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Climate Action

International carbon markets can play a key role in reducing global greenhouse gas emissions cost-effectively.

The number of emissions trading systems around the world is increasing. Besides the EU emissions trading system (EU ETS), national or sub-national systems are already operating or under development in Canada, China, Japan, New Zealand, South Korea, Switzerland and the United States.

Carbon markets in Paris Agreement

The Paris Agreement provides for a robust and ambitious basis for the use of international markets and reinforces international targets, transparency and the accountability of Parties.

Recognising the importance of international carbon markets, Article 6 of the agreement

  • allows Parties to use international trading of emission allowances to help achieve emissions reduction targets
  • establishes a framework for common robust accounting rules, and

creates a new, more ambitious market mechanism.

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Bilateral cooperation

China

In 2014-2017, the European Commission in close cooperation with China carried out a 3-year project to support the design and the implementation of emissions trading in China.

The project provided technical assistance for capacity building and supported the seven regional pilot systems already set up and the establishment of a national emissions trading system.

In the EU-China Joint Statement on Climate Change adopted at the EU-China summit in 2015, the EU and China agreed to further enhance their bilateral cooperation on carbon markets.

Against this background, the Commission and the National Development and Reform Commission of the People’s Republic of China agreed on a new project for 2017-2020.

The project titled “Platform for Policy Dialogue and Cooperation between EU and China on Emissions Trading” is now being implemented. It aims to provide capacity building and training to support Chinese authorities (since April 2018 the newly created Ministry of Ecology and Environment) in their efforts to implement and further develop the Chinese nationwide emissions trading system. More information is available on the project website.

The project has also established a policy dialogue between the Commission and the Chinese Ministry of Ecology and Environment, with the first dialogue held in April 2018.

At the EU-China summit in 2018, the EU and China signed a Memorandum of Understanding to further enhance cooperation on emissions trading. It provides a reinforced basis for the policy dialogue, including through further forms of cooperation such as the joint organisation of seminars and workshops, joint research activities and ad-hoc working groups.

Korea

The Korean emissions trading system (KETS), launched in 2015, covers around 66% of Korea's total greenhouse gas emissions. It is the first mandatory emissions trading system among non-Annex I countries under the UNFCCC.

The KETS could trigger the expansion of emissions trading among emerging economies and developing countries.

The European Commission supports Korea through a technical assistance project focused on building the necessary capacity to implement the KETS.

Multilateral cooperation

 

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The European Commission is a founding member of the International Carbon Action Partnership (ICAP), which brings together countries and regions with mandatory cap-and-trade systems. The ICAP provides a forum for sharing experience and knowledge and organises regular training courses.

The Commission also supports the development of domestic carbon markets through the Partnership for Market Readiness (PMR). The PMR is a platform for the exchange of experience on carbon market instruments and assists some 17 countries in preparing and implementing these.

Linking with other cap-and-trade systems

Linking compatible emissions trading systems with each other enables participants in one system to use units from another system for compliance purposes.

Linking offers several potential benefits, including:

  • reducing the cost of cutting emissions
  • increasing market liquidity
  • making the carbon price more stable
  • levelling the international playing field by harmonising carbon prices across jurisdictions, and
  • supporting global cooperation on climate change.

The EU ETS legislation provides for the possibility to link the EU ETS with other compatible emissions trading systems in the world at national or regional level.

Conditions for linking include:

  • system compatibility (the systems have the same basic environmental integrity, and a tonne of CO2 in one system is a tonne in the other system)
  • the mandatory nature of the system, and
  • the existence of an absolute cap on emissions.

Including aviation on both sides in the scope of the linked systems, wherever possible, would also represent an essential requirement of linking.

In 2017, the EU and Switzerland signed an agreement to link their systems. The agreement entered into force on 1 January 2020 following the exchange of the instruments of ratification or approval between the EU and Switzerland.

The Joint Committee, established by the Linking Agreement, paved the way for the entry into force of the Agreement through adopting its Decision 2/2019 that ensures the compatibility of the two systems for the year 2020 (consolidated version of the Linking Agreement). In November 2020, it adopted Decisions 1/2020 on the adoption of Common Operational Procedures (COP) and 2/2020 on amending Annexes I and II to the Agreement and the adoption of Linking Technical Standards (LTS). Both decisions mainly serve to provide common rules on the operation of the link. Furthermore, they establish legal certainty in this respect. As a consequence of the Corona pandemic, Decision 2/2020 also changes some provisions of Annexes I and II to the Agreement. Another decision of the Joint Committee will take account of the new trading period starting in 2021.

Linking of the EU ETS and the Swiss ETS results in the mutual recognition of EU and Swiss emission allowances when surrendering allowances to cover emissions occurring as from January 2020. Switzerland keeps a separate system from the EU ETS, but applies a similar scope as the EU ETS, including aviation.

The EU and Australia also considered the possibility to link their systems. However, due to the repeal of the Australian system in 2014, the linking negotiations have not been pursued.

Documentation

Eligibility of international credits

Linking with other greenhouse gas emissions trading systems

Encouraging new market mechanisms

Studies

Studies

Faq

FAQs concerning the linking between the EU ETS and the ETS of Switzerland

Questions & answers on implementation of rules regarding the eligibility of international credits in the EU ETS (10/2014)

    Questions & answers on use of international credits in the third trading phase of the EU ETS (January 2012)

    Terminology

      Implementation of provisions

        Future policy development

          Questions & Answers

            Questions & answers on use restrictions for certain industrial gas credits as of 2013 (November 2010)