Name: Budget impact model
Type: Linked models
Institutions: Federal Department of Finance (Switzerland); Ecoplan
Documentation: References in the 2024 fiscal sustainability report
Description: A budget impact model to analyze the long-term impact of achieving the net zero target on public finances, based on ESMs and a CGE model.
Questions to be answered/variables considered: The impact of reaching Switzerland’s target of net zero by 2050 on the economy (GDP, consumption, wages) and particularly the composition of public finances as measured by, for instance, the debt ratio, income taxes, profit taxes, VAT, mineral oil tax, and green subsidies relative to business as usual.
Strengths: The approach combines strengths of both ESMs and the CGE model: ESMs allow in-depth analysis within sectors (e.g., electricity, transportation, industry) that require accurate and detailed data on the energy system, and the CGE model assesses the macroeconomic impact of the energy transition.
Limitations: Due to a high degree of uncertainty, the following factors were omitted: costs of climate change itself and adaptation measures; and opportunities from a comparative advantage in green products (including technological breakthroughs) or, conversely, the loss of market share and increased reliance on imports, assuming net zero is reached globally by 2050. These omissions also mean avoided costs and benefits from mitigation are not captured.
Assumptions: The policy scenario assumes carbon neutrality is achieved by 2050 through an increase in carbon pricing, stricter emissions standards on buildings and vehicles, and an increase in subsidies. For more details see the 2024 Fiscal Sustainability Report for Switzerland and references therein.
Use: The approach was developed for a pilot study published in the 2024 Fiscal Sustainability Report for Switzerland.
Lessons:
- It is important to identify the channels and potential impacts of climate change and mitigation before a quantitative assessment of their economic and fiscal implications.
- The choice of policy scenario should be deliberate to inform the policy discussion, keeping in mind that while model-based analysis helps objectify the policy debate, politics will ultimately decide climate policies.
- Modeling should focus more on insights than on numbers, and the high degree of uncertainty in medium- and long-term analyses in this field ought to be kept in mind.
Empirical findings:
- Direct effects on public finances include higher CO2 tax revenues in the short- and medium-term, but lower revenues when CO2 emissions decrease over time.
- There is likely a loss of fuel tax revenue due to electrification of the transportation sector. However, alternative revenue sources, such as replacement levies on electric vehicles, can mitigate the negative fiscal impact of the transition.
- Indirect effects, including decreased revenue from income tax, profit tax, and VAT due to lower growth in GDP, consumption and wages, dominate the fiscal effects.