Options set out for EUETS auction

The Environment Department (DEFRA) is consulting on the design of a system to auction allowances over the second phase of the EU emissions trading scheme

The government is proposing to hold four allowance auctions a year in the second phase of the EU emissions trading scheme (EUETS) according to a consultation released in December.1 Member states are allowed to auction up to 10% of allowances in phase II of the EUETS, but few have taken up the option and the average level of auctioning across the bloc is around 3%.

The UK has set one of the highest levels of auctioning and plans to issue 7% of its cap this way. This equates to around 85 million allowances which will be taken from the power generators’ allocation (ENDS Report 378, p 42 ).

Any surplus in the new entrants reserve - a fund to allocate free allowances to new installations - and allowances from installations that close during the phase will also be auctioned. The total number of allowances auctioned will not exceed 121.9 million.

DEFRA expects the level of auctioning to increase as the scheme matures. In the long term the government has said it would like to see 100% auctioning for all sectors. And in January, EU Environment Commissioner revealed plans to auction virtually all allowances after 2020.

While the system only officially applies to phase II, DEFRA views it as providing the model for auctioning in future phases. It also aims to give UK firms and traders experience of auctioning before it becomes widespread. Because it is still experimental, the system will be reviewed after the first few auctions.

The government plans to auction most allowances in the first three years of the phase because it thinks demand will be high as generators buy allowances to cover advance electricity contracts.

Many member states will also sell the unused portions of their new entrant reserves near the end of the phase. This will release 23 million allowances a year between 2008 and 2010, and just eight million allowances a year in 2011 and 2012.

The auctions will be quarterly auctions and to prevent market disruption, they will be co-ordinated with other member states, such as Germany and Norway, which have also committed to auctioning a significant proportion of their allowances.

All sectors and installations covered by the scheme in all member states will be able to buy allowances in the auction - not solely UK electricity generators. This, DEFRA says, will maximise the revenue and prevent manipulation of the auction.

There will be one bidding round to set the price of the allowances for all successful bidders. The government expects this will be similar to the market price for allowances, but it will also establish a reserve price. This will be set transparently and close to the auction date as a percentage of the most liquid exchange rate or of the rate weighted across the volume of trades.

The auctions will be run by the UK Debt Management Office, part of the Treasury. The consultation lasts three months and closes on 14 March.

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