ETS Linking: A new link in Europe’s climate action
In January, negotiations between the EU and Switzerland to link their carbon markets were concluded after 5 years of talks. Since the linking agreement has not (yet) been made publicly available, the consequences for Europe’s climate ambition remain unclear, including how it may impact the domestic nature of the EU’s 2030 climate target.
The deal represents the first time the EU’s Emissions Trading System (EU ETS) is linked to another carbon market. Although the link with the much smaller Swiss ETS will not have a major impact on the functioning of the EU ETS, it does set the precedent for linkages with other –potentially larger- carbon markets in the future. It is still unclear what the impacts are of the upcoming link between the EU and the Swiss ETS, such as how the link impacts Europe’s domestic emissions abatement and the associated co-benefits.
Linking in the context of the EU’s domestic 2030 target
Linking the EU ETS to a foreign trading system could allow foreign allowances and credits to enter the EU’s carbon market and undermine the EU’s decision to achieve at least 40% emission reductions domestically by 2030. This would hence go against the decision by EU leaders to achieve the EU’s 2030 climate target wholly through domestic means, unless the EU’s climate ambition is raised by the same amount as the amount of foreign allowances and credits imported into the EU ETS.
Lack of public participation and transparency
It remains an open question what is included in the linking agreement with Switzerland, due to the lack of transparency in the linking negotiations. For example, there has been no public access to the negotiation mandate, the final linking agreement and little, if any, information on the progress of the negotiations. The only information made publicly available is provided by the Swiss government, that publishes a press release after each negotiation round and that has signaled the conclusion of the negotiations.
The impact that linking could have on the EU’s environmental standards when linked to a larger carbon market than the Swiss ETS shows how important it is to allow for public participations and to release all relevant information on the linking negotiations. As current EU rules do not provide for this, it will be up to the ongoing EU ETS revision to change this in the future. In the meanwhile, we count on the European Commission to make the linking agreement publicly available so that members of the European Parliament and other stakeholders can scrutinize it.
Should we be happy with the link?
In our opinion, the linking agreement with Switzerland should pass the following test in order for the link to happen:
- The agreement includes a mechanism to ensures that the EU’s 2030 climate target of at least 40% is wholly met by domestic climate actions, e.g. the EU’s 2030 climate ambition will be raised in case any foreign allowances are imported.
- The Swiss ETS excludes the use of international offsets from 2021 onwards, in line with the EU’s provisions, to ensure that international credits do not enter the EU ETS through the backdoor.
- Similar sectors are covered in both schemes, e.g. including aircraft operators. [This condition has been met according to the press release by the Swiss Federal Office of the Environment]
- There is a comparable level of ambition in both schemes.
- There is a robust allowance allocation method in both carbon markets, and the linkage will result in reduced free allocation of emission allowances as linking reduces carbon leakage risks.
- The recently adopted Market Stability Reserve will also apply to the Swiss scheme.
- Modifications made to the individual carbon markets can result in de-linking, when a majority of the other policymakers do not agree to the changes.
When will the Swiss and the EU ETS be linked?
The ratification of the linking agreement and the start of the connection might still take some time as it depends on when Switzerland and the EU can resolve an issue related to immigration. After the agreement has been ratified, the Commission will adopt the necessary provisions to the EU ETS directive to allow for the mutual recognition of allowances. These measures will be adopted in comitology which means that the Council and the European Parliament can object to the measures if they disagree.