EUROPEAN COMMISSION

Brussels, 16.8.2017

COM(2017) 428 final

2017/0194(NLE)

Proposal for a

COUNCIL DECISION

on the signing, 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

EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Cap and trade systems are policy tools that cost-effectively reduce greenhouse gas emissions. The cap on greenhouse gas emissions ensures that the policy is environmentally effective and the trading of emission allowances allows for flexibility in achieving emission reductions. The EU has more than a decade's experience with the EU's Emissions Trading System, the world's largest cap and trade system.

When emissions trading systems are linked, they enable participants in one system to use units from the linked system for compliance. Such linking is expected to result in broader carbon pricing. By expanding the market and increasing the availability of reduction opportunities, linking enhances the cost-efficiency of emissions trading.

•Consistency with existing policy provisions in the policy area

The development of a well-functioning international carbon market through bottom-up linking of emissions trading systems is a long term policy goal of the EU and the international community, notably as a means to achieve climate objectives, including under the Paris Agreement.

Article 25 of the Directive establishing the EU's Emissions Trading System (EU ETS) 1 allows for the EU ETS to be linked with other emissions trading systems provided they are mandatory, have an absolute cap on emissions and are compatible. On 20 December 2010, the Council adopted a Decision authorising the Commission to open negotiations with the Swiss Confederation for a link between the EU and the Swiss greenhouse gas emissions trading systems.

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.

Overall, the Swiss ETS has a very similar design to the EU ETS. The EU ETS and the Swiss ETS cover the same gases and industry sectors, with equal inclusion thresholds, and define liable entities at installation level. The quantity of allowances that are issued each year under the Swiss ETS decrease annually in line with the decrease in the EU-wide quantity of allowances. The allocation methodologies are compatible: auctioning is the default method and similar benchmarks are applied for allocation to industries that receive transitional free allocation. The quantitative and qualitative standards for international credits are alike. The current trading period of the two systems covers 2013-2020. In both systems, the compliance period covers calendar years, with covered entities having until 31st March and 30th April of the following year to report emissions and to surrender allowances. The penalties for failing to surrender sufficient allowances are similar in the two systems.

While the Swiss ETS does not yet cover aviation, aviation activities are one of the biggest sources of greenhouse gases from Switzerland, and coverage of aviation by the Swiss ETS has been considered essential for linking with the EU ETS. Switzerland is working on including aviation in the Swiss ETS, with Switzerland mirroring the EU ETS rules on aviation.

Like the EU ETS, the Swiss ETS is currently undergoing review for its next period from 2021 to 2030. The agreement to link the Swiss ETS and EU ETS (the Linking Agreement) includes provisions to ensure a continued compatibility between the systems for the link to be maintained in the 2021-2030 period.

•Consistency with other Union policies

Despite increasing use of emission trading in Asia and North America, for the time being no international carbon market with a uniform global carbon price exists. Countries are taking differing types of mitigation action, both market-based and more traditional 'command and control' policies. This constitutes a risk of carbon leakage for the most energy intensive sectors, i.e. transfer production to countries with less ambitious targets and policies. Linking will lead to convergence of carbon prices in the linked systems, which contributes to an improved level-playing field. As concerns aviation, once the Swiss ETS covers it, flights within Switzerland, flights between Switzerland and the EU and flights between EU Member States will be treated similarly.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis

The proposal is made under Article 192(1), together with Article 218, of the Treaty on the Functioning of the European Union (TFEU).

In accordance with Article 192(1) and 191 TFEU, the European Union shall contribute to the pursuit, inter alia, of the following objectives: preserving, protecting and improving the quality of the environment; promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.

Article 218 TFEU lays down the procedure for the negotiation and conclusion of agreements between the European Union and third countries or international organisations. Paragraph 5 thereof provides for the Council, on a proposal from the Commission as negotiator, to adopt a decision authorising the signature of an agreement on behalf of the European Union. Paragraph 6(a) of Article 218 TFEU provides for the Council, on a proposal from the Commission as a negotiator, to adopt a decision authorising the conclusion of the agreement after obtaining the consent of the European Parliament.

