1. Prescriptions of the Kyoto Protocol and CO2 Act

The legal framework for the implementation of flexibility mechanisms and the establishment of an emissions trading scheme in Switzerland is set by the Kyoto Protocol, the CO2 ordinance and the ordinance on the crediting of emission reductions achieved abroad.

By ratifying the Kyoto Protocol, Switzerland took on a commitment to reduce greenhouse gas emissions between 2008-2012 by 8% from 1990 levels. The country receives its assigned amounts (or levels of allowed emissions) corresponding to its emission targets from the secretariat of the United Nations Framework Convention on Climate Change  (UNFCCC). The target for Switzerland amounts to 48.25 million tonnes of CO2 equivalent emissions.

If its emissions remain below this level, Switzerland can sell its excess allowances on the CO2 market or carry them over to the post-2012 commitment period. The implementation of flexibility mechanisms is governed by the rules adopted by the Conference of the Parties to the UNFCCC. 

The CO2 Act focuses on the reduction of fossil-based energy consumption (by 2010, CO2 emissions from these sources are to be reduced by 10% from 1990 levels). 

2. Implementation by Swiss companies

The Swiss emissions trading scheme primarily concerns companies that assume a legally binding commitment to reduce their energy-related CO2 emissions and thus accept a target for 2008-2012. In return, these companies will be exempted from the CO2 tax. Negotiating reduction targets and thus gaining exemption from a possible tax are key priorities for energy-intensive sectors such as the cement, paper and pulp, glass and ceramics industries.  

Emission allowances are allocated to the companies free of charge, in accordance with the targets negotiated for 2008-2012. Reduction targets in absolute terms are to be calculated using a "bottom-up" approach: a company's potential to reduce emissions, from a technical and economic viewpoint, is assessed on the basis of projected production and emissions, taking into account any CO2 reduction measures already implemented. A simplified approach is used for SMEs. 

Starting in 2008, emission allowances equivalent to the amount of CO2 emitted have to be surrendered each year. Allowances not required for compliance can be sold. To cover excess emissions, allowances have to be purchased on the domestic or international markets and/or earned through emission reduction projects abroad. In the event of non-compliance, the CO2 tax is to be paid retroactively for each tonne of CO2 emitted since exemption was granted. 

Thus, the CO2 tax plays a double role in the Swiss emissions trading scheme: 

• it acts as a sanction if the reduction targets are not reached;
• the CO2 targets are legally binding for the companies.

Without CO2 tax, the objectives agreed on with the economy would remain totally voluntary, and non-compliance with the objectives would be devoid of any legal consequences.

3. Linking up with the EU trading scheme

The EU Directive establishing a scheme for emissions trading stipulates that agreements can be concluded with third countries that have ratified the Kyoto Protocol to provide for the mutual recognition of allowances.

In order to make it possible for Switzerland to join the EU trading scheme, the premises of an operational CO2 market must  first be created in the country. Based on the existing legislation, this is only possible through the introduction of a sufficiently high CO2 tax.