Across the Alps: Switzerland’s Climate Policy & EU ETS Unification

February 27, 2020

In many ways, Switzerland behaves like an island, and its climate policy is no exception. The country has developed its own separate climate policies, although it is surrounded by EU member states which act under a more synchronized climate approach. But this is changing: Switzerland is merging its emissions trading system (ETS) with the broader European Union program. To understand the effect of this change, one of our corporate sustainability experts in EMEA, Jana Pataky, will briefly explore standalone climate activities, then examine how the Swiss ETS and unification with the closely related EU scheme – EU ETS – will affect your company.

Contributed By: Jana Pataky, Sustainability Consultant, Schneider Electric

Switzerland’s Climate Policy to Date

The total energy mix in Switzerland is comprised of about 60% of fossil fuels, although electricity comes mostly from hydropower (60%) and nuclear power (33%). Air travel makes up to 10% of Swiss GHG emissions. While being a frontrunner in tackling GHG emission from transport sector with one of the most advanced public transport systems, Switzerland is still adopting plan to get aligned with the ambition of the Paris Agreement of keeping global warming related temperature increases to 1.5 degrees. The current Swiss Scheme, ‘CO2 Act’, took effect in 2000 and has been the major driver of Swiss climate policy. The next action plan targets Swiss climate neutrality by 2050, although the strategy for achieving this will be known only by the end of 2020.

The 2020 ‘CO2 Act’ has resulted in several ambitious policies and practical implementations that drive Swiss industry into GHG emission reduction. The most important ones, besides Swiss ETS, are the introduction of a CO2 levy (the key instrument of achieving the provisions of the ‘CO2 Act’), the introduction of building standards and programs, stringent regulation on vehicles, sectoral agreements and creating funds for technology development, climate change communication and education.

Switzerland’s Carbon-Reduction Measures Today

The CO2 levy is a direct tax applied to fossil fuels combustion, incentivizing consumption of energy sources with lower carbon footprints. The current levy applied equates to roughly 87 EUR per tCO2. Motor fuels, ETS companies and companies that commit to emission reduction are exempt from this tax.

Building standards and programs are partially funded by tax collected from the CO2 levy. About a quarter of GHG emissions and 40% of energy consumption in Switzerland is associated with the building sector. This program supports energy efficient renovation of buildings and encourages investments into renewable energy and waste heat recovery but should become unnecessary by 2025. On the cantonal level, mandatory carbon reporting from buildings was introduced in 2018.

Regulations for vehicles were implemented beginning in 2015. For passenger cars, it imposed an average target value of 130gCO2/km for new fleets. In 2020, a more stringent regulation will take place, of only 95gCO2/km. Currently, vans and delivery vehicles are not subject to this regulation, but are in the plan at the target value rate of 147gCO2/km.

Sectoral agreements in the area of environment and climate change have been implemented on emissions of SF6 and on waste incineration.

Mixed Signals About the Effectiveness of Switzerland’s Climate Policies

The Climate Change Performance Index (CCPI) ranks Switzerland as high-performer, mostly based on the GHG reduction commitments rather than the actual progress. However, the CCPI notes that the country is only a medium-performer when it comes to renewable energy. It is interesting to note here that the Climate Action Tracker (CAT), an independent monitoring group, rates Switzerland’s independent efforts as ‘Insufficient’ when it comes to holding global warming below 2 degrees (if all planned actions were fulfilled, the warming would be somewhere between 2 and 3 degrees). With the current mix of policies, the ambition of Paris agreement stays out of reach for the country.

Impact of Swiss-EU ETS Merger for Affected Organizations

Switzerland has enjoyed an independent emissions trading system (Swiss ETS) since 2008. The first negotiations about the potential merger with the EU Emissions Trading System started almost 10 years ago in 2011. In late 2017, Switzerland and the EU signed an agreement to link the two ETS schemes. In March 2019, the Swiss Parliament approved this agreement. Since January 2020, the link has become effective and Switzerland’s and EU’s CO2 emissions trading schemes have merged.

For Swiss installations captured by this change, allowances will be mutually recognized. This means that allowances that Swiss companies have in their account will be possible to use in the joint scheme. For all installations, both EU ETS and Swiss ETS, allowances may be transferred from Phase 3 to Phase 4.

The expectation of the merger between Swiss and EU ETS, and the possibility to carry over allowances from one scheme to another, was reflected in the price of allowances auctioned in the latest bi-annual auctioning period. This auctioning was limited only to the participants of the Swiss ETS. In the past, the price of Swiss allowances fluctuated, but over the course of the last 3 years, the average price of auctioned allowances was around 7.22 CHF (6.6 EUR). In the same period, the price of EUAs (operating currency of the EU ETS) jumped from 6 to 26 EUR.

The latest auction period for purchase of Swiss allowances happened between November 5^th to 12^th, 2019. The price during this auctioning period was 18.15 CHF (16.5 EUR), more than double compared to average price and the price from the first auctioning period in 2019. This price was still significantly under the market price which installations under EU ETS are exposed to.

With the schemes linked, the obligation will extend to and integrate Swiss aviation, which under the current arrangements is out of scope of Swiss ETS. This will impact EU flight operators as well, as going forth from the merger, flights to and from Switzerland will be included in the scope of ETS.

As a benefit of the merger, the Swiss national administrator (BAFU) sees long term stability of the prices of a larger market, as trading and pricing were difficult to achieve in a market as small as Switzerland. Another short-term benefit for Swiss companies is that their allowances will receive equal rights as other allowances issued within the EU. For large companies, it also might be a good opportunity to share a single carbon market of Switzerland and EU.