•Subsidiarity (for non-exclusive competence)

The EU ETS Directive is an existing EU policy instrument that continues after 2020. In accordance with the principle of subsidiarity set out in Article 5 TFEU, the objectives of the Linking Agreement can only be achieved through a proposal from the Commission at EU level, as the Agreement will enable participants in the EU system to use units from the Swiss system for compliance.

Acting at EU level, and where possible at global level, is more efficient than acting at the Member State level, due to the trans-boundary effects of climate change. Action at EU level will most effectively deliver the EU's domestic and international climate targets while preserving a level-playing field in the EU's internal market.

•Proportionality

3.BUDGETARY IMPLICATIONS

4.OTHER ELEMENTS

•Detailed explanation of the specific provisions of the proposal

The Agreement clarifies that Switzerland will mirror the EU ETS provisions on aviation in the Swiss ETS before the Agreement enters into force. Aviation operators will be administered by an EEA State or Switzerland under the 'one-stop shop' approach, so that a single authority takes responsibility of the implementation of the two systems.

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.

2017/0194 (NLE)

Proposal for a

COUNCIL DECISION

on the signing, 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

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 192(1), in conjunction with Article 218(5) thereof,

Having regard to the proposal from the European Commission,

Whereas:

(1)On 20 December 2010, the Council authorised the Commission to open negotiations with the Swiss Confederation for the linking of their greenhouse gas emissions trading systems. The negotiations were successfully concluded by the initialling of the Agreement.

(2)The Agreement ensures that the conditions for linking, as specified in Article 25 of the Directive establishing the EU's Emissions Trading System 2 , are met.

(3)Therefore, the Agreement should be signed on behalf of the Union, subject to its conclusion at a later date.

(4)To ensure coordination between the Parties and to take account of relevant legislative developments, Articles 11 to 13 of the Agreement should apply provisionally,

HAS ADOPTED THIS DECISION:

Article 1

The signing of the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems is hereby approved on behalf of the Union.

The text of the Agreement to be signed is attached to this Decision.

The text of the Agreement shall be signed on X November 2017.

Article 2

The Council Secretariat General shall establish the instrument of full powers to sign the Agreement, subject to its conclusion, for the person(s) indicated by the negotiator of the Agreement.

Article 3

Articles 11 to 13 of this Agreement shall be applied provisionally as from the date of signature, in accordance with Article 22 thereof, pending its entry into force.

Article 4

This Decision shall enter into force on the day following its adoption.

Done at Brussels,

(1) Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC

(2) Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC

EUROPEAN COMMISSION

Brussels, 16.8.2017

COM(2017) 428 final

ANNEX

to the

Proposal for a Council Decision

on the signing, 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

AGREEMENT between the European Union and the Swiss Confederation on the linking of their greenhouse gas Emissions Trading Systems

THE EUROPEAN UNION,

(hereinafter referred to as ‘the Union’)

of the one part, and

THE SWISS CONFEDERATION,

(hereinafter referred to as ‘Switzerland’)

of the other part,

(hereinafter referred to as ‘the Parties’),

CONSCIOUS OF the global challenge presented by climate change and the international efforts required to reduce greenhouse gas emissions to combat climate change;

NOTING the international commitments, in particular the United Nations Framework Convention on Climate Change and its Kyoto Protocol, to reduce greenhouse gas emissions;

CONSIDERING THAT Switzerland and the Union share the objective of reducing greenhouse gas emissions significantly by 2020 and beyond;

CONSCIOUS THAT revisions for future trading periods of the Emissions Trading Systems of the Union and Switzerland may necessitate reviews of the Agreement to, at a minimum, preserve the integrity of the mitigation commitments of the Parties;

RECOGNISING THAT Emissions Trading Systems are an effective tool for reducing greenhouse gas emissions cost-effectively;

CONSIDERING THAT linking Emissions Trading Systems to enable the trade of emission allowances between systems will help build a robust international carbon market and further reinforce the emission reduction efforts of the Parties who have linked their systems;

CONSIDERING THAT by linking Emissions Trading Systems carbon leakage and distortion of competition between the linked systems should be avoided and an orderly functioning of the linked carbon markets ensured;

HAVING REGARD TO the Emissions Trading System of the Union, established by Directive 2003/87/EC as amended, and the Emissions Trading System of Switzerland, established by the CO2 Act and its Ordinance;

RECALLING that Norway, Iceland and Liechtenstein participate in the Emissions Trading System of the Union;

