FRE525 – Tax on Volatile Organic Compounds of Switzerland

Introduction

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

Ordinance
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.

Implementation

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.

Conclusion

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.

Comments

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.

 

Resources

OECD (2010), Annex D. Switzerland’s Tax on Volatile Organic Compounds, Taxation, Innovation and the Environment OECD, Paris, available at http://www.oecd-ilibrary.org/environment/taxation-innovation-and-the-environment/annex-d-switzerland-s-tax-on-volatile-organic-compounds_9789264087637-12-en

Volatile Organic Compounds Tax (Switzerland) , available at http://www.economicinstruments.com/index.php/air-quality/article/69-

Ordinance on the Incentive Tax on Volatile Organic Compounds, available at http://www.admin.ch/ch/e/rs/8/814.018.en.pdf

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