Bidding for the Better
EU Emissions Trading Scheme moves to auctioning By Michael Chlistalla & Meta Zähres
AFTER A FIRST Phase of the EU ETS – which ran from 2005 to 2007 and was aimed at gaining experience with this new instrument – the second Phase (2008 to 2012) is ongoing. Currently, European regulators, notably the Commission, are focussing on designing the rules for the third trading Phase, which runs from 2013 to 2020. During the second phase of
the EU ETS, initial allocations of CO2 allowances to installations have been organised by means of ‘grandfathering’, that is based on historical data on emissions or fuel use. While the grandfathering approach is being applied for the far bigger part of allowances, Member States could individually sell or auction off small quotas of their emission allowances – up to a maximum of 5% in Phase 1 and 10% in Phase 2. However, only a few Member States used this option.
allocated via auctions. According to the Commission, auctioning best ensures the efficiency, transparency and simplicity of the EU ETS and creates the greatest incentive for investments in a low-carbon economy. Auctioning also potentially eliminates windfall profits which can arise when operators pass on the cost of allowances to customers even where they received them free. On April 23rd
, 2009, Directive 2003/87/EC was amended
by Directive 2009/29/EC (the ‘revised ETS Directive’) so as to improve and extend the EU ETS. Auctioning as the basic principle for allocation was established through Article 10(1). Article 10(4) requires the Commission to adopt a regulation on timing, administration and other aspects of auctioning to ensure that it is conducted in an open, transparent, harmonised and non- discriminatory way. On July 14th
, 2010, Member States in the Climate Change
The regulation will ensure that auctioning is conducted in an open, transparent, harmonised and non-discriminatory way
For Phase 3, the European Commission has announced its intention to increase the relevance and proportion of allowances being allocated via an auctioning mechanism. The Commission’s effort to create a single auctioning platform is to be welcomed. The objective of eliminating inconsistent allocation of allowances between Member States, however, will be thwarted by the possibility for States to opt out of the central platform which materialised due to strong political exertion of influence.
Changes in Phase 3 For Phase 3, the Commission announced its intention to increase the proportion of allowances being
50 December 2010
Committee (CCC) unanimously voted in support of the Commission’s draft Auctioning Regulation (see COM, 2010c), which was then submitted to the European Parliament and the Council for a three-month scrutiny. Provided neither of them opposes the draft within this period, the Commission will adopt the Auctioning Regulation by the end of 2010 as proposed. For Phase 3 of the EU ETS, the Commission has determined a community-wide ex-ante benchmark starting at 2,039,152,882 allowances in 2013 with an ex-ante defined, linear reduction path of 1.74% p.a. and an ex-ante defined, harmonised allocation methodology (COM, 2010a). This cap will amount to a 21% reduction in 2020 compared to 2005 verified emissions. In contrast to previous phases there is a paradigm shift in 2013 with regard to the initial allocation
of allowances to installations: National Allocation Plans are abolished and auctioning will become the default method of allowance allocation. In the power sector, 100% auctioning is proposed from 2013 onwards, whereas for all other sectors an initial auctioning share of 20% in 2013 to be increased linearly to 70% in 2020 is suggested. Full auctioning to all installations in all covered sectors will then occur by 2027. Non-auctioned allowances, i.e. those to be allocated for free, will
transitionally be distributed on the basis of ambitious benchmarks for industries up to a fixed industry cap. Corresponding EU- wide harmonised rules based, to the extent feasible, on these benchmarks will be defined by the Commission shortly.
Auction Design The auction design chosen by the Commission is a single-round, sealed-bid, uniform price auction. Any auction platform shall ensure its auctions can be accessed remotely via an electronic interface accessible securely and reliably through the Internet. An auction calendar must be maintained, specifying frequency and dates at which auctions will take place. Each auction’s bidding
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