CONSIDERING THAT, depending on the timing of ratification, linking should be operational from 1 January 2019 or from 1 January 2020 without prejudice to essential criteria being applied earlier by Switzerland or the Union, and to provisional application;

CONCIOUS THAT linking of Emission Trading Systems requires access to as well as exchange of sensitive information between the Parties and therefore appropriate security measures;

NOTING THAT this Agreement does not affect the provisions by means of which the Parties set their objectives for reducing greenhouse gas emissions not covered by their Emissions Trading Systems;

RECOGNISING THAT this Agreement shall be without prejudice to any bilateral agreement between Switzerland and France – in respect of the bi-national status of EuroAiport Basel-Mulhouse-Freiburg as established by the “Convention franco-suisse du 4 juillet 1949 relative à la construction et à l’exploitation de l’aéroport de Bâle-Mulhouse”, as long as the bilateral agreement respects the essential criteria and technical provisions defined in this Agreement;

RECOGNISING THAT the provisions of this Agreement are designed in view of the close connections and special relationship existing between Switzerland and the Union;

Welcoming the Agreement reached at the 21st conference of the parties to the United Nations Framework Convention on Climate Change reached in Paris on 12 December 2015, and recognizing that the accounting issues resulting from that will be looked at in due course. 

HAVE AGREED AS FOLLOWS:

CHAPTER I

GENERAL PROVISIONS

Article 1

Objective

This Agreement links the Emissions Trading System of the Union (hereinafter referred to as “EU ETS”) with that of Switzerland (hereinafter referred to as “ETS of Switzerland”).

Article 2

Essential Criteria

The Emissions Trading Systems (hereinafter referred to as "ETS") of the Parties shall meet at least the essential criteria set out in Annex I.

CHAPTER II

TECHNICAL PROVISIONS

Article 3

Registries

1.The registries of the Parties shall meet the criteria defined in Annex I, Part C.

2.To operationalize the link between the EU ETS and the ETS of Switzerland, a direct link between the European Union Transaction Log (EUTL) of the Union registry and the Swiss Supplementary Transaction Log (SSTL) of the Swiss registry shall be established, which will enable the registry-to-registry transfer of emission allowances issued under either system.

3.The registry link shall, inter alia:

a.be administered for Switzerland by the Swiss registry administrator and for the Union by the Union central administrator,

b.operate in accordance with applicable laws in each jurisdiction,

c.be supported by automated processes integrated into both the Swiss registry and the Union registry to enable transactions,

d.be implemented so as to ensure consistent functionality to the extent possible for users of the Swiss registry and the Union registry.

4.The Swiss registry administrator, the Union central administrator or both administrators jointly may temporarily close the registry link for system maintenance, security breach or security risk in accordance with the applicable Swiss and European Union legislations. The Parties shall give notice as early as possible of a temporary closure of the registry link for system maintenance, security breach or security risk and shall make the temporary closure as brief as possible.

5.The Parties shall act promptly and in close cooperation using measures available in their respective jurisdictions to prevent fraud and preserve market integrity of the linked ETS. In the context of the linked ETS, the Swiss registry administrator, the Union central administrator and national administrators from European Union Member States shall work together to minimise the risk of fraud, misuse or criminal activity involving the registries, to respond to such incidents, and to protect the integrity of the registry link. Measures agreed by the administrators to address risk of fraud, misuse or criminal activity shall be adopted by decision by the Joint Committee.

6.The Swiss registry administrator and the Union central administrator shall determine common operational procedures (COP) related to technical or other matters necessary for the operation of the linking and taking into account the priorities of domestic legislation. The COP developed by the administrators shall take effect when adopted by decision by the Joint Committee.

7.The Swiss registry administrator and the union central administrator shall develop Linking Technical Standards (LTS) based on the principles set out in the Annex II describing the detailed requirements for establishing a robust and secure connection between the SSTL and EUTL. The LTS developed by the administrators shall take effect when adopted by decision by the Joint Committee.

8.Issues requiring resolution arising out of the implementation and operation of the registry link will be resolved through timely consultation by the Swiss registry administrator and the Union central administrator and in accordance with the determined COP.

Article 4

Emission allowances and accounting

1.Emission allowances that can be used for compliance under the ETS of one Party shall be recognised for compliance under the ETS of the other Party.

