Trading of CO2-emissions certificates in Switzerland

In April 2014, the Federal Council decided that Switzerland will continue its efforts to reduce greenhouse gas emissions within the framework of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (“Kyoto Protocol”).

To date, Swiss companies still have no access to the European CO₂-emissions trading scheme. Further, Switzerland only recognizes Swiss emissions certificates, for which, however, no liquid market exists. Swiss certificates are traded either directly among the companies or through brokers. Recently, in the context of an auction process, the Federal Office for the Environment (“FOEN") offered certificates at a price of CHF 40.25 per ton of CO₂, which is more than six times the price of certificates traded in the EU.

It is expected that Switzerland and the EU will soon resume negotiations to interconnect their emissions trading schemes and mutually recognize emissions certificates, which will certainly help boost the trading activity of Swiss certificates.

Emissions allowances

In line with the Kyoto Protocol, the Federal Act on the Reduction of CO₂ Emissions (“CO₂ Act”) aims to reduce greenhouse gas emissions, in particular, CO₂-emissions that are attributable to the energy recovery of fossil fuels. To achieve this goal, the domestic greenhouse gas emissions shall be reduced in total by 20 per cent until 2020, based on the relevant emissions of 1990 (“Reduction Target”). Pursuant to the CO₂ Act, each company that operates installations with high greenhouse gas emissions (e.g. refineries, cement plants, aluminum plants) on Swiss territory shall participate in the so-called emissions trading scheme (“ETS”) – a market for the trading of emissions rights.

Similar to the European ETS, the Swiss ETS follows the so-called “cap and trade principle”: The Federal Government determines the quantity of emissions allowances that are made available each year in total and, on the basis of the relevant cap, assigns emission allowances to the companies that are required to participate in the ETS. The allowances are issued as certificates. A company that exceeds its emissions allowance, may either buy additional certificates (from a company that is below its emissions allowance) or improve its production technology.

Measures to achieve the reduction Target

Overview

The CO₂ Act provides for the following measures to achieve the Reduction Targets:

• technical measures to reduce CO₂ emissions of buildings and passenger cars
• emissions trading scheme
• compensation obligations
• CO₂ levy on thermal fuels.

These measures are set out below in more detail.

Technical measures

Each Swiss canton must ensure that CO₂-emissions of buildings heated with fossil fuels are reduced. The scope of the reduction is determined by the Federal Government together with the cantons. The cantons have to issue state of the art building standards for new

and older buildings. For example, the Canton of Zurich subsidizes improved insulation and allows taxpayers to deduct investments related to energy savings from the cantonal tax bill. Further, the Federal Government must implement technical measures to reduce CO₂-emissions of passenger cars.

Emissions trading scheme

while larger companies (with a total thermal input of their combustion installation of 20 Mw or more) must participate in an ETS, medium-sized companies (with a total installed rated thermal input of 10 Mw or more) have a right to “opt-in“. Each year, these companies have to provide evidence to the FOEN that they have sufficient certificates to cover their CO₂-emissions.

Pursuant to the CO₂ Act, Swiss companies may either use certificates issued in Switzerland or certificates issued by foreign countries, provided that the ETS of the relevant foreign country has been recognized by the Federal Council. However, since to date, no foreign ETS has been recognized by the Federal Council, Swiss companies may only use and benefit from Swiss certificates (“Swiss units”, “CHU”).

In contrast, certain emissions reduction certificates

which are tradable documents attesting emissions reductions achieved in a foreign country – are to a certain extent recognized in Switzerland.

Compensation obligations

Motor fuel importers must compensate for part of the CO₂-emissions attributable to the use of fossil motor fuels by financing domestic emissions reduction projects. Further, operators of fossil-fuel thermal power

plants are required to compensate in full for the CO₂- emissions caused.

CO₂ levy on thermal fuels

The CO₂ levy is the key instrument for the Federal Government to achieve the Reduction Target. It applies to fossil combustible fuels, such as heating oil and natural gas. Currently, the CO₂ steering levy is set at CHF 60 per ton of CO₂. Companies that participate in the ETS are exempted from the CO₂ levy. The same also applies to operators of fossil-fuel thermal power plants.

Trading Certificates

To date, the only official Swiss platform to trade emissions certificates is administered by the Cantonal Bank of Berne (BEKB/BCBE). However, trading on this platform has been illiquid for several years. Swiss companies tend to either trade certificates among themselves or through brokers.

Recently, the FOEN offered certificates in an auction process at CHF 40.25 per ton of CO₂, which revealed that Swiss companies are willing to purchase certificates at a price that is more than six times the market price for European certificates traded on EU platforms (currently traded at around EUR 5.00 per ton of CO₂).

In 2011, Switzerland and the EU entered into negotiations with the aim to interconnect the Swiss and EU ETS, which, however have come to a halt. A mutual recognition of certificates would grant Swiss companies access to the larger and more liquid European emissions trading market. The negotiations are expected to be resumed in the near future.