EU and Switzerland Agree to Link Carbon Markets, Start Date Uncertain

28 January 2016

After nearly five years of talks, the EU and Switzerland on Monday announced the conclusion of a deal linking their respective emissions trading schemes, in a move that will allow covered entities in both systems to trade emissions permits with each other.

Set up in 2008, the Swiss scheme includes around 55 companies, and last year covered 5.5 million tonnes of carbon emissions. By comparison, the EU’s Emissions Trading System (ETS) launched in 2005 is currently the world’s largest carbon market, regulating some 11,000 power stations and manufacturing plants representing around two billion tonnes of carbon emissions.

Most emissions trading schemes work by setting a cap on total emissions and requiring the surrender of emissions permits by participating factories, power plants, or other companies. These may then trade emissions allowances with each other as needed. In theory, a rising permit price driven by increasing scarcity should help spur investment in additional abatement and low carbon technologies, resulting in cost-efficient emission reductions.

Experts argue that linking schemes could help to address competitiveness and carbon leakage concerns related to different levels of climate action between various economies, as allowances from a system with a higher effective carbon price would flow to those with a lower cost, until prices converge at an intermediate point.

“The linking of the schemes will enable companies and operators in the Swiss system to trade emission rights on the considerably larger and more liquid European market,” a press release from the Swiss environment ministry read. “This will result in comparable prices for emission rights on both markets and create a level playing field, particularly for Swiss companies vis-à-vis their European competitors.”

Negotiations for the EU-Swiss carbon market deal were initially launched in 2011, but suffered a set-back at the start of 2014 due to a popular referendum in the Alpine nation backing a proposal to limit immigration quotas from the EU. The vote prompted retaliation from Brussels on other areas of cooperation.   

According to media outlet Carbon Pulse, the deal’s signature date remains up in the air pending a solution to the immigration issue. Bern’s press release also confirms that the treaty must be signed and ratified by both sides in order to enter into force and that the timetable for this remains “open.”  

Aviation emissions

Swiss aircraft operators will be added to the nation’s emissions trading scheme starting from entry into force of the EU ETS link. The topic reportedly proved a sticking point during the negotiations.   

The EU has included aviation in its ETS since 2012, and initially required the surrender of carbon permits for the duration of all flights landing or taking off in its 28 member states as well as the European Economic Area (EEA), which also includes Iceland, Liechtenstein, and Norway.

Emissions were set to be charged over a flight's entire trajectory, including those portions taking place outside EU airspace. The bloc argued that failure to make progress under the International Civil Aviation Organization (ICAO) on a multilateral aviation emissions-cutting agreement necessitated the unilateral action.

However, the move proved highly controversial, and received pushback from a number of the EU’s key trading partners. Following escalating tensions on the subject the Brussels agreed to “stop the clock” on its aviation emissions rule for one year starting from March 2013.  

Under the arrangement, all long haul flights landing or taking off the EU were exempt from the ETS, with the surrender of permits only required for intra-EU flights. After some back and forth EU lawmakers then agreed in April 2014 to continue exempting flights landing or taking off outside its borders from the ETS until at least 2017. (See Bridges Weekly, 10 April 2014)

The deal has permitted Swiss airlines flying to and from the EU/EEA zone to be excluded from the EU ETS up to this point.

ICAO members have agreed, meanwhile, to develop a proposal for the first-ever global market-based mechanism (MBM) on aviation emissions in time for a triennial assembly due to be held in September.

Brussels has warned that if the meeting fails to yield sufficient progress it will restore its original 2012 aviation ETS requirements. Mention of international aviation emissions was excluded from a UN climate deal struck among nearly 200 governments in December.

Some experts nevertheless suggest that recent developments augur well for the ICAO gathering, such as the confirmation of the inclusion of domestic aviation in China’s forthcoming national ETS, due to come online next year.

Linking up

While further details on the EU-Swiss linking remain scarce at press time, some analysts have been quick to speculate on the systemic implications, particularly the increasing uptake of carbon pricing initiatives worldwide. Already some 17 emissions trading schemes are in place across four continents, accounting for around 40 percent of global GDP, and several more are in the pipeline.

As part of the new multilateral climate deal agreed in Paris last December, governments have agreed to develop and apply guidance adopted by the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) for “robust accounting” when engaging in voluntary cooperative approaches that involve the use of internationally transferred mitigation outcomes. Experts say this recognises the interest of some countries to link up emissions schemes or create so-called “carbon market clubs.”

Several experts expect more countries to negotiate bilateral carbon trading arrangements alongside the UN process, with this potentially taking place at a number of jurisdictional levels. 

The EU, in particular, has indicated plans to consider linking its ETS with compatible schemes in other countries. The bloc has increased technical cooperation with South Korea, following the launch of carbon trading in the South Asian economy last January, which could pave the way for eventual linkage. (See BioRes, 25 September 2015)

The EU had previously agreed a pathway for linking with Australia’s fledgling carbon market, before a change in political leadership – and the subsequent repeal of Canberra’s carbon tax – scuppered these plans. Most recently, one UK senior official speaking with Business Green indicated that London is working closely with China as it develops its cap-and-trade system, with potential future linkage with the EU ETS in mind.  

A deal was also signed last December between Beijing’s sub-national carbon market and South Korea to cooperate on emissions trading development with an eye on eventual full national bilateral cooperation. Ontario last year unveiled plans to join California and Quebec’s carbon market under the so-called Western Climate Initiative. (See Bridges Weekly, 16 April 2015)

EU reform

The EU is in the process of reforming its flagship carbon market for the post-2020 period in order to help meet the bloc’s 2030 climate and energy goals. The effort is also designed to help fix some of the system’s current design flaws, which resulted in a glut of permits due to low demand, and consequently an ineffective carbon price.

A proposal unveiled by the EU Commission last July envisages an increased annual decline in the number of emissions allowances available and further development of carbon leakage rules.

Under the EU ETS, a certain amount of emissions allowances are auctioned annually, while others are allocated to help smooth the transition to the low carbon economy. Some stakeholders have expressed fears that tougher unilateral EU action on emissions would lead to the relocation of industry and associated emissions overseas. (See BioRes, 20 July 2015)

The Commission’s plan received mixed reactions, as energy-intensive industries criticised the projected decline in free allocation in the face of a fluid global market place, while some green groups criticised the plans for not going far enough.

The EU ETS will also be furnished with a new market stability reserve (MSR) from January 2019 designed to help buffer permit supply and prices on its market. (See Bridges Weekly, 9 July 2015)

As part of the EU’s co-legislative procedures, both member states and the European Parliament must agree on the ETS reform package. Many experts, however, do not expect a swift resolution on the issue and forecast the process extending into 2017.

An EU environment ministers meeting in early March may see some discussion on the topic, while senior EU parliamentarians are due to meet at the end of this week to resolve a procedural fight over whether its environment or industry committees should work on the dossier.

How EU lawmakers navigate the politics and hurdles of ETS reform over the coming months will be closely watched by both carbon traders and policymakers around the world for the potential impact on the bloc’s carbon price and climate action effort.

Current EU allowance prices have tumbled to below €6, nearly hitting all-time lows seen just under two years ago, likely due to speculative short-selling in the midst of weak global energy markets.

ICTSD reporting; “EU and Switzerland to link carbon markets after talks conclude,” CARBON PULSE, 25 January 2016. “EU Market: Carbon sinks 7.1% to back below €6 as warm weather weakens power prices,” CARBON PULSE, 25 January 2016; “Sir David King: EU and Chinese carbon market will ‘join forces’,” BUSINESS GREEN, 26 January 2016.

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