Recent developments in the Agreement between the EU and Switzerland on linking their Emission Trading Systems reflect an ongoing commitment inside the European Union to aligning carbon pricing strategies across borders, that is now expected to accelerate following the adoption and implementation of the Carbon Border Adjustment Mechanism (CBAM).
The EU Carbon Pricing Strategy
The EU Emission Trading System (EU ETS) was implemented in 2005 and remains the largest international emission trading system in the world, also the backbone of the European carbon pricing strategy to decarbonize its most carbon-intensive sectors: power generation, industry, and aviation.
The European Union’s decarbonization ambition has intensified with the launch of the EU Green Deal (2020) and the Fit for 55 policy package, aiming to reduce net greenhouse gas emissions by at least 55% by 2030 (1), with ongoing debates to increase EU targets to 90% by 2040. A critical policy instrument of this strategy is the Carbon Border Adjustment Mechanism (CBAM), which prices the carbon emissions of goods imported into the European Union. CBAM is consistent with the objectives of EU carbon neutral targets. CBAM levels the playing field between EU industries, which are subject to the EU ETS and their third country competitors which might not be subjected to any carbon costs in their production countries. CBAM harmonizes the carbon cost gap that is anticipated to widen significantly over the next decade once EU industrial operators will no longer receive public support due to the phase-out of the so-called ‘ETS free allocation’.
Although CBAM will significantly impact countries that have Europe as a major commercial partner, the policy measure does not apply to non-EU countries participating in the EU ETS, such as Iceland, Liechtenstein, and Norway, or those with a domestic ETS linked to the EU ETS, like Switzerland.
The Linkage between EU ETS and Swiss ETS
The Swiss ETS began in 2008 with a five-year voluntary phase. From 2013, participation became mandatory for large, energy-intensive entities and remained voluntary for medium-sized emitters (2).
The Agreement between the EU and Switzerland on linking their Emission Trading Systems (the ‘Agreement’) entered into force on 1 January 2020 (3). In accordance with the Agreement, the emission allowances of the Swiss ETS became valid for compliance purposes in the EU ETS and vice versa. Therefore, with the physical transfer of emission allowances, the EU-Swiss ETS became the world’s first international treaty to link emissions trading systems.
There are several criteria considered and defined as ‘essential’ in the Annexes to the Agreement, such as compatibility between the ETSs, equal treatment of participants, and system security. The Agreement also established a Joint Committee, tasked with revising the Annexes and ensuring the integrity and compatibility of the linked systems.
The latest update of the Agreement
On 25 January 2024, Decision No. 1/2023 of the Joint Committee (4) was published in the Official Journal of the European Union, introducing amendments to the Agreement. These amendments are necessary due to the regulatory changes stemming from the new EU ETS trading period that began in January 2021.
Specifically, the Decision updates the ‘essential criteria’ for the linkage as provided in Annex I to the Agreement and clarifies the definition of sensitive information with a high confidentiality and integrity rating for the purposes of the Agreement.
As we witness the strengthening of EU carbon pricing strategy and the broader implications of the CBAM, it is clear that businesses within the EU and in countries closely linked to the EU’s Single Market need to reassess their compliance strategies.
This is the time for organizations to evaluate how these changes impact their operations and strategic planning. PwC’s team of experts is on hand to provide insight and support, helping businesses navigate these developments, ensure compliance, and optimize their strategies in this new era of carbon pricing and environmental accountability.
- The 55% reduction in emissions is compared to 1990 levels.
- The “Opt-out” allows operators with emissions below 25,000 tonnes of CO2eq per year to apply for exemption from ETS, while the “Opt-in” enables voluntary participation in ETS by small emitters, subject to specific criteria outlined in the Swiss CO2 Ordinance.