Agreement between the EU and Switzerland on the greenhouse gas emissions trading system (ETS)

KEY POINTS

Cap and trade: how the EU ETS works

• The EU ETS, set up by Directive 2003/87/EC, works on the ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by power plants and industrial installations covered by the system. The cap is reduced over time so that total emissions fall.
• Besides stationary installations, the EU ETS applies to all flights between airports in the EU and the European Economic Area.
• Within the cap, companies receive or buy emission allowances¹ which they can then trade with one another as needed. Before 2021 they could also use limited amounts of international credits from emission-saving projects around the world for compliance with the system. The limit on the total number of allowances available ensures that they retain their value.
• Each year a company must hand over enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.
• Trading brings flexibility that ensures emissions are cut where it is most cost-effective. It also promotes investment in clean, low-carbon technologies.

EU-Swiss agreement

• The agreement sets out the key objectives and principles, as well as the institutional structure, for linking the EU and Swiss emissions trading systems.
• Once the link between the EU ETS and the CH ETS becomes operational, emission allowances that originate from one system are eligible for compliance with the other system.

Essential criteria

• To ensure the 2 systems are compatible, certain essential criteria, laid down in an annex to the agreement, must be met. These criteria largely reflect the provisions of the EU ETS legislation or its implementing acts. Either system can adopt rules that are more stringent than the essential criteria.
• The agreement allows for the possibility of future legislative developments in the linked systems without the need for substantial renegotiation as long as the systems continue to meet the essential criteria.

Information sharing and coordination

The agreement establishes a process for information sharing and coordination in areas of relevance. This is to ensure its proper implementation and the ongoing integrity of the linked systems. This process permits the parties to keep each other informed of relevant legislative developments.

Aviation

• The agreement clarifies that Switzerland will mirror the EU ETS provisions on aviation in the CH ETS for the linking of the two emissions trading systems to enter into force.
• Aviation operators will be administered by an EEA state or Switzerland under the ‘one-stop shop’ approach. This means that a single authority takes responsibility for the implementation of the 2 systems so that operators will only have to deal with one authority under the linked system.
• The special situation of the bi-national Basel airport is addressed to avoid double-counting, should Switzerland reach a bilateral agreement on the coverage of activities from Basel airport.

Joint Committee

The agreement establishes a JC as its main steering structure. The JC:

• comprises representatives of both parties and is responsible for the administration and proper implementation of the agreement;
• plays a key role in the information sharing and coordination process, as well as in assessing whether the parties continue to meet the essential criteria;
• can propose changes to articles of the agreement and make amendments to the annexes;
• became functional from the date of signature of the agreement under the terms of the agreement on the provisional application of certain articles.

Dispute-settlement mechanism

Disputes on the interpretation or application of the agreement can be referred by either party to the JC for resolution. Where the JC is unsuccessful in settling the dispute within 6 months, it can be referred to the Permanent Court of Arbitration at the request of either party.

Technical rules

In addition to the principles, objectives and institutional arrangements, the agreement contains technical provisions governing the operation of registries, accounting, auctioning, sensitive information and security.