3Linkage of EU and Swiss Emissions Trading Systems
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Committee’s assessment |
Politically important |
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Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy and Industrial Strategy and Environmentals Audit Committees |
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Document details |
(a) Proposal for a Council Decision on the conclusion, on behalf of the European Union, of an Agreement between the European Union and the Swiss Confederation on the Linking of their Greenhouse Gas Emissions Trading Systems; (b) Proposal for a Council Decision on the signing, on behalf of the European Union, of an Agreement between the European Union and the Swiss Confederation on the linking of their Greenhouse Gas Emissions Trading Systems |
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Legal base |
(a) Articles 191(1) and 218(6)(a), TFEU; EP consent; QMV; (b) Articles 192(1) and 218(5) TFEU;—; QMV |
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Department |
Business, Energy and Industrial Strategy |
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Document Numbers |
(a) (38987), 11699/17 + ADD 1, COM(17) 427; (b) (38988), 11700/17 + ADD 1, COM(17) 428 |
Summary and Committee’s conclusions
3.1Emissions trading systems (ETSs) are designed to reduce greenhouse gas emissions cost-effectively. They include both a cap on total emissions and the potential to trade emissions allowances so that a company that is taking steps to reduce its emissions can sell its allowances to a company that continues to emit. Linking one ETS to another expands the market and enhances the cost-efficiency of emissions trading.
3.2The EU introduced its Emissions Trading System (EU ETS) in 2003, including the possibility to link with other ETSs provided they are mandatory, have an absolute cap on emissions and are compatible. The Swiss ETS began in 2008 and became mandatory in 2013 for large, energy-intensive entities. It puts an absolute cap on emissions and has a very similar design to the EU ETS.
3.3In December 2010 the European Commission was authorised to launch negotiations with a view to linking the EU ETS and Swiss ETS. Technical negotiations concluded in January 2016, but final agreement was stalled as a result of the Swiss referendum in 2014 on the introduction of quotas for EU workers in Switzerland. Following resolution of those concerns through the adoption of new Swiss legislation in December 2016, the Commission proposed the conclusion (document (a)) and the signature (document (b)) of the agreement linking the two ETSs. The agreement mandates alignment between the two systems on a range of issues, such as: the cap, the minimum level of ambition, the gases and activities covered, limits on international credit use, penalties, and monitoring, reporting and verification. The Swiss ETS will mirror the EU ETS provisions on aviation before the agreement enters into force.
3.4The agreement is overseen by a Joint Committee of the two Parties, which should also be the first avenue for the resolution of disputes. Otherwise, disputes should be referred to the Permanent Court of Arbitration.
3.5The Minister of State for Climate Change and Industry (Claire Perry) indicated in her Explanatory Memorandum that the UK took an active role in negotiating the text of the agreement. It was in line with UK objectives for global carbon markets, she said, as expanding the market and increasing the availability of reduction opportunities enhances the cost-efficiency of emissions trading.
3.6The Minister has since written again, explaining that the Decisions were adopted on 10 November 2017, which was before the Committee was able to consider the document. Acknowledging that the Committee had not granted scrutiny clearance, the Minister reports that she nevertheless voted in favour of the proposals. Given the UK support for the proposals, and its efforts to negotiate them, the Minister did not wish to be isolated in either abstaining or opposing the agreement. The Minister emphasises that the UK’s position is without prejudice to the nature of the future UK-EU relationship.
3.7We are pleased to note the UK’s engagement in the negotiation of this agreement. As the Minister notes, a larger market increases the availability of emissions reduction opportunities and enhances the overall cost-efficiency of emissions reduction. On that basis, the development is a welcome one.
3.8Of greatest interest to us—and, we believe, the House—is the Brexit context. We appreciate that the Government is yet to finalise its approach to emissions trading post-Brexit, but we assume that creating a UK ETS and then linking it to the EU ETS would be an option. We would welcome the Minister’s assessment of the extent to which the EU ETS-Swiss ETS linkage agreement may prove a helpful model to the UK. It would also be helpful to understand from the Minister why—other than the Swiss referendum on free movement—it took seven years from authorising the start of negotiations to reaching this final stage. Taking into account the various factors, including the need to resolve the free movement of workers, what lessons can be learned from the process with a view to establishing the relationship between the UK and the EU ETS?
3.9Following the General Election, we were unable to consider the draft Decisions before they were adopted on 10 November. We recognise the Minister’s reasons for supporting the proposals before scrutiny clearance had been secured and we take no issue with the Government’s approach.
3.10In the light of the important issues raised in relation to the UK’s exit from the European Union, we retain these documents under scrutiny and draw them to the attention of the Business, Energy and Industrial Strategy and the Environmental Audit Committees. We look forward to the Minister’s response within one month.
Full details of the documents
(a) Proposal for a Council Decision on the conclusion, on behalf of the European Union, of an Agreement between the European Union and the Swiss Confederation on the Linking of their Greenhouse Gas Emissions Trading Systems: (38987), 11699/17 + ADD 1, COM(17) 427; (b) Proposal for a Council Decision on the signing, on behalf of the European Union, of an Agreement between the European Union and the Swiss Confederation on the linking of their Greenhouse Gas Emissions Trading Systems: (38988), 11700/17 + ADD 1, COM(17) 428.
Background
3.11The European Commission is proposing two related Council Decisions: one is to sign and the other is to conclude, on behalf of the European Union (EU), an Agreement between the EU and Switzerland to link greenhouse gas Emission Trading Systems (ETSs). The proposals are straightforward and will give permission to the European Commission to sign and conclude the Agreement which will link the ETSs.
