerland realized the importance of natural environment and started to take actions since very early time, which protect the circumstance of Switzerland stay in the best level.

According to OECD, Switzerland reduced around 37% reduction in VOCs’ emissions since 1985. Even with argument about the abolition of tax on the basis of low emission in 2002, which causes by the larger exemptions, the government insists it is because of the improvements they already made.  However, to give up all the efforts they already made and try to make more economical benefit but care less to the environmental benefit, it also causes the only 89th Ranking in EPI Pilot trend Ranking for Switzerland.



OECD (2010), Annex D. Switzerland’s Tax on Volatile Organic Compounds, Taxation, Innovation and the Environment OECD, Paris, available at

Volatile Organic Compounds Tax (Switzerland) , available at

Ordinance on the Incentive Tax on Volatile Organic Compounds, available at

FRE528: Problem Set 4 – SO2 Emission Trading in Taiyuan, China



Taiyuan (太原) is the capital city of Shanxi Province located in North China. According to the National Bureau of Statistics, Taiyuan has the fourth worst air quality among China’s main cities. It is also considered as one of the world’s most polluted cities.

SO2 is a poisonous gas released by various industrial processes, which mainly compounds in Coal and Petroleum, which is a precursor to acid rain. Coal, as the principal energy source in China, is used to meet around 70% energy demand (IEA, 2002). This makes the acid rain and SO2 pollution very severe. Government data shows that SO2 Emissions keep increasing from 1980 and 45% emissions are due to the Power sector. According to the statistic of 2006, China became to the largest SO2 polluter with over 25 million tons emission in 2005.

The sources we used to discuss the Taiyuan SO2 trading program are the documents at the beginning implementation stage and the study which has done investigation   of the program in 2009.


Taiyuan is the largest coal-mining center of China. To change the severe situation of SO2, Chinese government implemented the Emission Trading Pilot in the City of Taiyuan. 

The program was implemented by the National Government of China. Even though several early topics started from 1980s, the real pilot start to establish from 1990s and the first piloting program starts from 2002.

Coverage & Implementation

The scope of this program spreads in 23 key pollution sources, which emit SO2. All urban areas of Taiyuan are included in this project. However, the suburban districts and countries are exempted.

Project bases on the regulations of SO2 Total Emission Control (TEC) and the administrative regulation for SO2 emission trading in Taiyuan City.

The target of the project is unrealistic, with at least a 50% emission reduction by the year of 2005, which equals to 125,000 tons. This may causing an approximately 190 million Chinese Yuan (around U.S.D $30 million) cost to reduce SO2 emission, which is going to be a heavy burden of the Government of Province.

However, with the support from Asian Development Bank, Resources for the Future (RFF) and the Chinese Academy for Environmental Planning (CAEP), Taiyuan started this emissions trading program with a least costs as well as ended with a 30% reduction.

The Taiyuan SO2 trading program is a local regulation. At the national level there is no regulation for SO2 emissions. So it creates an incentive for firms to move their operations to other locations such as suburb, the exempted area. This weak legal basis leads to weak enforcement of the trading program.


The SO2 trading program is only at local level and there are exempted areas such as suburb. So it gives a firm an incentive to transfer their operation. And it also discourages new firms to enter the industry because they are required to obtain permits. They would choose other location where they do not need to pay for the pollution. Most of the firms that emit SO2 in Taiyuan are state-owned firms, and they rely on the raw materials in Taiyuan city or they have to provide necessary services such as electricity to the city. So they have little or no intention of moving their operation. [4]

The emissions program being within a city creates a relatively small market for trading, so it cannot capture the true cost of SO2 emissions; consequently, cost-effectiveness is not achieved. 

Distribution Method

The SO2 allowances are distributed for free, based on historical data of each firm’s emissions. The allowances remain the same for the next five years, once it is distributed. The most polluting firms got the most allowances. If a firm that emits larger amount receives more allowances for free, it implies that the firm gets free assets. As the firm lowers emissions through technology, they will end up with more of non-used allowances. And if there is a well-functioning trading market, the firm can make profits from selling those freely allocated allowances. Consequently it creates wealth to the firms who emit more, which is not a desirable outcome.

Another issue is that there is uncertainty on the total quantity of allowances, because the allowable emissions may be decreased with the stricter emission control at the national level. So it makes difficult for firms to make plans so they prefer to keep extra emissions permits on their hands rather than sell them in the trading market. [4]

Administrative Challenges

It appears that the Taiyuan SO2 trading market had not been properly developed. Since 2002, when the program was initially piloted, it has been known that there had been only 19 transactions until July 2009, involving 807 tons of emissions. And 18 of those transactions were between new firms, who are entering the industry, and the existing firms. It is because new firms can get the permits only from trading and then they have to wait to get their allocation until the next round of permit allocation. The reasons of the inactive trading market follow as:

  • Information availability : it has been indicated that the information of emission allowances allocation and transactions have been registered separately and it has not been able to get the trading related information in a timely and accurate way. So the limited information is attributed for the inactive trading market.
  • Management : it has been identified that when the trading program was first introduced, it seemed to be working. However, when the director who promoted the program left, no one seemed to pay attention to the program. There has been no fixed department or person that is responsible for the Taiyuan SO2 trading program. This fact also is attributed to the inactive trading market.

Conclusion and Comments

The SO2 trading program seems to have worked in a way of reducing emissions; however the trading market does not seem properly developed. The issues on allocation method and challenges in administration which were identified from the beginning of implementation could have not been resolved. And it resulted in the inactive trading market.

Emission trading policy and explicit legal basis should be well implemented to support this emission-trading program. To establish a legal authority, policy coordination as well as a comparative accomplished management system can partially solve the under-properly developed situation that we are facing right now.

With the weak implementation, China’s current market structure, semi-free market, may not work well with the trading program, which requires a perfectly competitive market in practice.


  1. SO2 EMISSIONS TRADING PROGRAM: A Feasibility Study for China:
  2. Implementing SO2 Emissions in China:
  3. Demonstrating emissions trading in Taiyuan, China:
  4. Emissions trading in China: lessons from Taiyuan SO2 emissions trading program:

 Presented by Lixi Li and Yijeong Park