Efforts to link the EU Emissions Trading System with Switzerland's national carbon market have moved forward after the European Commission on Wednesday adopted two proposals to finalize an agreement.
The linking process is significant because carbon prices under the EU and Swiss systems would be expected to converge once the linking is complete.
"Under the forthcoming linking arrangements, participants in the EU Emissions Trading System will be allowed to use allowances from the Swiss system for compliance and vice versa," the EC said in a statement Wednesday.
"Linking the EU ETS with other emissions trading systems expands opportunities for emissions reductions, thereby cutting the cost of fighting climate change," the EC said.
The EU and Switzerland have agreed on criteria and arrangements for linking their respective carbon markets after several years of negotiations.
The EC on Wednesday adopted two proposals: one for the signature of the agreement and one for its ratification.
"Signature of the agreement could take place before the end of this year. Following this, both sides will ensure that all criteria are met and prepare for implementation," the EC said.
Once technical arrangements for linking the two systems are finalized, the agreement would need to be ratified by both sides.
"The agreement will enter into force at the start of the year following ratification. This is not expected before 2019," the EC said.
PRICE CONVERGENCE
Pending final agreement, Switzerland's carbon market will link with the EU ETS, which includes 28 participating EU member states, including the UK, which remains an EU member state until it leaves the bloc under the Brexit negotiations.
The EU system also includes three non-EU countries, Norway, Iceland and Liechtenstein.
Switzerland's domestic carbon market was introduced on January 1, 2008 and includes 55 entities from sectors including cement, chemicals, refineries, paper, heat and steel, according to the International Emissions Trading Association.
The market was introduced as an alternative option for complying with the Swiss national CO2 levy on heating, industrial processes and transport fuels, which came into effect on the same day.
Swiss carbon prices have traded as high as CHF40/mt (Eur35/mt) in early 2014 but declined to CHF12/mt (Eur10.53/mt) by early 2015, and further to CHF9.00/mt (Eur7.89/mt) by March 2016.
EU carbon allowances for delivery in December 2017 have averaged Eur5.06/mt so far in 2017, moving in a range of Eur4.29/mt to Eur6.18/mt.
Carbon prices in the two systems would be expected to converge once the linking process is complete.
However, the small size of Switzerland's carbon market would make it likely that the Swiss carbon price would take direction from the EU carbon price, which may be higher by the time the link is operational.
Under the linking arrangements, Switzerland's system would remain separate from the EU ETS, rather than joining it as a participating country.
The EU ETS legislation provides for the possibility to link to other compatible emissions trading systems at the national or regional level.
Conditions for linking include: system compatibility (systems must have the same basic environmental integrity, based on a unit worth 1 mt of CO2 equivalent); the mandatory nature of the system; and the existence of an absolute cap on emissions, according to the EC.