Emission allowance means an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which has been issued under the EU ETS or the ETS of Switzerland valid for the purposes of meeting the requirements under the ETS of Switzerland or the EU.

2.Existing restrictions on the use of specific allowances in one system may be applied in the other system.

3.The ETS in which an emission allowance was issued shall be identifiable to the registry administrators and the account holders on the basis of at least the country code of the serial number of the emission allowance.

4.Each Party shall inform the other on at least an annual basis of the total holdings of emission allowances issued under the other system and the number of emission allowances issued under the other system surrendered for compliance or voluntarily cancelled.

5.Parties shall account for net flows of allowances in accordance with UNFCCC approved principles and rules for accounting following their entry into force. This mechanism shall be determined in an Annex to this Agreement adopted by decision by the Joint Committee.

6.Upon entry into force of the second commitment period of the Kyoto Protocol, the Parties shall transfer or acquire a sufficient number of Assigned Amount Units (AAUs) valid for the second commitment period of the Kyoto Protocol at an agreed interval and in case of termination in accordance with Article 16 to account for net flows of allowances between the Parties to the extent that such allowances have been surrendered by ETS operators for compliance and to the extent that such allowances represent emissions included in Annex A of the Kyoto Protocol. The mechanism for such transactions shall be determined in an Annex to this Agreement adopted by decision by the Joint Committee following the entry into force of the amendment of the Kyoto Protocol. The Annex shall also include agreement on the management of the share of proceeds applied to the first international transfer of AAUs. 

Article 5

Auctioning

1.Allowances shall only be sold by the Parties through auctioning.

2.Operators under either ETS shall be eligible to apply for admission to bid in auctions for allowances. Access to auctions of allowances for operators under either ETS shall be given on a non-discriminatory basis. To ensure the integrity of the auctions, the eligibility to apply for admission to the auctions may only be extended to other categories of participants that are regulated under the law of a Party or that are specifically authorised to participate in auctions.

3.Auctioning shall be conducted in an open, transparent and non-discriminatory manner and according to the criteria presented in Annex I Part D.

CHAPTER III

AVIATION

Article 6

Inclusion of aviation activities

Aviation activities shall be included by the Parties in their respective ETS in accordance with the essential criteria set out in Annex I, Part B. Inclusion of aviation activities in the Swiss ETS shall reflect the same principles as those of the EU ETS, in particular with regards to coverage, cap and allocation rules.

Article 7

Review of agreement in case of changes concerning aviation activities

1.In case of changes regarding aviation activities in the EU ETS, the corresponding Annex I, Part B, shall be reviewed by the Joint Committee pursuant to Article 13(2).

2.The Joint Committee shall in any event convene by the end of 2018 to review the relevant provisions of the agreement regarding the scope of coverage of aviation activities pursuant to Article 13(2).

CHAPTER IV

SENSITIVE INFORMATION AND SECURITY

Article 8

Sensitive information

1.'Sensitive information' means information and material whether in oral, visual, electronic, magnetic or documentary form, including equipment and technology, which has been provided by or exchanged between the Parties in connection with this Agreement and (i) the unauthorised disclosure of which could cause varying degrees of damage or harm to the interests of Switzerland, the Union or one or more of the Member States of the Union; (ii) which requires protection against unauthorised disclosure in the security interests of one of the Parties; and (iii) which bears a sensitivity marking assigned by one of the Parties.

2.Without prejudice of the respective laws and regulations of the Parties, each Party shall protect sensitive information, in particular against unauthorised disclosure or integrity loss, in accordance with the security requirements and sensitivity levels and handling instructions defined in Annex II, III, and IV respectively. 'Handling' includes generating, processing, storing, transmitting or destroying the sensitive information or any information contained therein.

Article 9

Sensitivity levels

1.Each Party is solely responsible for marking information it releases as sensitive and for downgrading or removing the level of sensitivity of information it released. Where sensitive information is released jointly by the Parties, the Parties shall agree together on the marking and the level of sensitivity, as well as the downgrading and removal of the level of sensitivity.

2.Sensitive information shall be marked ETS CRITICAL, ETS SENSITIVE or ETS LIMITED in accordance with its level of sensitivity listed in Annex III.

