Switzerland revises ETS rules on cap, allocation, and offsets

On 25 November 2020, the Swiss Federal Council revised its CO₂ Ordinance, which regulates the design of the Swiss ETS. The revisions include changes to the system’s cap trajectory, benchmarks, and the use of offsets.
 

The changes, which take effect 1 January 2021, are in line with those envisaged for the EU ETS’s Phase 4, bringing the two newly linked systems closer together. At the same time, the revision of the Ordinance aims to bridge a regulatory gap caused by a delay in revisions to Switzerland’s framework climate legislation, the CO₂ Law, which provides the mandate for its ETS and other climate policy instruments.

The CO₂ Ordinance is the main piece of secondary legislation regulating the Swiss ETS. Its revision will see some key design changes, mirroring those of the EU ETS’s upcoming fourth phase. For one, it will no longer be possible to surrender emission offset credits for compliance with the ETS. This is in line with Phase 4 of the EU ETS, in which the use of international credits for compliance is not envisaged. For compliance obligations under climate instruments outside of the Swiss ETS, the revised CO₂ Ordinance also excludes the use of international credits verified after 1 January 2021.   

The revised Ordinance also establishes a new formula for setting the ETS cap, increasing the linear reduction factor to 2.2%, equal to that of the EU from 2021. Additionally, it more closely aligns free allocation with the EU ETS Phase 4, including annual adjustments from changes in activity levels, the EU’s list of sectors deemed vulnerable to carbon leakage, and a phaseout of free allocation by 2030 for all others. However, Switzerland has yet to implement the product benchmarks used in the EU, with alignment expected to be implemented no later than in 2022.

The linking agreement between the Swiss and EU ETS entered into force on 1 January 2020, after earlier revisions of the CO₂ Ordinance and CO₂ Law. A continuous link between the markets has yet to be implemented, but a provisional link was created in September 2020, enabling the transfer of allowances between registries on pre-announced dates.

Switzerland’s framework climate legislation, the CO₂ Law, was partially revised in 2019, extending the ETS mandate indefinitely as its first mandatory phase comes to a close at the end of 2020. The full revision of the law, however, which set targets for GHG reduction and extends other policy instruments, was not approved by the Swiss Parliament until autumn of 2020 and will not come into effect before 2022, as citizens still have the possibility to request a referendum. The partially revised CO₂ Law is intended to bridge what could otherwise be a regulatory gap and sets an interim emissions reduction target for 2021 of 1.5% below 1990 levels.