3.12The EU ETS has been operating for more than a decade. It was the world’s first major carbon market and remains the biggest one. A cap is set on the total amount of certain greenhouse gases that can be emitted by installations and aviation operators covered by the system. The cap is reduced over time so that the total emissions fall. Within the cap, companies receive or buy emissions allowances which they can trade with one another on the secondary market as needed. After each year, a company must surrender enough allowances to cover all its emissions, otherwise enforcement action is taken. In this way, the EU ETS both sets a target to reduce the emissions from the EU over time and aims to effect change by incentivising a shift towards low carbon development.
3.13Article 25 of the Directive establishing the EU ETS allows for the EU ETS to be linked with other ETSs. In the past, the EU ETS has been linked with Norway, Liechtenstein and Iceland which are now fully integrated into the EU ETS. In December 2010, the European Council adopted a Decision authorising the Commission to open negotiations with the Swiss Confederation for a link between the EU and the Swiss ETS. This was part of a package of wider EU-Swiss negotiations. Negotiations at the technical level concluded in January 2016.
3.14In order for ETSs to be linked they must meet three basic conditions: they are mandatory, have an absolute cap on emissions; and are compatible. The Swiss ETS became mandatory in 2013 for large, energy intensive entities and puts an absolute cap on greenhouse gas emissions and so meets two of the basic conditions for linking with the EU ETS. It has also met the third basic condition of compatibility. The proposed linking agreement mandates alignment between the two ETSs on a range of issues, such as: the cap, the minimum level of ambition, the gases and activities covered, limits on international credit use, penalties, and monitoring, reporting and verification. EU Allowances (EUAs) will be eligible for surrender in the Swiss ETS, and vice versa. Switzerland will mirror the EU ETS provisions on aviation in the Swiss ETS before the Agreement enters into force.
The Minister’s Explanatory Memorandum of 6 September 2017
3.15The Minister reported that the UK took an active role in negotiating the text of the Agreement to be signed between the EU and the Swiss Confederation. She described the agreement as “in line with UK objectives for global carbon markets, as expanding the market and increasing the availability of reduction opportunities enhances the cost-efficiency of emissions trading”.
3.16The Minister went on to set out the details of the main considerations that had underpinned the negotiations: the EU 2030 emissions target; Phase IV of the ETS; and the price of EU ETS allowances:
“On the first issue, the EU collectively has a domestic greenhouse gas emissions reduction target for 2030 of at least 40% below 1990 levels. The EU ETS is the cornerstone of this policy and covers around 45% of the EU’s greenhouse gas emissions. Emissions from other sectors will be covered by the EU Effort Sharing Regulation. We are confident that the link to the Swiss ETS will not have a detrimental impact on the EU’s ability to meet its domestic climate target as: there is a review clause in paragraph 13(7) which provides member states with the flexibility to assess the link in 2020 and understand its implications on the EU’s emissions reduction target; and both systems are capped preventing any increase in overall emissions.
“Secondly, like the EU ETS’s Phase IV negotiations, the Swiss ETS is currently undergoing review for its next period, from 2021 to 2030. The Agreement to link the Swiss ETS and EU ETS includes provisions to ensure a continued compatibility between the systems for the link to be maintained in the 2021–2030 period. The proposed linking will not impact on the UK position in negotiations relating to Phase IV of the EU ETS or negotiations relating to the future of aviation in the EU ETS, both of which are currently in the EU trilogue process.
“Finally, the impact on the price of EU ETS allowances is likely to be negligible. This is because of the relatively small size of the Swiss ETS compared to the EU ETS and the fact that the Swiss ETS allowance price is only slightly higher than the EU ETS allowance price. The price of Swiss allowances was CHF6.50 (£5.23) as of March 2017, compared with an EU allowance price of €5.10 (£4.70).”
3.17On the timing, the Minister expected that the proposal would go to the Environment Council on 13 October 2017 to be agreed through a vote. The Agreement would then be ready for signature in November, prior to the 23rd Conference of the Parties to the UNFCCC with the conclusion at a later date.
The Minister’s letter of 11 December 2017
3.18The Minister writes to indicate that, on 10 November 2017, the Council adopted the Decisions. The signing of the agreement between the EU and Switzerland is planned to take place soon.
3.19On her decision to override scrutiny, the Minister says:
“Unfortunately, because of the General Election, you will have not had time to consider the proposal before the vote. I therefore took the decision to vote in favour of the proposal, despite not having received scrutiny clearance from the European Scrutiny Committee. As noted in the Explanatory Memorandum, the agreement is in line with the long term policy goal for the UK in supporting global carbon markets as a mechanism for facilitating cost-effective decarbonisation globally. As such, the UK had taken an active role in negotiating the text of the agreement between the EU and the Swiss Confederation and was content with the text of the Agreement. Furthermore, no other Member State abstained or voted against the proposal and so, combined with our wider policy interests, I judged it better for the UK not to be isolated in abstaining. The UK’s position on this matter is without prejudice to the nature of the future UK-EU relationship. While the UK remains a member of the EU, we will continue to exercise the rights and obligations of membership.
“I regret that a scrutiny override was required in this instance. As you know this is a situation that we seek to avoid if at all possible and I will do everything I can to avoid this happening in future.”
Previous Committee Reports
None.
22 December 2017