Energy Transition And Public Finances: A Projection Framework For Switzerland

Climate change and climate mitigation policies pose significant challenges to both the economy and public finances. This paper analyzes the long-term fiscal implications of climate policies aimed at achieving net-zero emissions in Switzerland by 2050. Using a novel budget-impact projection framework, we consider four climate policy scenarios with different mixes of carbon pricing, regulation and subsidies. Our projection analysis shows that the path to net-zero emissions will put pressure on public finances in the coming decades. This result primarily follows from the projected negative impact of climate mitigation policies on economic growth, which in turn dampens the growth of tax revenues and social security contributions. We highlight the importance of compensating for revenue losses due to the erosion of the fuel tax base as a result of the electrification of the transport sector. Finally, we show that the use of subsidies in climate and energy policies exacerbates fiscal pressures on the public expenditure side. Our projections highlight the need for policy action and the importance of forward-looking climate and fiscal policies to ensure sustainable public finances during the energy transition.