3.The sensitive information originator of the releasing Party should downgrade sensitive information to a lower sensitivity level as soon as information ceases to require a higher degree of protection or remove the sensitivity status as soon as the information no longer requires protection against unauthorised disclosure or loss of integrity.

4.The releasing Party shall inform the recipient Party of any new sensitive information and its associated level of sensitivity, as well as of any downgrades in sensitivity level or removals of sensitivity status.

5.A shared sensitive information list shall be established and maintained by the Parties.

CHAPTER V

DEVELOPMENT OF LAW

Article 10

Development of Law

1.This Agreement does not prejudge the right of each Party to amend or adopt legislation of relevance to this Agreement, including the right to adopt more stringent protective measures.

2.The Parties shall notify each other in writing in a timely manner when legislation is being developed by one of the Parties in an area of relevance to this Agreement. To this end, a process of regular information and consultation shall be set up by the Joint Committee.

3.Following notification pursuant to paragraph 2, either Party may request an exchange of views thereon within the Joint Committee under Article 13(4), in particular to assess whether the legislation would directly affect the criteria set out in Annex I.

4.Upon the adoption of a proposal for a legislative act of relevance to this Agreement by one Party, a copy thereof shall be transmitted to the other Party’s representative(s) to the Joint Committee.

5.Upon the adoption of a legislative act of relevance to this Agreement by one Party, a copy thereof shall be transmitted to the other Party’s representative(s) to the Joint Committee.

6.Where the Joint Committee concludes that the legislation is directly affecting the criteria set out in Annex I, the Joint Committee shall take a decision concerning a corresponding amendment of the relevant part of Annex I. Such a decision shall be taken before six months elapse from the date of referral to the Joint Committee.

7.Where a decision on an amendment of Annex I cannot be reached within the timeframe referred to in paragraph 6, the Joint Committee shall examine, within eight months of referral, all further possibilities to maintain the good functioning of the Agreement and take any decisions necessary to this effect.

Article 11

Coordination

1.The Parties shall coordinate in areas of relevance to this Agreement, and, in particular, on the criteria set out in the Annexes, to ensure the proper implementation of the Agreement and on-going integrity of the ETS of the Parties, as well as avoid carbon leakage and undue distortion of competition between the linked ETS.

2.Such coordination shall, in particular, take place through the formal and informal exchange or provision of information and, at the request of a Party, through consultations in the Joint Committee.

CHAPTER VI

JOINT COMMITTEE

Article 12

Composition and functioning of the Joint Committee

1.A Joint Committee composed of representatives of the Parties is established.

2.Either Party may request the convening of a meeting; the Joint Committee shall meet within 30 days of such a request.

3.Decisions taken by the Joint Committee in the cases provided for in this Agreement shall, upon their entry into force, be binding on the Parties, which shall take the necessary steps to ensure their implementation and application.

4.The Joint Committee shall establish its rules of procedure. Decisions taken by the Joint Committee shall be agreed by both parties.

5. The Joint Committee may decide to set up any subcommittee or working group that could assist it in its work.

Article 13

Functions of the Joint Committee

1.It shall be the responsibility of the Joint Committee to administer this Agreement and ensure its proper implementation.

2.The Joint Committee may decide to adopt a new Annex or amend an existing Annex to this Agreement.

3.The Joint Committee shall discuss amendments to the Articles of this Agreement proposed by one of the Parties. If the Joint Committee agrees to the proposal, it shall submit the proposal to the Parties for adoption according to their respective internal procedures.

4.Upon a request made pursuant to Article 10(3), the Joint Committee shall hold an exchange of views on proposed legislation, in particular whether this legislation would result in the respective Party’s ETS no longer meeting the criteria set out in the Annexes.

5.Upon suspension of or prior to the notification of termination of this Agreement in accordance with Articles 15 and 16, the Joint Committee shall hold an exchange of views and shall aim to find agreement to end the suspension or prevent the termination.

6.The Joint Committee shall aim to settle disputes referred to it by the Parties in line with Article 14.

7.The Joint Committee shall conduct periodic reviews of the Agreement in light of any major developments in either ETS, including on market oversight or the commencement of a new trading period, to ensure in particular that the link is not undermining either Party's domestic emissions reductions targets or the integrity and orderly functioning of their carbon markets.

