EU’s plan to link to Swiss carbon market adds pressure to announce an increased climate target

eu flagsTomorrow, the EU is expected to announce its climate contributions towards the Paris climate agreement. The expected decision will build on the European Commission’s Road to Paris vision published last week. Hopes are that Ministers take their chances to address a number of critical issues that risk severely undermining the 40% domestic reduction target. They include a clear commitment to increase the 40% target in case of linking the EU’s emissions trading system (EU ETS) with other carbon markets, the way land use emissions are accounted for and the threat the existing surplus of emission allowances pose on the 2030 climate target.

When announcing the European Commission’s Road to Paris vision last week, EU’s Climate Commissioner Miguel Arias Cañete highlighted the EU ETS as the centre piece of EU’s climate policy and mentioned ongoing negotiations to link the EU ETS with the Swiss carbon market. Yet, the subsequently presented proposal for the EU’s INDC explicitly highlights that the ‘at least’ 40% domestic reduction target will be achieved without any contributions from international credits. This strongly implies that any transfer of carbon credits between a potentially linked Swiss and EU carbon market can only take place if the EU increases its target beyond 40%.

The Communication presented last week does in fact leave doors open to complement the EU’s domestic commitments with the use of international credits as long as their environmental integrity is fully secured and double counting is avoided. However, the decision agreed by heads of states in October 2014 called for an “at least 40% domestic” target. Increasing the 40% target solely with international credits leaves no room to offer a higher conditional domestic target ahead of the Paris negotiations.

In respect of an already agreed position, the EU must therefore offer an opportunity to increase its domestic target beyond 40% and provide clarity on how the plans to link the EU’s carbon market with the Swiss carbon market do not undermine the domestic nature of the EU’s climate target. There are also other open questions, including how carbon offsets used to meet the Swiss climate target can be firewalled from entering the EU’s carbon market and how the integrity of internationally traded allowances can be assessed. This is particularly relevant as the EU’s carbon market is heavily oversupplied with surplus allowances.

The surplus allowances in the EU’s carbon market should not only worry the Swiss, they also threaten the integrity of the EU’s at least 40% climate target. A recently published policy brief estimates that the surplus is expected to grow to 2.6 GtCO2 by 2020, according to the EU’s own calculations which could dilute the 40% GHG target by 7% in 2030. At the minimum, the EU should be transparent about how many of these surplus allowances it intends to use after 2020 when announcing the EU INDC. The integrity of the EU’s at least 40% target can however only be guaranteed if the EU permanently cancels all surplus allowances before the start of the new international climate agreement.

The EU will also need to ensure that the surplus that Member States accumulated will not be used for accounting tricks. If used for negotiations behind the scenes, for example with other countries such as Norway, this surplus – worth 1.5-2 billion CO2 by 2020 – could undermine the target by another 5%.

Finally, the EU INDC artificial accounting gains in forest management could further weaken the 40% target by up to 5%. While a commitment to address the climate impact of the land use sector is needed, this must be done in a way that preserves the ambition of the emissions reduction target.

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