Under the Kyoto Protocol, developed countries receive the quantity of emission allowances they need to meet their reduction target. One unit (e.g. Assigned Amount Unit, AAU) offsets the emissions of one tonne of CO2.

Switzerland also issues the quantity of emission allowances required by companies participating in the emissions trading scheme (ETS companies) to meet their reduction target. Under the law, large, energy-intensive companies are required to participate in emissions trading, while medium-sized emitters may voluntarily participate in it.

Excess emission allowances can either be sold to other companies or kept as credits for the next commitment period after 2020. Companies that produce more emissions than the quantity of emission allowances issued to them must purchase the necessary credits to make up the shortfall.

Emissions trading gives companies more flexibility to reach their targets and lowers the overall costs for all companies that participate in the system.

Example of a calculation

Companies A and B each emit 100,000 tonnes of CO2 per year. The government issues each company over 95,000 tonnes of emission allowances. Company A succeeds in reducing its emissions to CHF 5 per tonne of CO2, while Company B continues to pay CHF 15 per tonne.

If the market price for the emission allowance is CHF 10, Company A will cut its emissions by 10,000 tonnes, for example. By selling 5,000 emission allowances, it can recover CHF 50,000, which fully offsets its emission reduction costs. Company B, however, purchases 5,000 emission allowances for CHF 50,000, instead of paying CHF 75,000 to reduce its own emissions.

In this system, CO2 emissions are reduced where it costs the least (and is most efficient) to do so.