8.The functions of the Joint Committee shall be limited to those foreseen in this Agreement.

CHAPTER VII

DISPUTE SETTLEMENT

Article 14

Dispute Settlement

1.The Parties shall refer disputes on the interpretation or application of this Agreement arising between them to the Joint Committee for resolution.

2.Where the Joint Committee is unsuccessful in settling the dispute within six months after the referral to it, the dispute shall be referred, at the request of either of the Parties, to the Permanent Court of Arbitration for resolution in accordance with the Permanent Court of Arbitration's Rules of 2012.

3.The dispute settlement mechanism shall continue to apply after suspension or termination of the Agreement for disputes according to paragraph 1 that arose during the application of the Agreement.

CHAPTER VIII

SUSPENSION AND TERMINATION

Article 15

Suspension of Article 4(1)

1.Without prejudice to Article 16, a Party may suspend the application of Article 4(1) of this Agreement in the following circumstances:

a.Where one Party considers the other Party not to comply, wholly or in part, with the obligations established under Articles 2, 3(1), 4(1), 5(3), 6, 8(2), 10(2), 10(4)-(5) and 18(2) under this Agreement.

b.Where the other Party notifies the former in writing of its intention to link its ETS to that of a third Party.

c.Where the other Party notifies the former in writing of its intention to terminate this Agreement.

2.A Party shall notify its decision to suspend Article 4(1) of the Agreement in writing to the other Party together with a justification for this suspension. The decision shall be made public immediately after the notification has been made to the other Party.

3.The suspension of Article 4(1) of the Agreement shall be of a temporary duration. Where Article 4(1) is suspended pursuant to paragraph 1(a) of this Article, the suspension shall end with the resolution of the dispute in accordance with Article 14. Where Article 4(1) is suspended pursuant to paragraph 1(b) or paragraph 1(c) of this Article, the suspension shall be of a temporary duration of 3 months. The Party may decide to shorten or extend the duration of the suspension.

4.During suspension, allowances cannot be surrendered for compliance in an ETS from which they do not originate. All other transactions remain possible.

5.If no exchange of views in the Joint Committee has been requested from the moment of transmission of the legislative proposal pursuant to Article 10(3) until the time limit set out in Article 10(6), or where such an exchange has taken place and the Joint Committee has concluded that the new legislation does not directly affect the criteria, a Party may not suspend the application of Article 4(1) on the ground that the other Party no longer complies with its obligation to meet the criteria set out in Annex I.

Article 16

Termination

1.A Party may terminate this Agreement at any time by notifying the other Party of its decision in writing and after consultation within the Joint Committee. The termination shall take effect 6 months after the notification has been made to the other Party. The decision shall be made public after the notification has been made to the other Party.

2.In the case of non-prolongation or abolition of a Party’s ETS, the present agreement shall be automatically terminated on the last operational day of the ETS in question.

3.In case of termination, the Parties shall reach agreement on the continued use and storage of the information that has already been communicated between them except for data held in the respective registry. If no agreement is reached, either of the Parties is entitled to request deleting the information which has been communicated.

CHAPTER IX

   FINAL PROVISIONS

Article 17

Implementation

1.The Parties shall take all appropriate measures to ensure fulfilment of the obligations arising out of this Agreement, including the decisions of the Joint Committee.

2.The Parties shall abstain from any measure which could jeopardise the attainment of the objectives of this Agreement.

Article 18

Linking with Third Parties

1.The Parties to this Agreement may negotiate with a third Party with a view to link their respective Emission Trading Systems.

2.Where a Party to this Agreement negotiates linking with a third Party, the former shall notify the other Party to this Agreement thereof and regularly update it on the status of the negotiations.

3.Before linking one Party to this Agreement with a third Party takes place, the other Party to this Agreement shall decide whether it accepts the other Linking Agreement or terminates the present Agreement. Where it accepts the other Linking Agreement, suspension of Article 4(1) will end.

4.Upon linking with a third Party, the provisions of this Agreement may be revised.

Article 19

Annexes

The Annexes to this Agreement are an integral part of it.

Article 20

Languages

This Agreement shall be drawn up in duplicate in the Bulgarian, Croatian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Irish, Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Romanian, Slovak, Slovenian, Spanish and Swedish languages, each of these texts being equally authentic.

