EU ETS linking
- Category: European Union Carbon Market Glossary
- they are mandatory,
- have an absolute cap on emissions, and
- are compatible.
1 January 2020
The agreement on linking the EU ETS with Switzerland’s ETS entered into force
In principle, when emissions trading systems are linked, they enable participants in one system to use units from the linked system for compliance.
By expanding the market and increasing the availability of reduction opportunities, linking allows for broader carbon pricing and enhances the cost-efficiency of emissions trading.
Swiss ETS linking
The linking agreement between EU and Switzerland was signed on 23 November 2017.
The link will allow participants in the EU ETS to use allowances from the Swiss system for compliance, and vice versa (once the link between the EU ETS and the Swiss ETS is operational, emission allowances that originate from one system are eligible for compliance in the other system - Article 4(1) of the linking agreement).
The agreement to link the EU and Swiss emissions trading systems sets out the key objectives and principles, as well as the institutional structure for the pertinent process.
The agreement’s purpose is also to ensure compatibility between the two systems until 2030.
This is the first instrument of this kind for the EU and between two Parties to the Paris Agreement on climate change.
On 20 December 2010 the Council adopted a Decision authorising the European Commission to open negotiations with the Swiss Confederation for a link between the respective greenhouse gas emissions trading systems.
The ratification of the agreement required, on the EU part, the approval of the Council and Parliament.
The agreement on linking the EU ETS with Switzerland’s ETS entered into force on 1 January 2020.
To operationalise the link between the emissions trading systems, the parties agreed to establish a provisional solution (Decision No 2/2019 of 5 December 2020 of the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems of 5 December 2019 amending Annexes I and II to the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems [2020/1359]) for linking the two registries and enabling the transfer of allowances between them.
The provisional solution became operational on 21 September 2020.
The Swiss Emissions Trading System (Swiss ETS) became mandatory in 2013 for large, energy intensive entities and puts an absolute cap on greenhouse gas emissions, meeting two of the basic conditions for linking with the EU ETS.
The Swiss ETS meets the requirements that are set up for linking with the EU ETS, in accordance with Article 25 of the EU ETS Directive.
Similarities of both schemes include:
- the same gases and industry sectors are covered and the same thresholds for inclusion applies,
- the Swiss ETS also puts a cap on greenhouse gas emissions and is since 2013 mandatory for large, energy intensive industries,
- the annual decrease in the quantity of allowances in the Swiss ETS is in line with annual decrease in the EU ETS,
- the allocation methodologies for the two systems are compatible, the standard method is auctioning and benchmarks are used when industries receive transitional free allocation,
- current period for trading covers the same years: 2013 -2020,
- penalties in the systems are similar if failing to surrender sufficient allowances.
The only major difference is that the Swiss ETS does not cover aviation activities, yet. Switzerland is however preparing an inclusion in its ETS of aviation that reflects the EU ETS rules.
It is noteworthy, as the allowances issued in the Swiss Emissions Trading System are equivalent to EU emission allowances, the Swiss allowances will also have indication of the period of issuance and the same restrictions will apply to them as to EU allowances (for details see EUA's validity).
Proposal for a Council Decision on the conclusion, on behalf of the European Union, of an Agreement between the European Union and the Swiss Confederation on the Linking of their Greenhouse Gas Emissions Trading Systems, 16.8.2017
The Joint Committee established by Article 12 of the Agreement is the main steering structure of the Agreement. It is composed of representatives of both Parties and is responsible for the administration and proper implementation of the Agreement. Notably, it plays an essential role in the process for information-sharing and coordination, as well as in the assessment of whether the Parties continue to meet the essential criteria. The Joint Committee can propose changes to articles of the Agreement and make amendments to the Annexes. The Joint Committee becomes provisionally functional from the date of signature of the Agreement.
Article 14 of the Agreement establishes a dispute settlement mechanism. Disputes on the interpretation or application of the Agreement can be referred by either Party to the Joint Committee for resolution. Where the Joint Committee is unsuccessful in settling the dispute within six months, the dispute can be referred to the Permanent Court of Arbitration at the request of either Party.
The Agreement can be permanently terminated by either Party (Article 16). Interim suspension modalities are foreseen in Article 15 that are capable to protect the integrity of the emissions trading systems at short notice. The proposed suspension mechanism prevents the surrender of allowances from the linked system for compliance. The suspension mechanism can only be triggered in limited circumstances for a fixed period of time and may be extended up until termination.
In addition to the principles, objectives and institutional arrangements, the Agreement contains technical provisions for the operationalization of the link that relate to registries (Article 3), accounting (Article 4), auctioning (Article 5), sensitive information and security (Articles 8 and 9).
A direct registry link will be established to enable registry to registry trading, which will be based on Linking Technical Standards reflecting the principles set out in Annex II to the Agreement. The Swiss registry administrator for Switzerland and the central registry administrator for the EU will be responsible for administering the registry link.
Next to the Linking Technical Standards, the registry administrators of the registry link are to determine common operational procedures for the registry link. They can individually or jointly temporarily close the link for system maintenance, or due to a security breach or security risk.
Account holders in the registries will be able to identify the origin of the emission allowances after the link. At least on an annual basis, Parties must inform each other of the total amount of emission allowances they hold in their ETS that originate from the linked ETS.
Similarly, they must inform each other at least annually of the emission allowances that originate from the linked ETS that were surrendered for compliance or were voluntary cancelled in the other ETS. The Agreement provides that the EU and Switzerland must account for net flows of allowances between the linked emissions trading systems in accordance with the future rules on accounting that are currently being developed under the United Nations Framework Convention on Climate Change.
Provisions are also made for transferring and acquiring Assigned Amount Units should the second commitment period of the Kyoto Protocol enter into force. The Joint Committee is to develop the details on accounting and, if required, for the transfer and acquisition of Assigned Amount Units in Annexes to the Agreement.
The Agreement specifies that allowances not allocated for free are to be auctioned in an open, transparent and non-discriminatory manner. Entities, including operators that are admitted to bid in auctions conducted in one system are also eligible to bid in auctions conducted in the other system.
The Agreement allows for the continuation of the current auctioning arrangements in Switzerland, provided the total number of Swiss allowances (stationary installations and aviation) to be auctioned per year is below a threshold of 1,000,000 Swiss allowances. Once the threshold is met, Switzerland will apply the same auctioning arrangements as apply in the EU and that are specified in the Annex I to the Agreement.
The Parties must protect sensitive information. Each Party remains responsible for marking information it releases as sensitive and for the decision on the sensitivity level, as well as the downgrading and removal of sensitivity, and must inform the other Party thereof. The EU and Switzerland will agree on the marking and the level of sensitivity for information that was released jointly.