The EU is to link its carbon market to the much smaller Swiss ETS after the conclusion of five years of talks, Switzerland’s Federal Office of the Environment said on Monday, though the parties did not set a start date for the connection as that depends on when they resolve an issue on immigration.

“The negotiations were concluded in January 2016, the initialling of the agreement at a technical level. For the agreement to enter into force, it must be signed and ratified by both sides. The timetable for it is open,” FOEN said on its website.

The linkage will enable emitters in Switzerland, which is part of the European Free Trade Association but not the EU, to trade emission rights on the considerably larger and more liquid European market, which should result in comparable allowance prices and a more level playing field.

The deal represents the second international carbon market linkage after California and Quebec’s, and the first link with the EU ETS.

However, following repeated delays it is unclear whether the connection will take place by the 2016-2017 start date that officials had been working towards.

The two parties had originally hoped to link their markets by 2015, but talks were temporarily put on hold by the EU in 2014 over concerns surrounding Switzerland’s referendum, which weighed voter appetite for limits on people immigrating to Switzerland.

“We have been informed by the EU that the date of signature will depend in particular on a solution regarding the issue of free movement of persons,” a FOEN official told Carbon Pulse by email on Monday.

The Feb. 2014 referendum, which led to the adoption of a popular initiative aimed at stopping mass immigration, gave the Swiss government three years to introduce a new admissions system for foreign nationals.  The procedure also includes a mandate to negotiate with the EU.

“Signature and entry into force of the agreement will depend on the finalisation of negotiations on a broader package of issues with Switzerland, including on the free movement of persons,” a European Commission official said in response to emailed questions on Tuesday.

AIRLINES IN

Swiss aircraft operators shall also be included in Switzerland’s ETS, the ministry added, referring to one of the final sticking points in the protracted talks. Swiss airlines flying between Switzerland and the rest of the European Economic Area have until now been exempt from the EU ETS.

Yet Switzerland is not willing to include airlines in its ETS until the linking arrangements are finalised.

“Aviation shall be included in the Swiss ETS following entry into force of the linking agreement. Entry into force will depend on the date of signature,” Sophie Wenger, a FOEN official, confirmed on Tuesday in response to emailed questions.

This is in contrast to other ETS reforms that Switzerland had previously undertaken with a view to cementing the EU link.

In 2013, participation in the Swiss market was made mandatory for large stationary emitters and voluntary for medium-sized ones that also have the choice of paying a costly carbon tax instead, which this year was raised to 84 francs (€76.51, $82.80 per tonne).

The Swiss ETS, launched in 2008, caps the emissions of around 55 companies in the country’s industrial manufacturing sectors including cement, steel, aluminum, oil refining, paper, glass, ceramics, chemicals and pharmaceuticals, as well as electricity and heating.

Last year it covered emissions amounting to some 5.44 million tonnes, a tiny fraction of the 1.8 billion regulated under the EU scheme, making it very unlikely that the link would impact EUA prices.

FOREIGN CREDITS?

Few details from the closed-door talks between Swiss officials and their European counterparts have emerged during the negotiation process.

Environmental campaigners at Carbon Market Watch last year raised concerns that the link risked diluting the EU’s own climate ambition due to Switzerland’s intention to make heavy use of international carbon credits to meet its overall emission targets after 2020.

This outsourcing of emission reductions could be at odds with the EU, which has no plans to use additional foreign offsets after 2020 unless its target to cut emissions by 40% below 1990 levels by 2030 is increased.

FACTFILE

• In general, the EU is keen to link its ETS to other schemes as this would theoretically allow more cost-effective GHG emissions reductions, increase market liquidity, make the carbon price more stable, level the international playing field by preventing carbon leakage, and support global cooperation on climate change.
• EU legislation envisages full two-way linking through the mutual recognition of allowances between the EU ETS and any other country’s ETS as outlined in Article 25 of the ETS Directive.
• The EU ETS was first expanded from EU Member States to include the EEA countries (Iceland, Liechtenstein and Norway) under the EEA agreement and currently regulates big emitters in 31 nations.
• All new EU member states that accede to the European Union become members of the EU ETS as they adopt and implement EU legislation that applies to all member states; the most recent being Croatia in 2013. These developments, however, did not require specific linking agreements as they fall under other broader agreements or treaties so are seen as more as an expansion of the EU ETS rather than outright linking.
• The EU and Australia agreed to partially link their respective markets when Australia launched its scheme in 2015, with a full link in 2018. But Australia’s market was scrapped by former Prime Minister Tony Abbott and his Liberal party upon taking office in 2013.
• The EU has cooperation agreements with China and South Korea, though this is based on technical cooperation rather than direct linking, with observers predicting any possible links to be at least seven years off.

By Ben Garside – ben@carbon-pulse.com