Article 21

Ratification and Entry into Force

1.This Agreement shall be concluded for an indefinite period, unless terminated in accordance with Article 16.

2.This Agreement shall be ratified or approved by the Parties in accordance with their respective internal procedures.

3.The Parties shall only ratify or exchange their instruments of ratification once they consider all conditions for linking as defined in this Agreement to have been fulfilled.

4.This Agreement shall enter into force on the 1 January following the exchange of the instruments of ratification by the Parties. 

5.Entry into force of Article 4(6) shall be dependent on the ratification by and entry into force for both Parties of the Doha amendment to the Kyoto Protocol adopted at the 8th Meeting of the Parties (Decision 1/CMP.8; the second commitment period).

Article 22

Provisional application

Before its entry into force, Articles 11 to 13 shall be provisionally applied as from the date of signature of this Agreement.

Done at … on the ...

For the Swiss Confederation:            For the European Union:

Annex I

Essential Criteria

A.Essential Criteria for Stationary Installations

B.Essential criteria for Aviation

C.Essential Criteria for Registries

The ETS of each party shall include a registry and a transaction log, which shall meet the following essential criteria in relation to security mechanisms and procedures and for the opening of accounts.

Essential Criteria on Security Mechanisms and Procedures:

The registries and transaction logs shall protect the confidentiality, the integrity, the availability and the authenticity of the data stored in the system. To this end, the following security mechanisms shall be implemented by the Parties:

Essential Criteria on the Opening and Management of Accounts:

The following essential criteria shall be respected with regard to the opening of accounts:

D.Essential Criteria for Auctioning Platforms and Auction Activities

Entities conducting auctions of allowances in the ETS of the Parties shall meet the following essential criteria and conduct the auctions accordingly.

Annex II

Linking Technical Standards

The Linking Technical Standards (LTS) shall specify:

·The architecture of the communication link;

·The security of data transfer;

·The list of functions (transactions, reconciliation …);

·The definition of the web services;

·The data logging requirements;

·The operational arrangements (Call desk, support);

·The communication activation plan and the testing procedure;

·The security testing procedure.

The LTS shall specify that the administrators shall take reasonable steps to ensure that the SSTL and the EUTL and the link are operational 24 hours a day, 7 day a week and those interruptions to the operations of the SSTL and the EUTL and the link are kept to the minimum.

The LTS shall specify that the communications between the Swiss Supplementary Transaction Log (SSTL) and the European Union Transaction Log (EUTL) consist in secure exchanges of Simple Object Access Protocol (SOAP) messages based on the following technologies 1 :

·Web services using SOAP;

·Hardware-based Virtual Private Network (VPN);

·XML (Extensible Markup Language);

·Digital signature; and

·Network time protocols.

The LTS shall set out additional security requirements for the Swiss registry, the SSTL, the Union registry and the EUTL and be documented in a 'security management plan'. In particular, the LTS shall specify that:

·If there is a suspicion that the security of the Swiss registry, the SSTL, the Union registry or the EUTL has been compromised then both Parties shall immediately inform each other and suspend the link between the SSTL and the EUTL.

·In the event of a security breach Parties commit to share the information with each other with no delay. To the extent that the technical details are available, a report describing the incident (date, cause, impact, remedies) shall be shared between the Swiss registry administrator and the Union central administrator within 24 hours following the security breach.

The security testing procedure set out in the LTS shall be completed before the communication link between the SSTL and the EUTL is established and when a new version or release of the SSTL or the EUTL is required.

The LTS shall provide two testing environments in addition to the Production environment: a developer testing environment and an acceptance environment.

The Parties through the Swiss registry administrator and the Union central administrator shall provide evidence that an independent security assessment of their systems has been performed in the last 12 months in accordance with the security requirements set out in the LTS. Security testing and in particular penetration testing shall be performed on all new major releases of the software in accordance with the security requirements set out in the LTS. The penetration testing shall not be performed by the software developer or a subcontractor of the software developer.

Annex III

Sensitivity levels and handling instructions

The Parties agree to make use of the following sensitivity levels to identify sensitive information handled and exchanged within the agreement:

·ETS Limited

·ETS Sensitive

·ETS Critical

Information marked "ETS Critical" being more sensitive than information marked "ETS Sensitive" itself being more sensitive than information marked "ETS Limited".

