Carbon Allowance Auctioning

Member States will be able to opt out of a single European platform for the auctioning of carbon allowances under draft proposals adopted by the Commission earlier this month. The Regulation, which will provide the rules on the timing, administration and other technical aspects of the auctioning of carbon allowances from 2013 onward, will establish a single EU auctioning platform but allow Member States to opt out in order to auction their share of emission allowances at national level until 2016.

The Emission Trading Scheme

Since 2005, some 10,000 large industrial plants in the EU have been required to buy and sell carbon allowances to permit the release of carbon into the atmosphere under the EU’s Emission Trading Scheme (EU ETS). Until now, Member States have auctioned only very limited quantities of these allowances; most carbon allowances have been allocated for free during both the first trading period (2005 to 2007) and the second trading period (2008 to 2012).

The revision of the EU Emission Trading Scheme Directive (2003/87/EC) by Directive 2009/29/EC said however that as of 2013, the auctioning of allowances will be the rule rather than the exception. At least half the revenue from auctioning allowances, which accrues to Member States, will be used to fight and adapt to climate change, according to the revised Directive.

The Draft Regulation

This Draft Commission Regulation on the timing and administration of the carbon allowance auctioning scheme was adopted on 06 April 2010. It has now been sent to the Member States and the European Parliament.

The option to not participate in the common EU auctioning platform is a reversal of the Commission original position. The impact assessment that accompanies the Draft Regulation, for example, found that a centralised approach would be the most effective method in minimizing costs and providing a clear procedure. Some Member States, such as the Germany, Poland, Spain and the UK, insisted on being able to keep their national platforms. 

Eligibility for Allowances

The Regulation would aim to ensure that operators, and in particular small and medium size enterprises covered by the EU ETS, have full access to auctions – hence the single EU platform concept. Free allowances may be given to electricity generators and to installations in sectors which are exposed to the risk of ‘carbon leakage’. Carbon leakage occurs when high emission sectors - such as cement - are put at a global competitive disadvantage because other areas of the world have more relaxed laws on carbon emissions. No allowances however will be allocated free of charge for electricity production, even if there are limited and temporary options to derogate from this rule.
The Draft Regulation states that the following persons are eligible to submit bids directly in the auctions:
• An operator or an aircraft operator having an operator holding account
• Investment firms bidding on their own account or on behalf of their clients
• Credit institutions bidding on their own account or on behalf of their clients
• A partnership, joint venture, consortium acting as agent on behalf of its members
• Public bodies or state-owned entities
Any auction platform can refuse admission to bid in its auctions if the applicant refuses any of the following:
• To comply with requests for additional information or clarification or substantiation of information provided
• To attend an invitation to interview any officers of the applicant including at its business premises or elsewhere
• To allow investigations or verifications, including on-site visits or spot-checks at the applicant's business premises
• To comply with requests for any information required from the clients of an applicant

Administration of the Auction

The Regulation contains rules on the timing and administration of the auctioning of allowances. Allowances will be offered for sale on an auction platform using standardised electronic contracts. Each bid - an offer in an auction to acquire a given volume of allowances - may only be submitted, modified or withdrawn during a given bidding window. The Commission defines a “bidding window” as the time period during which bids may be submitted. 
Bids submitted may be modified or withdrawn, by a given deadline which has to be set by the auction platform concerned and published on that auction platform's website at least five trading days prior to the opening of the bidding window. A bid can be rejected if there are grounds of suspicion regarding money laundering, terrorist financing, criminal activity or market abuse.
Any auction platform must conduct auctions separately through its own regularly recurring bidding window. The time period during which bids may be submitted must be opened and closed on the same trading day and cannot be open for more than two hours.
The Commission wants to avoid an overlap between the time periods during which bids may be submitted. The dates and times of the auctions must be determined taking account of public holidays that affect international financial markets and any other relevant events or circumstances that might affect the proper conduct of the auctions necessitating changes. For example, no auctions are allowed in the two weeks over Christmas and the New Year.
If MEPs decide not to oppose the draft, then the Commission Regulation will be adopted by June 2010, the deadline set in the original EU ETS Directive.