The Parties agree to develop handling instructions on the basis of the existing ETS information classification policy of the EU and on the basis of the Information Protection Ordinance (IPO) and the Federal Act on Data Protection (FADP) for Switzerland. These handling instructions will be submitted to the Joint Committee for approval. Following approval, all information will have to be handled according to its sensitivity level in compliance with these handling instructions.

In case of different level assessments by the Parties, the higher level shall be applied.

The legislation of each Party shall include equivalent essential security requirements for the following handling steps, taking into account the ETS sensitivity levels:

·Generation of document

oResources

oSensitivity Level

·Storage

oElectronic document on network

oElectronic document in a local environment

oPhysical document

·Electronic transmission

oPhone and mobile

oFax

oE-mail

oData transmission

·Physical Transmission

oOral

oPersonal handover

oPostal system

·Use

oProcessing with IT applications

oPrinting

oCopying

oRemoval from permanent location

·Information management

oRegular evaluation of classification and recipients

oArchiving

oDeletion and destruction

Annex IV

Definition of ETS Sensitivity levels

A.1- Confidentiality and Integrity rating

Confidentiality means the reserved character of information or of all or part of an information system (such as algorithms, programmes and documentation) to which access is limited to authorised persons, bodies and procedures.

Integrity means the guarantee that the information system and processed information can be altered only by deliberate and legitimate action and that the system will produce the expected result accurately and in full.

For each ETS information considered sensitive, confidentiality (resp. integrity) aspect has to be considered from the potential impact at business level in case this information is disclosed (resp. unwillingly modified, partially or totally destroyed).

For each security aspect confidentiality and integrity a rating is assessed based on the definition provided in section A.2 and then the global sensitivity level of the information is evaluated thanks to the grid provided in section A.3

A.2- Confidentiality and Integrity rating

A.2.1- Definition for "Low"

Any information relating to the Emission Trading System for which disclosure to unauthorised persons and/or loss of integrity would cause moderate prejudice to the Parties or other institutions to be likely to:

–moderately affect political or diplomatic relations;

–cause local negative publicity to the image or reputation of the Parties or other institutions;

–cause embarrassment to individuals;

–affect staff morale/productivity,

–cause limited financial loss or, moderately facilitate improper gain or advantage for individuals or companies;

–moderately affect the effective development or operation of Parties’ policies;

–moderately affect the proper management of the Parties and their operations.

A.2.2- Definition for "Medium"

Any information relating to the Emission Trading System for which disclosure to unauthorised persons and/or loss of integrity would cause prejudice to the Parties or other institutions to be likely to:

–cause embarrassment to political or diplomatic relations;

–cause damage to the image or reputation of the Parties or other institutions ;

–cause distress to individuals;

–cause consequential reduction in staff morale/productivity;

–embarrass the Parties or other institutions in commercial or policy negotiations with others;

–cause financial loss or facilitate improper gain or advantage for individuals or companies;

–affect the investigation of crime;

–breach legal or contractual obligations on confidentiality of information;

–affect the development or operation of Parties’ policies;

–affect the proper management of the Parties and their operations.

A.2.3- Definition for "High"

Any information relating to the Emission Trading System for which disclosure to unauthorised persons and/or loss of integrity would cause catastrophic and/or unacceptable prejudice to the Parties or other institutions to be likely to:

—Adversely affect diplomatic relations;

—Cause substantial distress to individuals;

—Make it more difficult to maintain the operational effectiveness or security of Parties or other contributors' forces;

—Cause financial loss or facilitate improper gain or advantage for individuals or companies;

—Breach proper undertakings to maintain the confidence of information provided by third parties;

—Breach statutory restrictions on disclosure of information;

—Prejudice the investigation or facilitate the commission of crime;

—Disadvantage the Parties in commercial or policy negotiations with others;

—Impede the effective development or operation of Parties’ policies;

—Undermine the proper management of the Parties and their operations.

A.3 – ETS Sensitive information level assessment

Based on both ratings for Confidentiality and Integrity completed as described in the former section, information sensitivity is established using the following mapping table:

* Possible variation to be assessed on a case-by-case basis.

(1)

Those technologies are currently used for establishing a connection between the Union Registry and the International Transaction Log as well as between the Swiss Registry and the International Transaction Log.